Complex Ownership Structures Research Articles

Corporate Governance Disclosure for Complex Ownership Structure in India

The transition of a national economy to global economy affected the corporate operation in a varied manner. The dichotomous models of corporate governance call for clarity in corporate objectives, strategies and responsibilities of the modern corporation. The dichotomous approaches towards corporate disclosure are influenced by ownership models, that is, concentrated (e.g., Germany and Japan) and dispersed (e.g., the United States [USA] and the United Kingdom [UK]). The dispersed ownership model implicates arm’s length relationships between shareholders and managers, whereas opposite trend demonstrates concentrated ownership. It implicates heavy reliance on large shareholders for bankrolling the firm. Post-reform market in India developed complex ownership structure which represents both concentrated and disperse trends. Consequently, learning curve for corporate governance disclosure in this type of ownership structure is yet to be consolidated. The present research article draws up a case for improvements in the corporate governance disclosure and attempts to indicate a smarter corporate governance disclosure framework for complex ownership structure in India from the learning of selected jurisdictions (the USA, the UK, Japan and Germany) and best practices. The research article also spotlights on the level of convergence of the corporate disclosure norms in India with the global standards. The scope of this article is limited to non-financial disclosure.

Impact of Excess Control, Ownership Structure and Corporate Governance on Firm Performance of Diversified Group Firms in Pakistan

This paper attempts to explore the effect of excess control, ownership structure and corporate governance on firm performance in Pakistan. The study takes a sample of 184 non-financial sectors' group firms listed on the Karachi Stock Exchange (KSE) covering a period from 2004 to 2012. The multiple regression models are applied using panel data framework to test the significance of relationship. The results are consistent with the findings of the prior studies conducted in both advanced and emerging economies. The results show that firm ownership is a strong influential factor in affecting firm performance in Pakistan. Both inside ownership and ownership concentration are negatively related to firm performance consistent with divergence of interest effect and entrenchment effect. However, inside ownership squared is strongly positively related to firm performance indicating that inside ownership beyond a certain threshold level started to influence firm performance positively consistent with incentives effect. Ownership disparity affects strongly negatively the financial performance of group firms consistent with the divergence of interest effect. Institutional ownership contributes positively towards firm performance. Noticeably, board independence and outside block holdings play a significantly positive role in affecting financial performance of the group firms in Pakistan. The results show strong evidence that ultimate controllers in group firms use complex ownership and pyramidal structures to extend their ultimate control over many firms with least cash flow rights. The higher the divergence between ownership and control, the greater the potential of the ultimate controllers exerted their entrenched behavior in group firms. These results highlight the internal corporate governance problems faced by the group firms and suggest the need for strengthening the corporate governance mechanism in Pakistan.

Business group affiliation, earnings management and audit quality: evidence from Bangladesh

PurposeThis study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh.Design/methodology/approachA usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation.FindingsResults showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms.Practical implicationsThe results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent.Originality/valueThis study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

Non-urban area ownership structure. Case study of Southern Poland

Abstract The study shows a possible way of analyzing the diversity of ownership forms in non-urban areas, with particular focus on land co-ownership. The data in cadastral databases was processed with the use of the relational model which applied information on the geometry of areal spatial objects and descriptive attributes. The paper presents also the results of the analysis of Nowy Sącz District with the area of 1.550 sq.km and containing approximately 200.000 parcels. The area is representative for many countries in Central and Eastern Europe, where unfavorable land fragmentation indices and complex ownership structures complicate investing processes and development of rural areas what results in progressive degradation of agricultural and cultural landscape. The results indicate that the co-ownership phenomenon affects 13% of parcels in the study area. However, it varies greatly depending on the village and ranges from 3 to 67% of total parcels number. Suggested methods of analyzing the ownership structure are of universal character. In spite of this, when used during analyses conducted in other countries, certain modifications are required. It is mainly caused by the differences in cadastral data models used in those countries.

Complex ownership structures, corporate governance and firm performance: The French context.

