Expropriation Of Minority Shareholders Research Articles

Form and Function in Doing Business Rankings: is Investor Protection in Italy Still so Bad?

The World Bank’s Doing Business Report (DBR) ranks every year numerous jurisdictions across the globe according to their ability to facilitate business activities. Among the indexes contributing to the definition of the global competitiveness of the legislations, the “Protecting investors index” (PII) measures the protection of minority shareholders in listed companies. In this paper, we analyse the DBR’s assessment of the Italian regulatory framework on investor protection. We find that the PII falls short of properly evaluating the applicable rules. First, it underrates Italy because the DBR evaluation falls short of properly evaluating the role performed by independent directors under Italian rules on related party transactions. In particular, the DBR fails to properly account for independent directors’ power to veto unfair transactions before they are submitted to the board, a safeguard that ensures minority investors’ protection at least as well as mandatory abstention by conflicted directors. Second, past DBR overrated the PII, so that subsequent reforms that substantially improved investor protection have not been grasped by more recent assessments, giving the misleading impression that no relevant changes have occurred. Far from representing one of the multiple coding errors reported in the literature, these flaws aptly show that the DBR methodology, while correctly attempting to preserve consistency in the evaluation of different jurisdictions, adopts an excessively formalistic approach and disregards the function of the rules it scrutinizes. In light of the influence that the DBR exerts on national policymakers, this approach is detrimental because it might induce window-dressing reforms. Moreover, it may rule out experimentation, which is key to ensuring that the applicable rules keep pace with the variety of techniques adopted to expropriate minority shareholders.

Country level governance variables and ownership concentration as determinants of firm value in Latin America

The goal of this paper, which follows a corporate governance approach, is to assess whether within country changes in governance (e.g. in legal and regulatory systems and financial development) and changes in corporate ownership concentration can predict a change in the value of Latin American firms. Using fixed-effect panel data models with a representative sample of firms for the period from 1997 to 2013, we observe that the investors’ rights and their legal protection as well as the rule of law are associated with a premium in the firm market value. Contrary to what was expected, in immature financial markets, as found in Latin America, firms take advantage of both the asymmetries of information and the multiple market frictions to be overvalued. So, as the financial system develops, firm value drops. At the firm-level, results confirm the hypothesis of the expropriation of minority shareholders.

A New Relationship between Ownership–Control Wedge and Overinvestment Practices: Evidence from Korean Business Groups (Chaebol)

AbstractThis study examines the effects of controlling shareholders’ ownership–control wedge on firms’ overinvestment practices. In addition, it further investigates the incentive effects of controlling shareholders’ cash flow rights on firms’ overinvestment. We find a non‐monotonic relation between controlling shareholders’ ownership–control wedge and a firm's overinvestment. Specifically, the relation between controlling shareholders’ wedge and overinvestment is significant for certain wedge levels. Thus we conclude that controlling shareholders with certain levels of wedge expropriate minority shareholders’ benefits since the marginal benefit exceeds the marginal cost. We also document that cash flow rights are effective to reduce a firm's overinvestment to certain levels.

When and Why Do Controlling Shareholders Expropriate?

Studies of the incentives behind the expropriation of minority shareholders of publicly listed firms by their controlling shareholders focus on the publicly listed firm’s performance or characteristics and treat the controlling shareholder as a black box. In this paper, we examine when and why controlling shareholders expropriate by linking the ex ante perception that the publicly listed firm will be expropriated to the performance of its controlling shareholder. We analyze pairs of publicly listed firms and their non-listed parents and assess expropriation by examining cash balances on the publicly listed firm’s balance sheet (their level and market valuation using the Faulkender and Wang (2006) model), and intra-group loans from the publicly listed firm to its parent (direct fund transfers and market valuation of the receivables generated by these transfers). Across all four measures, our results are consistent with more tunneling out of the publicly listed firm occurring when its controlling shareholder is underperforming.

The Relationship between Corporate Governance and Expropriation of Minority Shareholders’ Interests

Abstract This study empirically examines the relationship between corporate governance and expropriation of minority shareholders’ interests Malaysian firms. Using a sample of 73 companies that are screened from the top 100 companies in Malaysia, this study runs multivariate analysis to assess whether minority shareholders’ interests are protected by corporate governance mechanism in a company. The results of this study shows that audit committee independence would help reduce the tunneling and/or propping activities in a company. Besides, a company is suggested to have its positions of CEO and Chairman being held by two different persons. In the analysis, this study also controls for several corporate governance variables such as board size as well as CEO's and/or Chairman's financial expertise. In summary, investors may refer to the outcome of this study in making their investments, whereby they are recommended to obtain some information on board mechanisms of a company.

