Cash Flow Rights Research Articles

Information Asymmetry Effect on Stock Liquidity Effect on Dividend Payout in Market Microstructure in Indonesia

The impact of market microstructure in shaping corporate governance has been distinguished in several previous research. Market Microstructure becomes prominent factor in emerging markets. This study tested the effect of market microstructure, in the scheme of stock liquidity, on dividend payouts. This study has set focus mainly on the impact of stock liquidity on the corporate payout policy. Later, the researcher examined the interaction given to the stock liquidity factor with information transparency and agency problem properties since the researcher believed that transparency is linked to the and, subsequently, affecting the corporate agents. This research examined observations using quantitative research method, Tobit regression on 256 non-financial firms of the Indonesian capital market during 2010-2018. Stock liquidity significantly impacted dividend policy. The result showed robustness with other stock liquidity measures. This study found that information asymmetry and agency problems had a moderation effect on stock liquidity effect on dividend payout. However, the interaction of stock liquidity and disparity of control rights and cash flow rights did not give a moderation effect on the dividend payout policy. The result supports the notion that dividend payout is an outcome of firm good governance and an inverse of dividend signaling theory.

Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms

In this paper, we examine the antecedents of ownership rights within multiunit firms, focusing on the wedge between the control rights and cash-flow rights that parent companies hold over their subsidiaries. We argue that a key antecedent of a parent’s ownership rights in a subsidiary is the extent of the subsidiary’s interdependencies with the firm. Exploring two such interdependencies, we hypothesize that (1) the wedge between parents’ control and cash-flow rights is smaller for subsidiaries that are more closely related to the firm and (2) there is a U-shaped relationship between the extent of a firm’s multimarket contact in an industry and the wedge between parents’ control rights and cash-flow rights for subsidiaries that operate in that industry. We tested our predictions and found evidence supporting the first hypothesis and mixed results for the second in a sample of subsidiaries newly added to French manufacturing firms through acquisitions or de novo creations. In supplementary analyses, we also found that a subsidiary’s interdependencies are also associated with its hierarchical position within the firm’s formal authority structure. Supplemental Material: The online appendix is available at https://doi.org/10.1287/stsc.2022.0114 .

How does divergence of control and cash-flow rights influence cost stickiness?

This study investigates whether the degree of cost stickiness depends on the divergence between control and cash-flow rights of ultimate owners using data from 22 countries. Firms with a large divergence between control and cash-flow rights are known to take more opportunistic actions at the expense of minority shareholders. The empirical results show that the magnitude of cost stickiness decreases as the divergence between control and cash-flow rights increases due to the greater incentives to manipulate earnings. Firms use both accruals earnings management (AEM) and real-activities earnings management (REM), and among REM, they adjust production activity and discretionary expense to affect cost. Additional tests show that the negative relationship between the divergence between control and cash-flow rights and cost stickiness is more pronounced in countries with weak economic, legal, and social factors. This paper, by examining the effect of ownership structure on cost behavior as well as its underlying mechanism, broadens the understanding of sticky cost behavior and contributes to the growing body of literature on the convergence of financial and managerial accounting.

The Choice between Family CEO and Non-Family CEO: What Are the Determinants?

We examine the factors that influence family firms that are no longer run by the founder, to appoint a chief executive officer from the family rather than from outside the family. Based on agency and signaling theories, we hypothesize that the concentration of family ownership and the presence of the founder increase the likelihood of appointing a family CEO, whereas the gap between voting rights and cash-flow rights (excess voting rights) decreases it. Our regression analyses of Canadian S&P/TSX family firms over the 2002–2008 period confirm our theory that contextual governance factors are good predictors of the type of CEO chosen in family firms.

Foundation-controlled firms and CEO compensation

We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants. Lastly, there is no conclusive evidence of differences in the levels of cash compensation. Our findings support the view that incentive contracts can substitute for large shareholder monitoring.