This study seeks to understand the leading role played by the blockholders and their true governance mechanism, in the French context, characterised by complex ownership structures. We focus on the role that second-tier shareholders can play in the optimal governance of companies and in their capacity to solve both principal/agent and principal/principal agency conflicts. Using a sample of 2118 observations between 2000 and 2009, we find that second-tier shareholders exercise effective additional monitoring when power is contestable but increase principal/principal agency costs in the presence of a controlling owner. We also show that shareholder homogeneity reduces agency conflicts. Our results demonstrate that the level of control contestability is essential in the understanding of governance mechanisms. Such contestability is to be found simultaneously at institutional level, at the level of the balance of power between blockholders, and according to the nature of the shareholders. Thus, the usual agency theory conclusions are debateable when the legal framework offers little protection of minority shareholders, and when ownership structure is complex and heterogeneous in nature. The study of corporate governance must therefore encompass a twofold analytical perspective, namely, an institutional and a socio-organisational one. The analysis and findings could be particularly useful in assessing corporate governance in the context of several European countries with a similar self-dealing legal environment to the French one, including Italy and Greece.

Research on the Impact of Ownership Structure to Operation Performance of the Chinese Listed Port Companies

The ownership structure which has a huge impact on company operation performance is the foundation of corporate governance structure choice. At present, the number of China's listed port companies is the largest in the world; however, they have a very complex ownership structure. This study discusses the impact of ownership structure on the operation performance of the Chinese ports. This empirical research applies factor analysis to evaluate the operation performance of listed port companies, and then adopts linear regression analysis based on the evaluation results to explore the impact of ownership structure to operation performance. Finally, it proposes recommendations for optimizing the ownership structure of listed port companies, in order to promote a better and faster development of China's port industry. The empirical results show that for most of the listed port companies, the largest shareholder is in the absolute controlling position, and the gap between the largest shareholder and the second largest shareholder is very large, which means the ownership concentration is relatively high. Meanwhile, the top five shareholders equity ratio squared is in negative correlation with operation performance.

Multiple Large Shareholders And Owner-Manager Compensation: Evidence From French Listed Firms

The objective of this study is to examine the relation between complex ownership structures and managerial compensation. More specifically, we examine the impact of the owner-managers excess control and the presence of multiple large shareholders (MLS) on the owner-managers compensation. Using a sample of French publicly listed firms, the results reveal several important points. First, the owner-managers compensation increases with the owner-managers excess control. This finding indicates that managers use their power to increase their pay, hence expropriating minority shareholders. Second, the presence of MLS decreases managerial opportunism and prevents owner-managers from diverting corporate resources for their own benefit. Hence, MLS play an important monitoring role.

Does cadastral division of area-based ecosystem services obstruct comprehensive management?

Management of ecological entities in agricultural landscapes is often challenged by a complex ownership structure governed by a cadastral system dictated by agricultural interests and historical land use practices. The cadastral division is suspected to obstruct the deliverance of ecosystem services (ES) from the landscape. The objective of this analysis is to quantify the cadastral fragmentation of selected landscape-scale ES. Contiguous ecological units and landscape entities as designated in Danish municipal planning were analyzed. The designations comprised the existing ES represented by EU Natura 2000 areas, drinking water protection areas and valuable landscapes, and potential ES in areas designated for potential wetlands, afforestation and recreational trails. In each designated area the cadastral structure in terms of number of units, size, and number of affected properties was analyzed. In all cases a large number of rather small (mean area <10ha) cadastral units with different owners characterize the designated areas providing particular ES. Accordingly large numbers of properties were affected by the designations. The reasons for the high numbers of cadastral units pertain to the historical background of the cadaster as a tool of optimizing agricultural production. This suggests inherited difficulties in imposing a uniform management regime in cases where regulatory tools are dependent on the attitude of the individual land owner. Difficulties are also arising in situations where potential ES are to be unfolded in spatial explicit contexts; all landowners must be aligned in terms of new regulation if the particular service is to be released simultaneously and uniformly in a spatial defined area. It is concluded that sound ecosystem and landscape management that follows boundaries defined by natural phenomenon is impeded by cadastral divisions.

Do venture capitalists play a monitoring role in an emerging market? Evidence from the pay–performance relationship of Chinese entrepreneurial firms

This paper investigates venture capitalists' monitoring of managerial behavior by examining their impact on CEO pay–performance sensitivity across various controlling structures in Chinese firms. We find that the effectiveness of venture capitalists' monitoring depends on different types of agency conflict. In particular, we find that venture capital (VC) monitoring is hampered in firms that experience severe controlling-minority agency problems caused by disproportionate ownership structures. We provide further evidence that VC is more likely to exert close monitoring in firms that have greater managerial agency conflict, and thus require more direct monitoring. However, controlling-minority agency problems have a greater impact on VC monitoring than managerial agency problems. Overall, our study suggests that venture capitalists' monitoring role is hampered in an emerging market where firms have complex ownership structures that contribute to severe agency conflict between controlling and minority shareholders.

