Ownership Structure, Share Transferability, and Corporate Risk-Taking

Abstract

Basic shareholder rights include control rights, cash flow rights, and the rights to transfer shares. We investigate the impact of the divergence of shareholder rights on corporate risk-taking by exploiting two regulatory reforms in China. First, the privatization of Chinese state-owned enterprises (SOEs) launched in the late 1990s conferred cash flow rights to the controlling shareholders of the privatized SOEs. Second, the Split-Share Structure Reform (SSSR) initiated in 2005 repealed the restrictions on the transferability of controlling shareholders’ shares. We report three main findings relating the divergence of shareholder rights to corporate risk-taking. First, corporate risk-taking is significantly lower for SOEs than for family-owned firms. This result is robust to propensity-score matching and various changes in the sample and specification. Second, corporate risk-taking increases significantly after SOEs are fully privatized to family firms. Third, the SSSR significantly increases corporate risk-taking for both SOEs and family firms, and more so for family firms than for SOEs. Our evidence highlights the importance of the alignment of control rights and cash flow rights and that of share transfer rights in inducing higher corporate risk-taking in value-enhancing projects.