Pyramidal Structure And Shareholder Behavior

Many accounting scandals occurring around the world these days are mostly associated with the expropriating behavior of controlling shareholders. Under the pyramidal structure, one of the most prevalent ownership structures at present, there is a separation between cash flow right and control right, which provides the controlling shareholder with an good opportunity to pursue opportunistic transaction.Most of China's private listed companies adopt pyramidal structure.This paper attempts to analyze the behavior of controlling shareholders against the background of pyramidal structure, which is of great realistic significance to intensify regulation of private listed companies and ease the conflict between large and small shareholders. Based on relevant literatures, we utilize a total of 1458 private listed companies from the year 2006 to 2008 as our samples and analyze tunneling and propping of controlling shareholders under the pyramidal structure. Our empirical results show that corporate governance mechanism significantly constrains the two behaviors of tunneling and propping of controlling shareholders. However, the existence of outside large shareholders decreases tunneling. For the incentive of maintaining listing status or increase issues in stocks, controlling shareholders will prop the listed companies. However, propping under this incentive is opportunistic, with the aim to satisfy the requirements of the regulatory authorities and thus expropriate more resources in the future. The cash rights controlling shareholders decreases tunneling. The more independent directors the company has, the more propping it will get from its controlling shareholders. In terms of corporate value, the two behaviors of controlling shareholders show different influences on corporate value. The propping increases corporate book value Roa, while the tunneling impairs corporate market value. Listed companies with managements designed by controlling shareholders have lower values than those without managements designed by controlling shareholders. Independent directors do exert their supervisory functions effectively and thus increased corporate value. From the perspective of the attributes of controlling shareholders, family shareholders prop the listed companies less and tunnel more than non-family shareholders and have a lower book value. Therefore, it is of great practical significance to enforce the regulation of family-controlled firms.On April 12nd,2005, the CSRC (China Securities Regulatory Commission) officially initiated equity division reform. Equity division reform will, on one hand, form the common interest between floating equities and non- floating equities and make the fluctuation of stock prices become an incentive and restriction for controlling shareholders. On the other hand, equity division reform helps the large shareholders except the controlling shareholders to play a more active role in checking the controlling shareholders. All these will improve corporate governance. This paper also studied the policy effect of equity cushion on the sample companies to examine whether equity division reform would affect the behavior of shareholders and improve corporate value.This paper is divided into seven parts. The first three parts pose research hypotheses on the influencing factors of the two behaviors, the relationship between the two behaviors, the incentives to prop and the influence of the two behaviors to firm value and make some analysis based on relevant literatures. The fourth and fifth parts carry out empirical analysis using single factor and multiple factors respectively, including statistical and econometrical analysis of the samples. In the sixth part, we analyze the policy effect of equity division reform on the sample companies. In the final part, we put forward some suggestions about corporate governance in private listed companies according to the conclusion.