An Empirical Research On The Effects Of Ultimate Controller To Capital Structure

Since the concept "ultimate controller" brought out by La Porta (1999) , scholars have found that except rich common law countries such as UK and the United States, the main conflict in corporate governance was not the conflict between managers and shareholders, but the conflict between the inner controlling shareholder and the outer small shareholders. In fact, the inner controller is controlled by the ultimate controlling shareholder. The complexity and concealment of ultimate controller will make him use all resorts to maximize his own benefit, so that the benefits of outer small shareholders will be hurt. Because the stagnancy of legal system construction, many irregular problems in the stock market of our country are also related to the ultimate controller. The theory of capital structure shows that manager's behavior will affect the firm's capital structure. The large shareholder may implement stronger surveillance to managers or even change the manager. So the benefit of managers will be consistent with that of the large shareholder. Because the change of manager's behavior will affect the firm's capital structure, then many theories consider there are correlations between capital structure and ownership structure. Then how about the ultimate controller affects capital structure? Hence, this paper will trace to the ultimate controller, investigate about the effects of the ultimate controller's three characteristics to the capital structure, which are the separation of control rights and cash flow rights, kinds and control layers. This has important academic value and praxis significance to protect the benefits of small shareholders, and consummate the mechanism of corporate governance.In this study, the author conducts a research according to the data of 3408 listed companies in Shenzhen and Shanghai stock markets ranging from the year of 2004 to 2007, in order to find out the major motives of the shareholders in deciding capital structure, their behavioral differences as well as predatory behaviors. The findings are as follows: (1) The separation of ultimate control rights and cash flow rights prevails among 43%listed companies, the degree of which is more significant for non-stated-owned holding listed companies as compared with state-owned holding ones.(2) Almost all listed companies are single-track controlled, only one company is different, of which the ultimate controller uses cross-holding in the control chain. The ultimate controllers with different ownership kinds have difference in their control manner. Non-state ultimate controllers have higher ratio in direct control and longer layers pyramid control than that of state ultimate controller. And the main control manner of both non-state and state ultimate controllers is pyramid with 2 to 3 layers.(3) By testing the degree and size of the separation of ultimate control right and cash flow right, this paper discovers that shareholders with ultimate control right pay more attention to the non-dilution effect with respect to stock ownership, whereas the effects regarding to transfer restriction on asset of debt and threats of bankruptcy constitute only minor significance.(4) The ownership kinds of ultimate controllers pose limited impact on the decision of capital structure. The state-owned ultimate controllers do not drastically magnify the non-dilution effect of debt comparing to the non-state-owned ultimate controllers.(5) The layers of ultimate controller are positively related to capital structure of the firm. That is to say, the longer of the layers, the more debt the ultimate controller prefers to financing.