Excessive Control Right,Cash Holdings And Placement Structure Of Debt

In modern corporate ownership structure,using pyramid ownership structure,multiple control chains and dual-class shares,the ultimate controlling shareholder can own the control rights of a company with a low cash-flow rights.On one hand,the widespread divergences between the control and cash-flow rights can improve the resource allocation efficiency within the enterprise groups.On the other hand,the high control rights enable the ultimate controlling shareholders to engage in various self-dealing activities to diver corporate resources for private benefit while the low cash-flow rights expose the ultimate controlling shareholders to very limited direct financial cost of such activities.The agency cost between the ultimate controlling shareholders and the minority shareholders,known as Type ? agency cost,is one of the main topics in China.Traditional theories on capital structure focus on the choice between equity financing and debt financing and ignore the heterogeneity of debt financing.The choice between public debt,which includes corporation bonds,Medium Term Note and Short-term financing bond,and private debt,which is mainly bank loan,is known as the placement structure of debt.On one hand,compared to public debt holders,banks have significant comparative advantages in monitoring efficiency due to access to private information as insiders.Superior access to information enables banks to detect expropriation or opportunistic activities by controlling shareholders and corporate insiders and,accordingly,to punish the offending borrowers either by liquidation or through renegotiation.In contrast,the diffuse ownership of public debt and the resulting free rider problems weaken individual bondholders'incentives to engage in costly monitoring.In short,the combination of concentrated holdings,credible threats,and superior access to information makes banks much more effective monitors than public bondholders in deterring potential self-interested or self-dealing activities.On the basis of the previous analysis,we investigate the impact of the ultimate controlling shareholder's excessive control right on the placement structure of debt from the idea that the ultimate controlling shareholder may choose public debt financing over bank debt financing as a way of avoiding scrutiny and insulating themselves from bank monitoring.Based on the data of A-Share listed companies on both Shanghai and Shenzhen stock markets from 2008 to 2015,we find that the ultimate controlling shareholder's excessive control right has a significant negative impact on the proportion of bank debt and a significant positive impact on the proportion of public debt,which is consistent with the hypothesis that ultimate controlling shareholder with excessive control right choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.In another set of tests,we investigate whether state-owned and the level of cash holdings affect the relationship between excessive controlling right and the placement structure of debt.Due to the soft budget constraint,it's possible that for firms owned by state,the placement structure of debt may be less sensitive to the ultimate controlling shareholder's excessive controlling right.As the agency problems are particularly acute for firms with high level of cash holding,it's possible that for firms with high level of cash holdings,the placement structure of debt may be more sensitive to the ultimate controlling shareholder's excessive controlling right.Indeed,we find that the effects of ultimate controlling shareholder's excessive controlling right on the placement structure of debt is more pronounced when the firms is state-owned or the firm's level of cash holdings is relatively high.In addition to the effects of ultimate controlling shareholder's excessive controlling right on the placement structure of debt,we also explore the impact of excessive controlling right on firm value.As has been widely shown in the literature,we find that the ultimate controlling shareholder's excessive controlling right has a negative impact on firm value.Compared with public debt,bank monitoring can reduce the moral hazard problems and provide borrowers strong incentives to make appropriate corporate decision.As a consequence,we find that the proportion of bank financing can weaken the negative impact of the ultimate controlling shareholder's excessive controlling right on firm value,and the proportion of public debt can strengthen the negative impact.To take the level of cash holdings into consideration,we spilt the sample into firms with high level of cash holdings and firms with low level of cash holdings and repeat the regression.In firms with high level of cash holdings,we continue to find that the proportion of bank financing can weaken and the proportion of public debt can strengthen the negative impact of the ultimate controlling shareholder's excessive controlling right on firm value.