The UK and dual-class stock-lite – Is it really even better than the real thing?

Abstract In December 2021, the Financial Conduct Authority (FCA) revised the Listing Rules applicable to companies listed on the London Stock Exchange’s (LSE) Main Market to permit the premium-tier listing of companies with specified weighted voting rights shares structures. The revision, broadly based upon the concept of “dual-class stock,” was premised on a desire to attract innovative, high-growth firms to the LSE. Founders would now be able to list their firms, sell equity and issue further shares for growth without fully relinquishing voting control. However, the FCA was clearly also concerned that an unconstrained dissociation between voting and cash flow rights could incentivize pernicious behavior on the part of founders. Accordingly, specified weighted voting rights shares structure embodies various conditions that restrain a founder’s ability to access the full gamut of advantages that dual-class stock can offer. As a result, specified weighted voting rights shares is more dual-class stock-lite rather than a fully-fledged premium-tier move toward multiple voting rights share structures. Less than two years later, the FCA appears prepared to revisit its approach to dual-class stock. Did the FCA get it wrong with dual-class stock-lite? In this article, each of the conditions attached to the use of specified weighted voting rights shares is scrutinized in the context of whether it appropriately balances the desire of founders for flexibility with public shareholder protection. If the intention was to encourage visionary founders to list their high-growth firms on the LSE, it is understandable that the FCA apparently now has buyer’s remorse.

Use of comment letters for mergers and acquisitions in a setting with weak investor protection: The Chinese experience

We adopt a principal–principal perspective to examine whether comment letters for mergers and acquisitions (M&A) protect shareholders, particularly minority shareholders, of acquiring firms in China, where investor protection is weak. This public enforcement tool has several features: (i) regulators provide detailed comments on various matters, (ii) various stakeholders are called upon to respond, and (iii) failure to adequately address the comments to the satisfaction of regulators results in M&A applications being rejected. Our main results show that M&A comment letters affect the outcome of M&A transactions by reducing acquisition premium and improving the fulfillment of performance commitment. Furthermore, this effect is more pronounced when the principal–principal conflict is more severe, as indicated by a greater divergence between cash flow rights and control rights, along with weaker monitoring by multiple large shareholders. Our results suggest that M&A comment letters, if used appropriately, effectively enhance investor protection in less developed economies. We contribute to the literature by providing new evidence of the effects of M&A comment letters in settings with weak investor protection.

Controlling shareholders, their incentives and corporate governance ratings

PurposeThis study aims to facilitate the development of a better understanding of how controlling shareholders respond to the mandatory system of corporate governance rating (CGR) for all firms listed on Taiwanese stock markets and the incentives of controllers to apply corporate governance best practices.Design/methodology/approachUsing CGR data for all Taiwanese listed firms from 2014 to 2020, this study examines whether controlling shareholders determine a firm’s CGR.FindingsSingle-family-controlled firms have the lowest CGRs, and management-controlled firms have the highest ratings. Blockholder-controlled firms are more likely to have top 20% ratings than single-family-controlled firms and bottom 20% ratings than single-family and management-controlled firms. All three categories of firms have unfavorable (favorable) ratings because of substitute governance effects (signaling effects).Originality/valueManagement-controlled firms, in which agency problems refer to principal-agent conflicts, are more likely to have good ratings than single-family controlled firms, in which agency problems refer to principal-principal conflicts. Blockholder-controlled firms have extreme ratings, suggesting that multiple large shareholders develop corporate governance practices consistent with their best interests to increase firm value or expropriate wealth. Low cash flow rights and high control-ownership divergence lead firms to adopt additional governance arrangement(s) to make shareholders trust firms with capital and signal to shareholders that they can trust them with their capital.

