Expropriation Of Minority Shareholders Research Articles

Enhancing external oversight: The complementary role of regulatory minority shareholders in China

In 2014 the China Securities Investor Services Center (CSISC) was set up to serve as a government-backed entity to represent minority shareholders. Does CSISC achieve its role as a complementary external regulator? We present empirical evidence to show that CSISC can effectively alleviate the severity of the minority shareholder expropriation problem. Further, the effect is particularly noticeable in firms that lack measures to prevent misconduct by blockholders, which implies that CSISC significantly complements existing external regulation.

CEO's early‐life famine experience and tunneling: Evidence from China

AbstractThe Great Chinese Famine is considered one of the most traumatic events recorded in human history and has a long‐lasting influence on the survivors' behaviors. Previous studies have linked the CEOs' early‐life experiences to corporate decisions and managerial behaviors, but does experience affect corporate governance? We investigate the impact of the CEO's early‐life famine experience on tunneling using a data set consisting of 11,573 firm‐year observations from the Chinese manufacturing companies publishing A‐shares on the main board from 2006 to 2016. We find that companies run by CEOs who experienced the Great Chinese Famine (1959–1961) in their early life are less likely to collude with controlling shareholders to expropriate minority shareholders than those who did not suffer the hardships of famine. We further make mediation tests to confirm two channels: risk aversion and empathy for poverty. The overall findings align with the view of imprinting theory: CEOs' experiences of adverse events in their early life have a lasting impact on their later‐life behaviors.

Does investor base affect the firm-level ex-ante cost of equity capital?

This research investigates how ownership structures affect the cost of equity capital (COE) in Indian companies, particularly in market conditions with weak investor protection and increased ownership concentration by promoters and families. Using ordinary least squares (OLS), panel fixed effects, and two-step system generalised method of moments (GMM) analysis on data spanning from 2016 to 2021, we discovered that a dispersed ownership structure is linked to a higher ex-ante COE. Our findings indicate that companies with dispersed shareholders have less motivation to monitor managers, which leads to the expropriation of minority shareholders and results in higher costs of equity capital.

Cultural Origin and Minority Shareholder Expropriation: Historical Evidence

ABSTRACTCan culture explain regional differences in minority shareholder expropriation? Examining regional variation in China, we document that the influence of historical Confucian values persists, despite decades of political movements clamping down on these values, and that these values reduce minority shareholder expropriation in local public firms. The effect on minority shareholder expropriation, in part, operates through the establishment of oversight mechanisms (i.e., greater financial reporting quality and dividend payouts) that constrain expropriation. The findings have important implications for understanding the origins of enduring regional differences in minority shareholder expropriation and capital market development.

A good manager or a bad agent? Military CEOs and tunneling

The literature on tunneling generally suggests that controlling shareholders expropriate minority shareholders by assuming executives play an assistant role in the process. We explore whether the military background of CEOs makes a difference in tunneling. The findings suggest that firms with CEOs who have served in the military exhibit less tunneling than those whose CEOs did not have previous military experience. Additional analysis suggests that the negative relation between military CEOs and tunneling is more salient for firms with large shareholding controlling shareholders, without seasoned equity offering (SEO) plans, audited by non-Big Four accounting firms, or have fewer analysts following them. Interestingly, we find that, by restraining a controlling shareholder’s tunneling, a military CEO firm has better firm value, lower perk consumption, and more positive media coverage. However, the military CEO also pays the price of being more likely to get dismissal than a non-military CEO. Hence, our evidence suggests that CEOs, especially those with military background, may not always follow controlling shareholders to expropriate minority shareholders.

Interlocking directorates and family firm performance: an emerging market’s perspective

PurposeThis study analyses interlocking directorates from the perspective of an emerging market, Mexico, where formal institutions are weak, and family firms with high ownership concentration dominate. It responds to recent calls in the literature on interlocks, which urge the differentiation between family and non-family businesses and to complete more research on emerging economies.Design/methodology/approachA database was constructed for 89 non-financial companies (52 family-owned) listed on the Mexican Stock Exchange (BMV) from 2001 to 2014. This period includes normal times and an episode of financial crisis (2009–2010). To test the hypotheses, a dynamic panel model (in two stages) is used, applying GMM.FindingsIn normal times, the advantages of Board Chairman (COB) interlocks for the performance of publicly traded Mexican family firms are obtained regardless of the weak formal institutional environment. By contrast, during financial crisis, interlocking family COBs are more likely to jointly expropriate minority shareholders with actions that further their family objectives, which mitigates the positive effect of interlocks on performance. These findings contrast with the insignificant effects of COB interlocks found for non-family corporates.Originality/valueA new framework is proposed which, through agency theory, finds points of concordance among resource dependence and class hegemony theories, to understand the effect of interlocking directorates on the performance of family firms operating in Mexico. The results of the empirical exercise for family companies listed on BMV during normal and financial crisis periods suggest its applicability.

