Corporate Financing Policy under Large Shareholder's Control: Evidence from Chinese Listed Companies

Abstract

The ownership concentration and insider control by large shareholders is currently the only corporate governance mechanism in Chinese stock market, and no effective corporate governance mechanisms have emerged as a counterbalance power to restrict the expropriation of outsider investors by these controlling shareholders. So our central hypothesis is that most of Chinese listed companies with ownership concentrated in hands of large shareholders use the stock market just as a source of capital, irrespective of improving corporate performance or financing subsequent investment and growth. In other words, mere purpose of these SOEs going to stock market is nothing but for controlling shareholders to maximize the proceeds from outsider individual investors. We test this hypothesis through examining the behaviors of capital structure and dividend policies, based on a full sample of all listed Chinese companies for a period 1995-2001, using pooled Ordinary Least Square (OLS) models and pooled Logit model. The results support our central hypothesis. We find that there is a U-shaped relationship between largest shareholding and leverage, and there is a reverse U-shaped relationship between largest shareholding and dividend policies. This demonstrates that before threshold level of the largest shareholding, the expropriation effect of largest shareholders dominates and only after a high threshold level of the largest shareholding, the alignment effect begins to dominate. We also have other findings, which help to understand the features of corporate financing policies of Chinese listed companies.