Font Size: a A A

The Study On The Entrenchment Behavior Of Controlling Shareholder And Agency Costs

Posted on:2012-02-04Degree:MasterType:Thesis
Country:ChinaCandidate:X P DingFull Text:PDF
GTID:2189330335455743Subject:Business management
Abstract/Summary:PDF Full Text Request
Since the proposition "separation of ownership and control" has been proposed by Berle and Means (1932), most scholars start to research about the agency problem between managers and shareholders in the company where the shares are widely held. Jensen and Meckling (1976) do the ground-breaking research on the asset substitution problem caused by the interest between shareholders and creditors, and then asset substitution problem attracts extensive theoretical analysis and empirical test in the academic field. However, in recent years many scholars have done a lot of empirical research on ownership structure, found that ownership structure in most countries has showed a degree of centralization tendencies, rather than highly decentralized. LLSV use a new concept "tunneling" to describe the benefit entrenchment behavior of controlling shareholder, which means the controlling shareholder tend to transfer the company's assets or profits to reduce the company value.In China, since the capital market start late, it is still in a special stage, "emerging and transitional. With the ownership structure of high degree of concentration, investor protection laws and judicial system are still imperfect and ineffective; the phenomena that controlling shareholders harm the interests of minority shareholders and creditors through "tunneling" are often seen.In the paper, based on the valuation model (Merton,1974) using option pricing theory, we establish a valuation model considering controlling shareholder's sudden entrenchment of the company assets. The research method applied in the paper is the combination of formula derivation and numerical simulation, and then we study the behavior of the controlling shareholder when the benefit entrenchment happens and the agency problem between the controlling shareholder and creditors. In the end of this article, we try to discuss the internal relation between ethical constraints and legal constraints on the behavior of the controlling shareholder.The results are as followings:First, based on hypothesis that self-interest and the pursuit of utility maximization, there is a optimal ratio of entrenchment regardless of whether the benefit entrenchment conduct of the controlling shareholder is certainty; Second, the wealth of controlling shareholder and its optimal ratio of entrenchment is positively related, so is the benefit entrenchment tendency of the controlling shareholder. So the measures taken to curb benefit entrenchment can reduce the degree of assets; Third, the behavior of benefit entrenchment conducted by the controlling shareholder has externality, which means not only the value of the creditors will suffer a loss in the form of debt-agency costs, but the whole company value; Finally, when a company in bankruptcy, the role of ethical constraints and legal punishment are of a complementary relationship that different forces are of dominant within the different regions. In addition, if we assumed that the entrenchment behavior of the controlling shareholder be a noise process, an interesting conclusion can be obtained that even if there is no "fact" of benefit entrenchment, of the existence of motives to entrench the assets also can affect the value of liabilities and its yield to maturity, which we call a statistical "asset substitution".
Keywords/Search Tags:controlling shareholder, entrenchment tendency, optimal ratio of entrenchment, agency costs, ethical constraints
PDF Full Text Request
Related items