Decentralising for local information? Evidence from state‐owned listed firms in China

AbstractThis study investigates the effect of decentralisation of SOEs on stock price crash risk. In so doing, we test two competing hypotheses. Under the Political Influence Hypothesis, decentralisation aggravates local government's expropriation of minority shareholders (type II agency conflict), and thus increases crash risk. Under the Local Information Hypothesis, decentralisation decreases monitoring distance (type I agency conflict), strengthens external monitoring and thus decreases crash risk. We find robust evidence supporting the Political Influence Hypothesis. Cross‐sectional analyses show that our baseline results are more pronounced when firms are decentralised to the provincial level and politicians have greater incentives to pursue their political objectives. We further show that bad news hoarding and risk‐taking are two potential channels through which SOE decentralisation increases crash risk. Taken together, our results imply that the decentralisation exacerbates the type II agency conflict rather than ameliorates the type I agency conflict in SOEs.

Corporate governance from colonial Ceylon to post-civil war Sri Lanka

This paper examines the corporate governance mechanisms in Sri Lanka, a country that only a little more than a decade ago emerged from a 30-year long civil war. We focus on the evolution of Sri Lanka’s corporate governance from historical, sociocultural, and institutional perspectives. Taking Sri Lanka as a case where inclusiveness and reconciliation at the board level is important, we aim to diagnose the key corporate governance issues which we then broaden towards other South Asia developing countries and provide a research agenda. Many Sri Lankan firms suffer from typical Asian-style agency problems; conflicts of interest between (i) minority and majority shareholders, (ii) shareholders and debtholders, and (iii) shareholders and stakeholders. The most prevalent agency problem is the expropriation of minority shareholders’ rights through ownership pyramids, cross-holdings, or intermediate private firms. Although creditor protection laws limit the expropriation of debtholders’ rights, firms’ widespread use of political connections forces banks to grant cheap credit at favorable terms. Poor stakeholder management creates agency problems following window dressing of ESG disclosures, corporate opacity, and ethnicity-and gender-based discrimination in the workplace. This study shows that social norms and ethical values play a non-negligible role in the functioning of the corporate governance regulation and in corporate culture in Sri Lanka.

Sunlight is the Best Disinfectant: Real-Time Comment Letters and Large M&As in China

ABSTRACTThis paper investigates how communications between regulators and firms through comment letters affect the outcomes of large mergers and acquisitions (M&As) in China. Unlike the U.S. Securities and Exchange Commission (SEC), which uses comment letters to improve the accuracy of the measurement of deals, Chinese regulators worry about controlling shareholders' self-dealing and use real-time comment letters to expose suspicious deal specifics and to create pressure for controlling shareholders to back down. I find that the Chinese stock exchanges issue more severe comment letters on deal filings that indicate controlling shareholders’ expropriation of minority shareholders. More severe comment letters are associated with a lower market response to the receipt of letters, predict a higher probability of voluntary deal cancellation by management, and indirectly increase the probability of deal withdrawal and lengthen the processing time for equity-funded deals by affecting the approving body’s scrutiny level.

Does ownership structure affect the ex-ante cost of capital?

