The impact of separation of ultimate control rights and cash flow rights on debt financing cost

Abstract

To disclose the effects of separation of ultimate controlling rights and cash flow rights on debt financing cost, this paper examines empirically how ultimate controlling shareholder influences cost of debt, based on a balanced panel (4880 observations in total) composed of 976 non-financial companies listed in Shenzhen and Shanghai stock exchange during 2006 ∼ 2010 and applied random effect model and parametric tests to empirically investigate the impact of separation of ultimate controlling rights and cash flow rights on debt financing cost by controlling related variables. The results show that the separation of ultimate controlling right and cash flow right does affect cost of debt. Specifically speaking, (1) the ultimate controlling shareholders' cash flow rights is negatively related to cost of debt, indicating that the higher cash flow rights of ultimate controlling shareholders,the lower the cost that it expropriates the debtor,the listed company will use little cost of debt;(2) the degree of separation of ultimate controlling shareholders' control rights and cash flow rights has significantly negative correlation with cost of debt, indicating that the supplier of debt capital will charge for higher capital cost for higher separation of control rights and cash flow rights in order to mitigate agency conflicts, compared with those companies without separation of control right and cash flow right.