Reasons for and implications of the presence of institutional investors in the ownership structure of Brazilian companies

Using 3,057 observations from 2000 to 2012, we found the risk of expropriation of minority shareholders by controlling shareholders is positively associated with participation of institutional investors in equity funding. There is no evidence that these investors increase the likelihood of substituting the chief executive officer or increase the company’s value or its financial performance. However, the presence of institutional investors is associated with higher company debt. This study suggests that institutional investors assume a function not fully explained by agency theory, such as enabling greater access to debt markets, but accentuate the agency conflict between controlling and minority shareholders. The main results show that the presence of institutional investors mitigates agency conflicts between shareholders and creditors, but increases the risk of expropriation of minority shareholders.

Pre-Going Private Ownership Around the World

We examine ownership structure prior to going private transactions in 39 countries around the world from 2002 to 2014. The data indicate strong and consistent evidence that pre-going-private ownership is characterized by higher institutional and corporate ownership. Family ownership lowers the probability of a public to private transaction. Concentrated ownership facilitates public to private transactions. In addition, the data indicate that antidirector (shareholder) rights across countries affect going private transactions in ways consistent with potential wealth expropriation of minority shareholders.

Closely held family business agency costs between owners

This paper investigates the relationship between corporate governance mechanisms and principal-principal (PP) agency conflict in Sri Lankan listed family firms. In many countries, the family business sector is seen as a means of rejuvenating the economy and developing sustainable growth. A dynamic modelling framework, which controls for potential endogeneity, is used to investigate 120 family firms and 90 non-family firms from 2006 to 2014. Similar to prior studies, this study reflects deeply on the idea of PP agency conflict between majority and minority shareholders for family firms in emerging economies. This study employed four board characteristics and found large boards with non-executive directors and family leadership increase PP conflict in Sri Lankan listed family firms. Overall results indicate that traditional corporate governance mechanisms cannot mitigate PP agency conflict in family firms in emerging markets. There is strong evidence supporting a need for promulgating and streamlining of corporate laws, in emerging markets, to reduce the possibility of expropriation of minority shareholders by owners of politically powered family firms.

Closely held family business agency costs between owners

This paper investigates the relationship between corporate governance mechanisms and principal-principal (PP) agency conflict in Sri Lankan listed family firms. In many countries, the family business sector is seen as a means of rejuvenating the economy and developing sustainable growth. A dynamic modelling framework, which controls for potential endogeneity, is used to investigate 120 family firms and 90 non-family firms from 2006 to 2014. Similar to prior studies, this study reflects deeply on the idea of PP agency conflict between majority and minority shareholders for family firms in emerging economies. This study employed four board characteristics and found large boards with non-executive directors and family leadership increase PP conflict in Sri Lankan listed family firms. Overall results indicate that traditional corporate governance mechanisms cannot mitigate PP agency conflict in family firms in emerging markets. There is strong evidence supporting a need for promulgating and streamlining of corporate laws, in emerging markets, to reduce the possibility of expropriation of minority shareholders by owners of politically powered family firms.

Stock‐Based Compensation in a Concentrated Ownership Setting: An Empirical Investigation

AbstractStock‐based compensation has been viewed as an important mechanism for tying managers’ wealth to firm performance, and thus alleviating the agency conflict between the shareholders and the managers when ownership is diffused. However, in a concentrated ownership structure, controlling owners are usually the management of the firm; they can engage in self‐dealing activities to the detriment of minority shareholders’ interests. Yet, outside investors may anticipate the problem and discount the share price for the entrenchment behaviors they observe. In this study, we investigate how controlling owners trade off the benefits and the costs of using stock‐based compensation. Based on a sample of Taiwanese firms, our evidence shows that stock‐based compensation is negatively related to the agency problem embedded in a concentrated ownership structure. This relationship is evident among firms with more frequent equity offerings. Overall, our empirical evidence suggests that controlling owners consider the negative price effects of stock‐based compensation and trade off these costs with the benefits of expropriating minority shareholders’ interests, particularly when firms seek more external equity capital. Our results hold after controlling for selection bias and share collateral by controlling owners.

Financial Flexibility and the Moderating Role of Principal-Principal Conflict

This paper examined the ability of principal-principal conflict to moderate the relationship between financial flexibility and its outcomes, namely investment propensity and dividend payout. Financial flexibility was measured using triple indicators of liquidity, internal funds, and spare leverage capacity. This research used a sample of publicly listed firms in the Caribbean to examine this issue and conducted a secondary data analysis of financial statement data using Generalized Methods of Moments techniques. Testing revealed that principal-principal agency negatively moderates the relationship between financial flexibility and dividend payouts, and positively moderates the relationship between financial flexibility and investment propensity. The results of this study suggested that concentrated ownership may at times positively impact the benefits of financial flexibility through higher levels of investment, but lower dividends maybe paid in the interest of maintaining future financial flexibility. These results reinforce the need for a customized approach to the setting of appropriate corporate governance policy for firms in transitioning markets, which limits the possibility of expropriation of minority shareholders, while promoting the investment benefits and prudent financial management which comes with the identification of block holder ownership.

