Institutional Environments, Ultimate Control Rights And Corporate Capital Structures

Conflicts of interest between the ultimate controlling shareholder and other outside investors isan important factor in the company’s access to capital capacity, and the other vital factor isexternal institutional environments. The paper examines the reciprocal effect of the ultimatecontrolling rights and institutional environments on capital structure, trying to explain theultimate controlling shareholder’s financing structure selection in the background of differentrule of law level and degree of government intervention.Based on the theory of capital structure, we examines the relationships mentioned above bytaking empirical test of the listed company in Shanghai and Shenzhen securities exchanges from2008to2010. The study found the following conclusions. Firstly, in order to ensure control overand access to more disposable resources, the ultimate controlling shareholders significantly tendto arrange a high debt level following the degree of deviation between controlling rights and cashflow rights. Secondly, Areas with high rule of law level do not contribute a higher debt financinglevel to the listed company. However, favorable legal environments tend to curb the ultimatecontrolling shareholders’ preference for debt financing. Thirdly, government intervention willstrengthen the ultimate controlling shareholders’ preference to have a high level of debt. Lastly,we also found the state-owned listed companies had a higher average debt levels than privatecompanies because of government intervention.