On the cash-flow and control rights of contingent capital

Partial conversion of contingent capital (CC) provides its owners with a portfolio of equity and debt. Since the cash-flow rights on equity (debt) typically induce a preference for risk taking (safety), the net preference of CC-holders upon conversion will depend on their relative holdings of each asset, which in turn, depends on the amount of CC converted. Conversions also provide CC-holders with equity-control rights, which afford them greater influence over management. Taking into account these cash-flow/control rights, initial shareholders may find it optimal to: (1) select high-risk assets that create influential and risk-loving CC-holders, or (2) select low-risk assets that forestall the influence of safety-loving CC-holders.

Shareholding control, ownership concentration, and the value of the Brazilian firm

The study analyzes whether the type of shareholding control (dispersed, shared, or dominant) affects agency conflicts by investigating the relationship between shareholding control, ownership concentration, and firm value. The sample is a panel data comprising 1977 firm-year observations from 167 Brazilian firms in the period 2010–2022. Our results show that shared control creates value, whereas dominant control destroys firm value. Voting rights concentration and cash-flow rights reduce the value of firms with dispersed and shared control. However, at firms with dominant control, these firm characteristics increase firm value. Excess voting rights, in turn, destroy the value of firms with shared and dominant control. Our evidence shows that the type of shareholding control influences the nature and magnitude of agency conflicts and the relationship between ownership concentration and firm value. Thus, within an institutional environment, agency conflicts may differ among firms, depending on the type of shareholding control.

The Benefits and Costs of Employee Stock Ownership Plans in China

ABSTRACTResearch IssueWe investigate the deliberations of controlling shareholders in assessing the trade‐offs between costs and benefits preceding the adoption of an Employee Stock Ownership Plan (ESOP). Furthermore, we explore the market responses to ESOP announcements and their associations with the private benefits of control. Moreover, our study delves into the modifications in private benefits of control, changes in employment dynamics, and subsequent operating performance subsequent to the implementation of ESOPs.Research InsightsWe conduct our research employing a comprehensive dataset encompassing the adoptions of ESOPs within publicly listed Chinese companies during the period spanning from 2014 to 2020. Our empirical findings reveal that firms characterized by diminished private benefits of control, as indicated by a reduced wedge between control rights and cash flow rights, as well as a lower frequency of related party transactions, are more inclined to consider the adoption of ESOPs, especially when the potential for productivity gains is substantial. These firms also elicit more positive market reactions upon the announcement of their ESOP initiatives. While ESOPs do lead to heightened productivity, the overall enhancement in operating performance remains relatively modest due to the significant cost burden imposed on shareholders by the large unearned employee compensation. Our results suggest that controlling shareholders who partake in fewer private benefits of control are more inclined to forego these entitlements in favor of embracing ESOPs as a strategic mechanism for realizing productivity gains. However, it is imperative to acknowledge that such gains may be considerably offset by substantial increases in employee compensation expenses. Despite the prevalence of short‐lived features in Chinese practice, we lack substantial evidence supporting their inhibitory effects on the increased monitoring and productivity following ESOP adoption.Academic ImplicationsThis study provides a comprehensive examination of recent ESOPs in the Chinese context, offering insights into the regulatory complexities within the largest emerging market. The research contributes to the existing literature by unveiling the intricate relationship between private benefits of control and the decision to adopt ESOPs, as well as their subsequent implications. Notably, our findings, particularly the observed neutral impact on operating performance, augment the ongoing discourse surrounding the efficacy of ESOPs in augmenting shareholder value.Policy ImplicationsThis research introduces ESOPs as an innovative mechanism for mitigating private benefits of control, particularly in the context of emerging markets where controlling shareholders tend to accrue significant private benefits of control. The incorporation of performance‐related criteria within the ESOP framework serves as a means to effectively manage the additional compensation associated with these plans, thereby enhancing their overall efficacy.