Concentração de propriedade e qualidade da governança da empresa brasileira

A relação entre concentração de propriedade e qualidade da governança corporativa é analisada no Brasil. Modelos são estimados pelo método generalizado de momentos sistêmico (GMM) para um painel balanceado de 85 empresas no período 2010-2013. Os resultados indicam que a concentração de propriedade tem um efeito adverso sobre qualidade da governança corporativa, mensurada através de um índice baseado em 28 boas práticas voluntárias de governança. Esta relação linear negativa indica que grandes acionistas são desfavoráveis à adoção de práticas diferenciadas de governança.
 Adicionalmente, a relação quadrática negativa reforça este resultado para altos níveis de concentração destacando a possibilidade de expropriação de acionistas minoritários. Menos concentração de propriedade favorece a qualidade da governança corporativa sugerindo que a necessidade de coalizão para controle
 diminui o poder do acionista principal, podendo contribuir para atenuar o conflito entre acionistas controladores e minoritários, conflito abordado sob o marco teórico do modelo de agência principal-principal.

Company Performance in Nigerian Listed Companies: Do Large Shareholders Expropriate Minority Shareholders?

It is argued that large shareholders have enormous influence over their companies as their ability to monitor the executives can mitigate the agency problems. This paper examines how large shareholders are related to company performance after distinguishing domestic large shareholders from the foreign large shareholders. Using a panel of 58 companies listed on the Nigerian Stock Exchange with 222 company-year observations from 2009 to 2012, firm-level fixed effects regression was used for analysis. We find evidence that domestic large shareholders are associated with better company performance while foreign large shareholders show a concave relationship with company performance with inflection point at 31.88%. The empirical result also shows that the joint presence of the both domestic large shareholders and foreign large shareholders in companies seems to make them pursue overall wealth maximization objective of the company. The result is consistent with the contention that concentrated ownership remains an effective corporate governance mechanism in an environment with weak investor protection rights. The study contributes to the corporate governance literature of the substitution effect of large shareholders for effective corporate governance practice. DOI: 10.5901/mjss.2015.v6n6p236

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.

Do CEO and board characteristics matter? A study of Thai family firms

Family businesses are dominant players in global economies. Using the data of family firms in a setting of weak institutions resulting from a deficiency of market-based management skills, we ask which CEO and board characteristics matter? The involvement by family members as CEOs is a common practice in family businesses. However, we find that family CEOs reduce firm value, indicating higher potential expropriation of minority shareholders or possible lower competency of family CEOs relative to professionals. Our results show that such negative effects could be moderated by certain characteristics of appointed CEOs. Family CEOs who are young, have business expertise, or are in the alumni network lead to higher firm value. Interestingly, the presence of family CEOs with a doctoral degree is negatively associated with firm value, which is possibly caused by their interest in research or innovation-related strategies. In addition, boards of directors could be designed by controlling families to support family CEOs. We find that the value of family CEO-run firms improves if their boards of directors are diverse in ages and have political ties, showing the importance of board roles in providing advice and access to external resources for family CEOs. Our analysis suggests a promising set of CEO and board characteristics of family firms in prolonging the survival of family-run firms.

Regulatory Reform of Cumulative Voting in Corporate China: Who Were Elected and its Impacts

In emerging markets characterized by weak institutions, the expropriation of minority shareholders by large shareholders is the primary concern in corporate governance. One important way to indurate the protection of minority shareholder rights is the implementation of cumulative voting (CV) scheme for board election. China carried out an experiment of regulatory reform to introduce the CV rule to many listed companies in China. In 2002, the Chinese Securities Regulatory Commission released the Code of Corporate Governance for Listed Companies'', aiming to elevate minority shareholder rights and to improve corporate governance. In this paper, based on our unique hand-collected data set, we investigate whether the use of CV has substantial effects on board composition and the characteristics of elected board directors, corporate policies and further on firm value. To mitigate the endogeneity'' or self-selection'' problem, this paper adopts matching methods to construct control groups and conduct DID style analysis to further reduce econometrical confoundedness. To increase the robustness of our main empirical results, we employ two different matching methods (Barber and Lyon method and Coarsened exact matching'' method) to construct two samples. To assess the efficacy of the implementation of CV, we examine whether the directors elected via CV are different from those elected via straight voting in terms of personal characteristics of directors including their education qualifications, professional experiences (accountant, lawyer, engineer, economist, etc.), managerial experiences (CEO/chairman experiences), work experiences in the same industry, and political connections (former central, or local government officials). We find that the proportion of directors as representatives of the second largest shareholder significantly increases under the CV rule based on a clean subsample where the top ten shareholders are unrelated. We also find that the implementation of CV has created some positive changes in the quality of directors and the independence'' of independent directors. But the incremental improvements are not significant enough to curb tunneling activities and generate substantial positive effects on firm performance. Our findings imply that the CV reform has achieved some success, bringing some positive changes to corporate boards, but the success is still limited to a large degree. The broad institutional and legal environment in China remains weak, which imposes constraints on the functioning of the reform scheme.