Rethinking Market Regulation: A Proposal to Integrate the National Accounts and Expose Foreign Exchange Risks

The SNA and BOP are not ‘fit for purpose’. There are major differences in reporting between stocks and flows: net versus gross; end-period versus transaction date valuation; absent stocks; obfuscation from financial innovation; complex ownership structures; and unconfirmed transactions. Instead, there is blind faith in market-clearing and regulatory reporting ex-post. Integrated National Accounts would better reveal risks. The design could be adapted from other technologies, including crypto-currencies to ensure anonymity in the public ledger. Reform requires the introduction of the Product Identifier (PI) and Legal Entity Identifier (LEI). The challenges are illustrated with some contemporary examples: TARGET imbalances; leveraged external positions; trade imbalances; and gross domestic product measurement. The alternative is stark: we can continue to put our faith in private markets alone.

Do Venture Capitalists Play a Monitoring Role in an Emerging Market: Evidence from the Pay-Performance Relationship of Chinese Entrepreneurial Firms?

This paper investigates venture capitalists’ monitoring of managerial behaviour by examining their impact on CEO pay-performance sensitivity across various controlling structures in Chinese firms. We find that the effectiveness of venture capitalists' monitoring depends on different types of agency conflict. In particular, we find that venture capital (VC) monitoring is hampered in firms that experience severe controlling-minority agency problems caused by disproportionate ownership structures. We provide further evidence that VC is more likely to exert close monitoring in firms that have greater managerial agency conflict, and thus require more direct monitoring. However, controlling-minority agency problems have a greater impact on VC monitoring than managerial agency problems. Overall, our study suggests that venture capitalists' monitoring role is hampered in an emerging market where firms have complex ownership structures that contribute to severe agency conflict between controlling and minority shareholders.

Factors in Managing Actuarial Assumptions for Pension Fair Value: Implications for IAS 19

Corporate managers make several discretionary assumptions (i.e., the rate of salary growth and assumed return rate of pension plan assets) in calculating the fair value of pension assets and value of pension liabilities. In this study, we examine the factors that can induce managers to increase (decrease) fair value of pension assets (liabilities) through pension assumptions. We use the Taiwan setting as a natural experiment because Taiwan is planning to adopt IFRS from 2013 on. The estimation of pension asset (liability) value is similar between Taiwan accounting standards (i.e., TFAS 18) and international accounting standards (IAS 19); however, fair value is only disclosed in the financial statements under TFAS 18, but is required to be recognized in the balance sheet under IAS 19. The findings under TFAS 18 can provide important implications for future adoption of IAS 19. Using two key inputs for pension pricing model, this study finds that companies are inclined to increase (decrease) the value of pension assets (liabilities) by rising (lowering) the assumed expected rate of asset returns (expected salary growth). The manipulation is more pronounced for firms with high distress risk and complex ownership structure. Prior studies find that once firms are required to recognize the fair value (i.e., adopting IAS 19) as opposed to disclose the information (i.e., TFAS 18), firms have higher incentives to manipulate the model inputs. This suggests that the regulator needs to specify the authoritative enforcement rules regarding fair value estimation, and provides more insights on firms with high distress risk and complex ownership structure.

Complex ownership and capital structure

This paper explores pyramidal firms and their motivations for the use of debt financing. We find that pyramids have significantly higher leverage than non-pyramids and that the use of debt in pyramids is associated with the risk of expropriation. We do not find evidence for the control-enhancing, disciplining, tax-reduction, and risk-sharing explanations for the use of debt financing. Our results indicate that the capital structure of pyramids is affected by the expropriation activities of ultimate owners that have excess control rights.

Does the Control-based Approach to Consolidated Statements Better Reflect Market Value than the Ownership-based Approach?

Motivated by the recent Discussion Paper (DP) issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on how to define reporting entities, this study investigates the value relevance of consolidated statements under the ownership-based approach of U.S. Accounting Research Bulletin No. 51 (ARB 51) and the control-based approach of International Accounting Standard No. 27 (IAS 27). The results show that consolidated financial statements based on a broader definition of control provide more useful accounting information than those based only on majority-ownership control. We also address one concern raised in the DP, namely, whether a reporting entity should use the common control model to include entities that are under common control of an individual investor or family. The results suggest that accounting standard boards should include the common control model in defining the group reporting entity for firms with complex ownership structures.