Impact Makers (A): The Newman's Own of Management Consulting

This case requires students to evaluate alternative dual-share-class corporate structures that allow companies and entrepreneurs to pursue profit with purpose. The case explores Impact Makers, an IT consulting company based in Richmond, Virginia. While original founders of the firm hold all voting rights, the cash flow rights belong to two nonprofits setting the stage for a Newman's Own model of management consulting. The case discusses whether and how the alternative corporate structure aids the firm's overall strategy to attract top-quality employees, pay them competitive salaries, and provide superior service to its clients while donating 100% of its lifetime value to charitable causes, largely through partnerships with various nonprofit organizations. More importantly, the case asks students to evaluate how such a dual-share-class and dual-purpose company can raise capital to fund continued growth.The case opens with CEO Michael Pirron reminding himself of all the questions he had run through to execute a strategy to further grow Impact Makers' consulting business both through expanding a menu of services and through conquering new geographical markets. To do either, or both, the company needed a cash infusion. Internal cash was limited, as up to 40% of it flowed to charitable partners, demonstrating Impact Makers' commitment to its mission. Raising debt for a company without fixed assets was challenging and time consuming. Complicating it all was that being structured as a nonstock corporation rendered equity raising difficult. Could Impact Makers raise money to grow and stay true to community values at the same time?

Disclosure rules, controlling shareholders, and trading activity in the new issues market

This study examines the impact of controlling shareholders’ ownership on trading activity under regimes with different disclosure rules. In regimes with ambiguous disclosure rules, trading volume and turnover are higher when controlling shareholders’ ownership is low and their control rights potentially exceed their cash flow rights. However, this impact diminishes in regimes with strict and unambiguous disclosure rules. These findings are robust to endogeneity concerns, suggesting that investor beliefs about potential agency conflicts are less heterogeneous, as evidenced by their trading behavior when disclosure rules are stringent and well defined. The results highlight the role of disclosure credibility and readability in influencing trading activity, offering new insights into the relationship between ownership structure and market behavior.

Exacerbate or alleviate? Impact of controlling shareholders' share pledging on over-investment

This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-investment degree becomes severer as the pledging percentage increases. In addition, we observe this effect more pronounced in firms characterized by more concentrated ownership structure. Our findings still hold after the endogeneity disposal with a firm-fixed effect regression, Heckman two-stage regression with instrumental variables, the propensity score matching (PSM) and differences-in-differences (DID) approach. Furthermore, we observe that firms with controlling shareholders' share pledging tend to be concerned more with additional investments while neglecting maintenance investments and R&D investments. Combined with the motivation of controlling shareholders to gain substitute cash flow rights and convey good signals to the market, as well as the feasibility by using their dominate voting rights and pledged funds, it properly illustrates the mechanism through which controlling shareholders' share pledging impact over-investment, which meanwhile aggravates the principal-principal (PP) conflicts between controlling shareholders and minority shareholders. Consequently, our findings empirically demonstrate that signaling costs in signaling theory could be explicit conflicts in the agency theory, adding new empirical evidence for the relationship between signaling theory and agency theory.