PENENTU BESARAN TRANSAKSI PIHAK BERELASI: TATA KELOLA, TINGKAT PENGUNGKAPAN, DAN STRUKTUR KEPEMILIKAN

Indonesian firms are characterized by conglomeration that tends to conduct related party transaction (RPT). Extant academic literature provides two competing views on RPTs: the efficient transaction hypothesis and the conflict of interest hypothesis. The purpose of this study is to investigate RPT from the point of view of the conflict of interest hypothesis. Specifically, this study examines the size of RPT which is performed by majority shareholders to expropriate minority shareholders. The size of RPT measures the direct influence of RPT on shareholders’ wealth. In this study, the size of RPT is measured by RPT transactions of assets plus liabilities (RPTAL) and sales plus expenses (RPTSE) relative to book value of equity. Furthermore, this study investigates whether RPTAL and RPSE are determined by CG practices, disclosure of RPT, and ownership structure. This study cannot find the influence of CG on size of RPTAL and RPTSE. The results of the study also show that only disclosure of RPT and ownership structure that have positive impact on size of RPTSE. Disclosure of RPT increases more efficient RPTSE than abusive RPTSE. This study find that the relationship between the disclosure and RPTAL is insignificant as efficient RPTAL does not dominate abusive RPTAL, while concentrated ownership has a positive impact on abusive RPTSE.

Dividend Policy with Controlling Shareholders

AbstractThis Article investigates the determinants of dividend policy in firms with concentrated ownership structures. A review of the empirical literature shows that dividend payout ratios are lower in firms with controlling shareholders. We explain this finding as a consequence of the legal rules governing cash distributions, which leave the dividend decision in the hands of the firm insiders, and the lack of monitoring mechanisms for checking the power of controlling shareholders. The analysis of the empirical evidence on dividend policy points to the existence of an unresolved agency conflict between controlling shareholders and outside investors. We conclude that controlling shareholders are currently using the dividend policy to expropriate minority shareholders.

Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities

In this paper, we investigate the problem of controlling shareholder Non-Operational Fund Occupancy (NOFO) in China, where controlling shareholders directly take funds away from listed firms without matching business transactions. The NOFO problem was an evident and widely used tunneling activity in China and was identified by the securities market regulators. Unlike previous literature that used indirect measures of tunneling, we directly collect the actual amounts of NOFO from mandated disclosures and utilize this direct measure of tunneling in a series of empirical tests. First, we examine and find that various mechanisms such as ownership structure, corporate governance and institutional environments could restrain tunneling activities. Second, we find significantly positive market reactions to regulations that aimed to solve the NOFO problem. Third, we find evidence that the operating performance and valuation of firms with a NOFO problem improved after the regulations went into effect. Our study sheds light on the severe issue of minority shareholder expropriation and the effectiveness of regulators' policy to remedy the tunneling problem.

Related Party Transactions: Policy Options and Real-World Challenges (With a Critique of the European Commission Proposal)

This paper provides a legal and policy analysis of transactions between a corporation and one of its “related parties.” It first highlights the reasons why related party transactions (“RPTs”) are so common around the world. Next, it better identifies the phenomenon as a specific form of potentially abusive behaviour by dominant shareholders and managers, i.e. as an instrument for tunneling, asking why many jurisdictions provide for specific regulations on RPTs in addition to general rules or standards on tunneling. Then, it describes the main legal tools available to prevent corporate agents from diverting value from the corporation via RPTs. Further, it provides a (partially) critical assessment of the measures put forth by the European Commission to harmonize rules on RPTs within the EU, based on the previous analysis of individual legal tools. Finally, it shows that no regulation of RPTs (or tunneling) can succeed in preventing minority shareholder expropriation in the absence of sophisticated enforcement actors (specialized courts and/or active and committed securities regulators) and non-legal supporting institutions, like independent financial media and anti-tunneling social norms.