Form versus substance: The effect of ownership structure and corporate governance on firm value in Thailand

We examine the relation between the quality of corporate governance practices and firm value for Thai firms, which often have complex ownership structures. We develop a comprehensive measure of corporate governance and show that, in contrast to conventional measures of corporate governance, our measurement, on average, is positively associated with Tobin’s q. Furthermore, we find that q values are lower for firms that exhibit deviations between cash flow rights and voting rights. We also find that the value benefits of complying with “good” corporate governance practices are nullified in the presence of pyramidal ownership structures, raising doubts on the effectiveness of governance measures when ownership structures are not transparent. We conclude that family control of firms through pyramidal ownership structures can allow firms to seemingly comply with preferred governance practices but also use the control to their advantage.

Complex Ownership and Capital Structure

This paper explores pyramidal firms and their motivations for the use of debt financing. We find that pyramids have significantly higher leverage than non-pyramids and that the use of debt in pyramids is associated with the risk of expropriation. We do not find evidence for the control-enhancing, disciplining, tax-reduction, and risk-sharing explanations for the use of debt financing. Our results indicate that the capital structure of pyramids is affected by the expropriation activities of ultimate owners that have excess control rights.

Rebuilding the Great Pyramids: A Method for Identifying Control Relations in Complex Ownership Structures

Identifying the corporate controller (controlling shareholder, ultimate owner) is an essential prerequisite for any debate on the corporate governance of a specific firm and of entire markets. This paper aims to provide a comprehensive, precise and economically sound method for identifying control relations on the corporate level and especially in complex ownership structures. We apply weighted voting games literature as a theoretical framework for our analysis and use the Shapley-Shubik and the Banzhaf power indices to determine control rights. The core element of the proposed method, distinguishing our study from others, in solving the puzzle of corporate control, is the simultaneous analysis of both the specific ownership map within the corporation and the corporate network in which the firm is embedded. We implemented our algorithm into a Java computer program and tested it on a real-world data set of corporate ownership in the Israeli market. The direct product of the analysis of these data is a comprehensive map of control relations at every time point. We find that the corporate control relations identified by our method are richer and more accurate than those provided by different official sources.

Complex Ownership Structures and Accounting Conservatism

This study examines the use of accounting conservatism in firms with multiple controlling owners. In particular, we investigate the association between dispersion of cash-flow rights among controlling shareholders and accounting conservatism as well as how ownership type differences among controlling shareholders, family ownership, and legal institutions influence this association. Using a comprehensive, firm-level ownership dataset for thirteen Western European countries to conduct the empirical analysis, we find that: (1) dispersion of cash-flow rights across multiple large owners is positively associated with accounting conservatism; (2) the positive association between dispersion of cash-flow rights and accounting conservatism is more pronounced when controlling shareholders are of different types; (3) family ownership strengthens the positive association between dispersion of cash-flow rights and accounting conservatism; (4) the positive association between dispersion of cash-flow rights and accounting conservatism is more pronounced in countries with stronger legal institutions. This study contributes to the literature in a number of ways. First, this study highlights the importance of the second largest controlling shareholder in affecting the level of accounting conservatism. Second, this paper reinforces the important role played by ownership type differences among controlling shareholders in influencing the association between dispersion of cash-flow rights and accounting conservatism. Third, this paper strengthens the importance of family ownership in affecting agency problems between majority and minority shareholders. Fourth, this paper stresses the importance of legal institutions in influencing the installation of firm-level corporate governance mechanisms. Finally, the findings of this study have important implications for accounting standard setters attempting to eliminate conservatism in financial reports.

Complex Ownership and Capital Structure

Complex Ownership and Capital Structure

Complex Ownership and Capital Structure

This paper investigates the impact of pyramid ownership structure and multiple controlling shareholders on firm leverage. Pyramids, having at least one controlling shareholder and a subsidiary, rely significantly more on debt financing than non-pyramid firms. Moreover, higher leverage is observed in pyramids where the second controlling shareholders have more voting rights. We also find that the disparity between the voting rights of the first two controlling shareholders is negatively related to firm leverage. Interestingly, the influence of the second controlling shareholder is only present in non-family controlled pyramids. Overall, the results are consistent with the view that controlling shareholders in pyramids use debt to secure their private benefits.