The impact of business group affiliation on CO2 emissions: evidence from Chile

ObjetivoEste estudio tiene como objetivo investigar la relación entre la afiliación a grupos empresariales y las emisiones de CO2 en Chile, proporcionando información sobre las externalidades de contaminación asociadas con las estructuras de grupos empresariales y sus implicaciones para el desempeño ambiental de las empresas.Diseño/Metodología/AproximaciónSe utilizó una muestra recolectada de manera manual de instalaciones industriales y subsidiarias de empresas listadas en Chile para analizar las emisiones de CO2 de empresas afiliadas a grupos empresariales en comparación con empresas independientes. Se emplearon análisis de regresión de efectos fijos y modelos de emparejamiento por puntaje de propensión para examinar las diferencias en los niveles de emisiones.HallazgosLos resultados sugieren que las empresas afiliadas a grupos empresariales tienen mayores emisiones de CO2 en comparación con empresas independientes similares. Esto sugiere que las estructuras de grupos empresariales pueden debilitar las presiones para la reducción de emisiones y el mantenimiento de la legitimidad pública entre las empresas afiliadas.OriginalidadEste estudio contribuye a la literatura sobre gobierno corporativo, riesgos climáticos y externalidades de contaminación al proporcionar evidencia empírica sobre la relación entre la afiliación a grupos empresariales y las emisiones de CO2. Destaca la importancia de considerar la influencia de las estructuras corporativas en el rendimiento ambiental, especialmente en el contexto de las economías de mercados emergentes.Limitaciones/Implicaciones de la InvestigaciónLos hallazgos de este estudio están sujetos a ciertas limitaciones, como el uso de un conjunto de datos específico de Chile y la incapacidad para explorar ciertos factores debido a restricciones de datos. Por ejemplo, no pudimos examinar la influencia de las características de los ejecutivos de las empresas en los niveles de contaminación. Investigaciones futuras deberían abordar estas limitaciones y ampliar el análisis a otros países de mercados emergentes para investigar más a fondo el impacto de regulaciones ambientales laxas o ineficaces en los resultados de contaminación.Implicaciones PrácticasLos hallazgos de la investigación tienen implicaciones prácticas para inversores y responsables políticos. Los inversores interesados en inversiones ambientalmente sostenibles deben tener en cuenta los niveles más altos de contaminación asociados con empresas afiliadas a grupos empresariales. Los responsables políticos pueden utilizar estos hallazgos para diseñar regulaciones más efectivas e incentivos para fomentar los esfuerzos de reducción de emisiones dentro de las estructuras de grupos empresariales.Implicaciones SocialesLos resultados del estudio enfatizan la necesidad de comprender de manera integral las implicaciones ambientales de la afiliación a grupos empresariales. Al reconocer el potencial de mayores emisiones en las estructuras de grupos empresariales, los interesados pueden abogar por prácticas sostenibles, fomentar la transparencia y promover una gestión ambiental responsable dentro de las entidades corporativas.

Dual-Class Share Structure in the Indonesian Equity Market

A lot of major equity markets abroad have allowed the listing of the Dual-Class Share Structure (DCSS) corporations. DCSS is an agreement in which two types of shares are issued by the very same firm, with one type of share conferring greater power compared to the other. The Indonesian Stock Exchange only allows for limited access for DCSS technology-related corporations to list on its Mainboard. To remain attractive as Southeast Asia's top financial centre, Indonesia needs to alter its securities regulations while making its listing market adaptable to meet the needs of various enterprises. This research aims to analyse and elaborate on permitting DCSS corporations to go public and devise suitable governance safeguards to guarantee the highest possible standards of corporate governance are upheld. This research explores the legal certainty and applicability of DCSS in the Indonesian equity market and abroad, using a qualitative approach and thematic analysis of secondary data. The major finding of this research is the acceptance of DCSS adds to issues with abuse of power by the controlling shareholders, which was outweighed by their cash flow rights. While those in favour of DCSS argue that the existing shareholders' main reason for choosing a DCSS arrangement is to preserve company control. Most major exchanges in the world have taken action to accommodate DCSS going public, like those in the USA, Hong Kong, Singapore, and China. Considering the magnitude of the Asian market, Indonesia can emulate the accomplishments of other exchanges too. A series of recommendations are provided to guarantee the highest standards of corporate governance can be upheld, such as: permitting DCSS for new entrants and innovative businesses, regulating the ownership of enhanced voting shares, and setting out sunset provisions for DCSS arrangement.

Ownership structure and carbon emissions reduction

This study investigates the relationship between ownership structure and reductions in carbon emissions. The Taiwan government passed the Greenhouse Gas Reduction and Management Act in July 2015, requiring carbon-intensive firms to disclose their annual direct and indirect carbon emissions. To mitigate endogeneity concerns, we use Taiwan's inheritance and estate tax reform in 2017 as an exogenous shock to a firm's ownership structure to conduct two-stage least squares analyses. We find that the higher the controlling shareholder's cash flow rights, the more a firm's direct carbon emissions will be reduced, consistent with the positive incentive effect, long-term decision-making, and socio-emotional wealth argument. Furthermore, we also find that when the controlling shareholder's board seat ratio highly deviates from their cash flow rights, the controlling shareholder is less concerned about carbon risk and even increases direct carbon emissions, consistent with the negative entrenchment effect.