The literature on ownership structure in Indian firms does not clearly show how various large shareholdings connected to controlling agency conflicts affect a firm’s outcome. Evidence suggests that large shareholders are in a stronger position to keep a firm’s management more responsible than its dispersed shareholders, thereby positively affecting the firm’s outcome. This research gap has sparked interest in examining the relationship between three large holdings – corporate, institutional, and foreign holdings – and expected returns measured using an ex-ante cost of capital approach in Indian listed firms between 2016 and 2021. The study used a pooled OLS technique to estimate the baseline results and a two-step system GMM technique to validate the baseline results. The results indicate that corporate holdings and expected returns have an inverted U-shaped relationship, institutional holdings and expected returns have a U-shaped relationship, and foreign holdings and expected returns have a U-shaped relationship. The results also reveal that while the threshold for each firm and industry can be different, on average, corporate holdings above 34.3%, institutional holdings below 14.15%, and foreign holdings below 49.80% negatively affect expected returns. The findings suggest that an optimal mix of large shareholders can reduce the risk of any group exerting excessive control over a company and provide benefits in terms of efficient monitoring. Expropriation of minority shareholders can occur in developing countries with weak legal protections. However, this study suggests that large shareholders can mitigate this issue by acting as a check on managerial agency problems, thereby increasing a firm’s efficiency.

In What Contexts Institutional Investors Can Be Catalyst? The Moderating Role of Corporate Governance

The paper examines the role of institutional investors in improving firm-level financial competitiveness by enhancing corporate governance. We employ multiple case study methods to analyze the role of institutional investors in improving firm competitiveness. The study finds traces of institutional activism across different industries and their role in major corporate governance issues. Thus, the study suggests that institutional investors help in improving the corporate governance landscape of the firm, which in turn can impact the firm financial competitiveness. In India, the indicators of the principal–principal dilemma can be mitigated by implementing governance mechanisms such as empowering minority shareholders and increasing institutional investor engagement. Thus, the findings of this study propose changes in the legal framework that would empower institutional investors, primarily by reducing the expropriation of minority shareholders by majority shareholders (concentrated promoters), who could otherwise skew voting outcomes in favor of minority shareholders.

Pay-or-Explain Regulation and Minority Shareholder Expropriation

Pay-or-Explain Regulation and Minority Shareholder Expropriation

Impact of share pledging by controlling shareholders on firm value in the context of China's tightened regulatory reforms

AbstractThis study investigates the effect of the 2018 regulatory reforms of share pledging by a controlling shareholder on firm value in China. Using a dataset spanning the period 2015 to 2020, we provide robust results suggesting that tighter regulations effectively reduce firms' crash risk, relax financial constraints, reduce bankruptcy risk, and mitigate the controlling shareholder expropriation of minority shareholders' wealth via tunnelling. Additionally, controlling shareholders, by investing more pledged funds in the listed firm after reforms, foster capital investment and R&D expenditure, which benefit firm growth and competitiveness and ultimately increase firm long‐term value.

Corporate governance, CEO compensation, and corporate performance: evidence from India

PurposeThe purpose of this study is to examine the impact of corporate governance (CG) on chief executive officer compensation (CEO COMP) and pay–performance relationship (PPR) in Indian listed firms.Design/methodology/approachA sample of 196 companies listed on the S&P BSE 500 (Standard and Poor's Bombay Stock Exchange 500) Index has been analyzed using the panel (random effects) regression technique over the period 2010–2019. In addition, the system GMM technique was used to deal with the endogeneity issue.FindingsThe study found that block ownership and ownership concentration negatively impact COMP measures and PPR. Board size also had a negative direct and moderating impact on CEO COMP; however, the linkages were generally insignificant, especially for total pay. Similarly, outsider blockholders were found to be playing an insignificant role. Further, board independence positively influences COMP levels and PPR, though the results were mixed with respect to significance. Finally, CEO duality positively and significantly influences CEO COMP and PPR. A comparison before and after the new Indian Companies Act 2013 also revealed similar results, particularly in the after period. It suggests that the new legislative initiative was not effective enough in improving the CG and, hence, the alignment of pay with performance.Originality/valueThis study investigates the direct and moderating impact of CG on CEO COMP in the context of emerging economy India. Further, it makes a comparison before and after the introduction of the new governance reform, that is, the Indian Companies Act, 2013. Moreover, providing support to the entrenchment effect, the study reveals that large shareholders expropriate minority shareholders’ wealth by not aligning CEO pay with performance, making agency problems graver in emerging economies like India.

