A Research On Function Distortion Of Internal Capital Market In Non-state-owned Business Groups

As the rise of corporate diversification strategy and more frequentmerger and acquisition reorganization activities, internal capital market hasbecome an emerging academic field of study at home and abroad. Internalcapital market turns up when the company’s organizational structuredevelops into the M-type or H-type structure, and as an organization ofcapital market, it makes relationship of transaction more complex, whichadds difficulties to corporate governance of the M-type or H-typeenterprises. The root cause of internal capital market not always being ableto run effectively is corporate governance problem. In developing countries,internal capital market has taken on a negative effect because of theproblem of corporate governance. It mainly reflects conflicts of interestbetween the controlling shareholders and outside investors under theorganizational structure of holding company, and internal capital market hasprovided a convenient place for the controlling shareholders to plunderinterest. Especially at present China lies in a period of economic transition,at which corporate governance is not perfect and agency problems are moreserious. It not only reduces the efficiency of internal capital market, but alsocauses function distortion of internal capital market.This paper tries to investigate the way and root of function distortion ofinternal capital market in a case of the Hongyi and Mingtian business groupfrom the perspective of corporate governance. Since it deals with internalcapital market in Non-state-owned business groups, the main study will focus on ultimate controlling shareholder of business group establishinginternal capital markets through the pyramid structure in order to achievetheir interests, which constitutes conflicts of interests between controllingshareholders and small shareholders. This paper systematically combinescorporate governance mechanisms, such as ownership structure, excesscontrol of controlling shareholders and Board Composition and so on, withthe related study of internal capital market based on existing literature andtheories. It is helpful to reveal motivation of ultimate controllingshareholders establishing internal capital market and their decision-makinginfluence. Through different modes of internal capital operation from twodifferent typical groups, it finds that their internal capital markets provide aconvenient channel for ultimate controlling shareholders to occupy interestof listed companies rather than achieve efficient allocation of resources.When exploring the roots of function distortion of internal capital market atthe perspective of company governance, it finds listed companies naturallybecome tools for ultimate controlling shareholders to snatch. At last throughthe findings from case study, this paper appropriately learns relativelymature theories and successful experiences from foreign countries, andthen put forward some countermeasures for internal capital market.