The Impact Of The Separation Between Cash Flow Rights And Control Rights On Enterprise Value

The phenomenon of separation between cash flow rights and control rights iswidespread, which now is one of the hot-spots issues. Under this structure, ultimatecontrollers achieve company’s control rights with a lower proportion of cash flowrights, existing researches don’t reach the same conclusion in these areas: whether theseparation between cash flow rights and control rights will generate agency conflictsbetween controlling shareholders and minority shareholders, whether it has a positiveor negative impact on enterprise value. In recent years, the rapid development ofprivate enterprises and its increasingly important role in economic development makeit particularly important for the healthy development of Chinese private enterprises toverify the existence of separation between cash flow rights and control rights, if so, toexplore its main causes and its impact on enterprise value by using the data of Chineseprivate listed companies.Almeida and Wolfenzon (2006)’ study confirmed that pyramidal ownershipstructure has a financing advantage than parallel ownership structure in the case offacing financial constraints for start-up companies. Based on the research of Almeidaand Wolfenzon (2006), Zhang Wenlong (2009) took into account financial constraintsand insolvency risk factors in his research, and through establishing thedecision-making model of ultimate controllers to choose control structure, he foundfinancial constraints faced by start-up companies and insolvency risk during businessprocess were important factors of organizational structure. Companies facing withfinancial constraints are easier to build pyramidal ownership structure. Consideringthe reality of financial constraints faced by our private enterprises, based on previousstudies, this paper selects2008-2010data of Chinese private listed companies as thestudy sample, measures financial constraints by building factor analysis model,examines the extent of debt financial constraints’ impact on separation between tworights, and then tests impacts of cash flow rights, control rights, separation betweentwo rights, separation between two rights under pyramidal structure than otherstructures, on enterprise value by building multiple linear regression model.This study shows:(1) the proportion of cash flow rights or control rights variesgreatly for ultimate controllers of different listed companies to achieve control; Fromthe median view, the proportion of control rights and cash flow rights both show a clear upward trend, but the latter’s growth rate slightly higher than the former,separation between two rights shows a significant downward trend.(2)The greaterfinancial constraints enterprises face, the bigger separation between two rights isunder pyramidal ownership structure.(3)The higher proportion of cash flow rights orcontrol rights the ultimate controllers own, the greater enterprise value will be; Withthe increasing separation of two rights, the enterprise value will be lower; Comparedwith other controlling means, the negative effects of increasing separation onenterprise value are more obvious under pyramidal structure, the behavior of theultimate controllers “hollowing out” enterprise value is more serious, the infringementagainst small investors is greater.