Common Owner, Uncommon Value: Business Group Ownership and Firm Growth Opportunities

Recent research on business groups has traced their continued growth, despite widespread institutional changes, to their inherent characteristics such as diverse business portfolio and multi-entity structure. We add to this stream of work by focusing on the third important characteristic of business groups, viz., their ownership structure. In sharp contrast to the prevailing view that business group core owners use their control to expropriate minority shareholders in weak institutional environments, we focus on their value adding potential in strengthened institutional environments. We argue that higher levels of controlling ownership positively influence all key drivers of opportunity pursuit by firms, viz., motivation, firm-specific knowledge, and controllability, and hence a firm’s growth opportunities. More significantly, we highlight the common nature of business group ownership that distinguishes them from controlling owners of standalone firms. We argue that this common characteristic together with control enables business group owners to orchestrate resource and information transfer across affiliate firms and importantly leverage their accumulated expertise of making decisions to positively influence growth opportunities of affiliate firms. We test our arguments on a sample of Indian firms during the time period 2001-2019 and find significant support. Our work adds to business group research by investigating a defining yet understudied characteristic of business groups—common ownership. By demonstrating their value adding role, we complement the emerging body of work that looks beyond institutional environment-based explanations for the existence of business groups. Our work also has significant implications for the nascent competence-based view in ownership research.

Expropriation or Coinsurance? Legal Environment and Stock Market Responses to RPTs

How does the legal environment influence investors’ distinguishing between related-party transactions that are part of the ‘coinsurance’ strategy of a business group and those enabling the ultimate controller to expropriate minority shareholders? Using a longitudinal (2008–2015) dataset of loan guarantees offered by Chinese publicly listed firms to their parent firms or subsidiaries and stock market responses, I find an exacerbated negative effect on the stock price of corporate governance structures, incentivizing the ultimate controller to expropriate minority shareholders, and stronger positive effect of corporate governance structures, indicating the monitoring of controlling shareholders in regions where the legal environment is less developed. The results reveal the important role of the local institutional environment in influencing how investors interpret related-party transactions.

The Enduring Tension Between the Family Owners and the Atomistic Absentee Owners in Canada: How the Capital Market Regulations Allow for the Abusive Expropriation of Minority Shareholders?

The Enduring Tension Between the Family Owners and the Atomistic Absentee Owners in Canada: How the Capital Market Regulations Allow for the Abusive Expropriation of Minority Shareholders?

Do the Minority Shareholders of Russian Corporations Need More Protection?

Russian corporate governance has traditionally been viewed as lacking in contrast to that of Western states. The major concern has been controlling shareholders’ expropriation of minority shareholders, especially in the setting of state-owned enterprises (SOEs). However, in recent years, the law and court treatment of minorities’ rights have taken a positive turn, drawing more investors to joint-stock companies (JSC), the Russian equivalent of US corporations. This article examines whether such developments sufficiently protect minority shareholders’ interests in the areas of (1) access to information, (2) controlling shareholder transactions, (3) takeovers by a controlling shareholder, and (4) dividend distributions. This article examines the formation and current state of the law and court practice in these areas, and proposes legislative reform, where appropriate. The article concludes that, although there is room for improvement, the law and the courts generally afford sufficient protections to minority investors, but the key factor that may boost the quality of corporate governance is minority shareholders’ active participation in corporate affairs, especially in the general meetings of shareholders. corporate governance, minority shareholder protection, Russian corporate law

Corporate governance of controlling shareholders and labor employment decisions: Evidence from a parent board reform in China

Controlling shareholders commonly expropriate minority shareholders in state-owned enterprises (SOEs) with concentrated ownership. To curb such behavior, studies have focused on the role of internal corporate governance structures and largely ignored the governance structure in relation to the controlling shareholders. Using a board reform that altered the governance of controlling shareholders in Chinese central SOEs between 2003 and 2019, we show that enhancing the controlling shareholders' corporate governance significantly reduces firms’ overinvestment in employees. We demonstrate that strengthening the monitoring of management is the most likely underlying channel for this association. Our findings indicate that governance enhancement of controlling shareholders mitigates human capital misallocation in SOEs, suggesting that reforming the governance structure of controlling shareholders is effective in enhancing SOE efficiency.

Ownership concentration and firm valuation in a typical frontier market

This study investigates the valuation effect of concentrated ownership in a typical frontier market. Using an extensive sample of Vietnamese publicly listed firms, we find that the valuation effect is inconclusive before combined equity holdings reach a certain threshold beyond which market valuation increases exponentially with ownership. The latter log-linear effect can be interpreted as a more profound dominance of the monitoring incentives of large shareholders over the potential expropriation of minority shareholders at higher levels of concentration. Our finding reconciles the seemingly conflicting results of previous studies and contributes to understanding corporate governance practices in frontier markets.