Abstract
It is documented that there is a large divergence of cash flow rights and control rights in ownership concentrated corporations whereby power lies in the hands of the ultimate controlling shareholder especially for Malaysian pyramidal firms. The divergence of these two rights via length of chain leads to the expropriation of minority shareholders interest. Thus, this study aims to examine the factors influencing the length of chain of Malaysian pyramidal firms implying expropriation of minority interest. This study hypothesizes that the distance separating the ultimate controlling shareholder from their affiliated firms is positively related to the presence of eventual negative shocks and vice-versa. Applying the Attig Model and Panel Generalised Least Square (GLS) estimation on Malaysian pyramidal firms between 1990 to 2010 as the underlying statistical test, the results show that there is association between the length of chain separating ultimate controlling shareholder from the affiliated groups and the entrenchment effect. Factors influencing the length of chain such as risk, cash, size, TobinQ, duality, financial institution and liquidity posit significant results and consistent with the entrenchment effect. Future research needs to highlight on identifying the heterogeneous factors that improve the generalizability of research.
Highlights
IntroductionPyramidal firms tend to have excess voting rights over cash flow rights (Claessens, Djankov, Fan, & Lang, 2000; La Porta, Lopez, & Shleifer, 1999)
According to previous studies, pyramidal firms tend to have excess voting rights over cash flow rights (Claessens, Djankov, Fan, & Lang, 2000; La Porta, Lopez, & Shleifer, 1999)
The results report that when the ratio of cash flow right to control right is smaller among Malaysian pyramidal firms, the tendency for the ultimate controlling owner to conduct expropriating behaviour is higher, due to longer length of ultimate controlling owner chain which affects the dilution of minority shareholders’ interests
Summary
Pyramidal firms tend to have excess voting rights over cash flow rights (Claessens, Djankov, Fan, & Lang, 2000; La Porta, Lopez, & Shleifer, 1999). According to Claessens et al (1999), the problem which is associated to ownership concentration is the agency problem which occurs among ultimate controlling shareholders and minority shareholders. There is a high incidence of agency problems due to the divergence of cash flow rights and control rights via length of chain in the pyramidal firms. It is because the ultimate controlling shareholders at the peak of the pyramid takes advantage of the higher control rights to increase leverage which leads to opportunity of expropriation for minority shareholders at the bottom of the pyramids (Claessens et al, 2000)
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