Ownership structure and eco-innovation: Evidence from Chinese family firms

Although eco-innovation is typically less economically appealing due to double externalities, it provides initiators with the socioemotional wealth of green reputation and social capital, which family owners may be willing to preserve through economic concessions. We argue that the separation of voting rights and cash flow rights of family ownership eases the tension between socioemotional wealth and financial wealth for family owners. When family owners have a high level of rights separation, they benefit more from eco-innovation in terms of socioemotional wealth while requiring fewer economic concessions; as a result, they are more likely to invest in eco-innovation. The data on Chinese listed family firms supports our hypothesis, and this relationship is more pronounced in years with more prominent environmental concerns, among larger firms, and in firms with political capital. Our findings highlight the role of ownership structure in influencing the tension between socioemotional wealth and financial wealth, which is a key consideration in family firms' decision-making.

Foreign residency rights and corporate supplier concentration: Evidence from China

Using data of Chinese non-state-owned firms, we investigate the impact of controlling person’s foreign residency rights on corporate supplier concentration. We find that a firm’s supplier concentration decreases when its controlling persons have foreign residency rights, particularly when the country of residence has no extradition agreements with China or has a weak institutional environment. The impact is more pronounced for firms in competitive industries, firms with larger separation of control rights and cashflow rights, firms with fewer independent directors, and firms with fewer analyst coverage. Studies on influencing channels show that foreign residency rights decrease corporate supplier concentration through an increase in corporate fraud and cash flow risks, and a decrease in corporate information disclosure quality and overseas investment efficiency. Finally, we find that the reduced corporate supplier concentration accompanied by foreign residency rights decreases corporate operating performance and increases operating risk. We also find that suppliers’ such reaction can increase their operating performance and decrease operating risk.

Loyalty Voting Rights in Belgium: Nothing More than a Control-Enhancing Mechanism?

Abstract 27In 2019, Belgium joined the European trend and allowed listed companies to adopt loyalty voting rights, i.e. double voting rights for shareholders who have held their shares for more than two years. The stated goals were to combat short-termism by rewarding long-term shareholders and to encourage IPOs by allowing founders to retain control over the corporation with a smaller participation. Our paper analyzes these rationales from a conceptual perspective, describes the Belgian legal framework for loyalty voting rights, and presents novel empirical evidence on the use of loyalty voting rights in Belgium. We argue that the Belgian legal framework is designed to favour controlling shareholders and other insiders. In addition, our empirical data supports the view that loyalty voting rights mainly function as a control-enhancing mechanism, as loyalty voting rights are almost exclusively used by insiders. This is not necessarily a problem, in our view, as controlling shareholders may be able to help combat the short-termism problem where it would exist. However, loyalty voting rights also increase the incentives for insiders to extract private benefits of control by creating a wedge between cash flow rights and voting rights. We find that this wedge in our Belgian sample has been on average 11 percentage points. In addition, our evidence finds that the votes of insiders were often sufficient to adopt loyalty voting rights, and that non-insiders on average vote against loyalty voting rights. This highlights the risk of making it too easy to introduce loyalty voting rights in the midstream. The arguments for allowing loyalty voting rights are the strongest when they are introduced at the IPO stage, but so far, none of the Belgian corporations with loyalty voting rights have introduced them at the IPO. We conclude that loyalty voting rights are nothing more than a control enhancing mechanism. This raises the questions: why not allow other types of control enhancing mechanisms, such as dual class share structures? And why not treat the midstream introduction of loyalty voting rights with a similar level of protection as the midstream introduction of dual class share structures? We fail to see the policy reasons for this wide divergence.28