Separation Of Cash Flow Rights Research Articles

Corporate Governance, Media Coverage, and Corporate Environmental Protection Investment: Empirical Evidence from Listed Companies in China’s High-Pollution Industries

In this study, regarding listed companies of high-pollution industries in China’s A share as the research object and media coverage as the moderator variable, corporate governance data from 2015 to 2019 were selected. Studied the impact of corporate governance and media coverage on corporate environmental protection investment. Corporate governance was divided into four dimensions: shareholding structure, characteristics of the independent directors, characteristics of the board of supervisors, and management characteristics. A multiple regression model and monitoring model were constructed to study the influencing factors of the environmental protection investment behavior of enterprises, and the relationship between relevant variables was empirically tested. The results show the following: (1) The equity structure is expressed by the degree of separation of cash flow rights and shareholders’ control rights. There is a significant negative correlation between shareholding structure and enterprise environmental protection investment. The characteristics of the board of supervisors and management are measured by executive compensation. The characteristics of the board of supervisors have a significant positive impact on an enterprise’s environmental protection investment. Management characteristics have a significant positive impact on enterprise environmental protection investment. (2) Media coverage as a moderator variable is measured by the data reported by important Chinese newspapers. In the robustness test, media coverage is measured by the number of Chinese financial newspaper reports and the number of online media reports. Media coverage positively regulates the relationships among the ownership structure, the characteristics of the board of supervisors, management characteristics, and enterprise environmental protection investment. (3) Positive media reports have a more significant moderating effect than negative media reports.

Does the preference of family board seats allocation influence corporate investment efficiency?

Purpose This paper aims to investigate the influence of over-allocation and under-allocation of family board seats on the corporate investment efficiency. Design/methodology/approach Based on the perspective of altruistic behavior, this paper theoretically analyzes the relationship between the preference of family board seats allocation and corporate investment efficiency, and designs the research. On this basis, we use STATA14.0 as an analysis tool to empirically test the relationship between the preference of family family board seats allocation and corporate investment efficiency, and consider the impact of different governance scenarios. Findings This study finds that firms with a higher over-allocation degree of family board seats invest more efficiently, evidenced by significantly suppressed over-investment rather than mitigated under-investment. However, we do not find evidence that the higher degree of under-allocation of family board seats contribute to lower corporate investment efficiency. Additionally, this study finds that the positive relationship between the over-allocation degree of family board seats and corporate investment efficiency is more pronounced for firms with higher separation of cash flow rights and control rights, and weaker regional law system environment. Our mechanism discussion shows that the higher over-allocation level of family board seats contributes to the mitigation of agency costs for family firms by reducing the tendency for non-family boards to vote “against board proposals” and the appropriation behavior of the controlling family, and eventually improving corporate investment efficiency. Originality/value This paper examines the relationship between the preference of family board seats allocation and corporate investment efficiency from the perspective of altruistic behavior. Unlike previous studies, this paper distinguishes the governance effects arising from over-allocation and under-allocation of family board seats. Additionally, different governance scenarios are incorporated into the decision-making mechanism of the board of family firms, and the influences of the divergence of cash-flow and control rights and a weaker regional law system on the governance effect of the preference of family board seat allocation are analyzed.

The Effect of Pyramidal Ownership Structure to the Financing Policies and Firm Value in Indonesia: Cronyman as Moderating Variable

The research to examine the effects of ownership structures on financing policies and firm valuation. The populations are all listed companies in Indonesia Stock Exchange for period of 2013 and 2015. The sample selection technique used purposive sampling and resulting in a final sample of 72 listed firms. Empirical tests are conducted using multiple regressions and two stages least squares regression to test the simultaneous relationship between ownership structure, financing policies and firm value. The estimated results provide support for the hypotheses proposed that the separation of cash flow rights and control rights have led the use of excess leverage among pyramidal companies to preserve ultimate owner’s control. However, we failed to find a significant relationship between firm’s leverage and firm’s value. The conclusion is the simultaneounity relation between ownership structure, leverage and firm value appear that only the ownership structure significantly related with leverage and firm value. Also firm value and leverage ownership impact the ownership structure. Meanwhile, leverage does not appear to have a significant relation with the firm value, or the other way around.

The capital structure dynamics of Malaysian firms: timing behavior vs adjustment toward the target

PurposeThe purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision.Design/methodology/approachThis study used the GMM system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment (SOA) of capital structure.FindingsThis study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7 percent annually and this rate increased to 14.2 percent when the timing variable is accounted for. Moreover, the SOA is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market.Research limitations/implicationsThe findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research.Originality/valueThis study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation support the conclusion that firms consider both targeting and timing in their financing decisions. This study provides evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. Therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm.

Separation of cash flow rights and control rights and debt among Malaysian family firms

Purpose– The purpose of this paper is to examine the relationship of separation of cash flow rights (CFR) and control rights (CR) and debt policy of Malaysian listed family firms.Design/methodology/approach– The sample of this study consists of 256 observations from companies listed in the Main Board of Bursa Malaysia for the period between year 2005 and 2009. The multivariate ordinary least square regressions have been conducted in order to examine the relationships between separation of CFR and CR and debt.Findings– The study reveals that the separation of CFR and CR does not lead to the increase of debt policy among Malaysian listed family-owned firms. Thus, the results suggest there is no expropriation of minority interests in Malaysian family-owned firms. The plausible reason is that Malaysia has better investor or shareholder protection laws compared to other emerging markets such as Indonesia, Thailand and Philippines.Research limitations/implications– The first limitation is the underestimation of CFR and CR because the affiliated business of unlisted firms and foreign companies are excluded. The second limitation is the presence of 100 percent ownership in firms controlled by family-owned firms or in firms that are controlled by another firms which are under the controlled of family-owned firms, or both, will lead to equal proportion of CFR and CR. Thus, the degree of separation of CFR and CR of such firms are indeterminable.Originality/value– This paper investigates the expropriation of minority interests by Malaysian family-owned firms on which has not been explored.

Does ownership structure affect the degree of corporate financial distress in China?

Purpose – The purpose of this paper is to investigate the degree of corporate financial distress (DOFD) and relationship between ownership structure and the DOFD in China. Design/methodology/approach – The authors estimate the DOFD across a sample of 378 Chinese-listed companies that got into financial distress between 2000 and 2008. The DOFD reflects long-term solvency capability, short-term liquidity capability, development capability, risk level, profitability capability, operating capacity, and cash flow capability. The authors analyze the relationship between ownership structure and the DOFD in these companies, using the panel data analysis method. Findings – The authors find that a concentrated ownership structure is negatively related to the DOFD. Further, the results indicate that a state-owned status helps firms in decreasing their DOFD and that the separation of cash-flow rights and control rights is positively related to the DOFD. The authors also found that the Chinese special treatment (ST) system needs further improvement. The reason is that ST firms can be classified into “value” ST firms and “garbage” ST firms. They have different DOFD and change trend, so they should not be treated equally. Originality/value – This paper find that Chinese ST system and previous research are not helpful for risk-seeking investor to distinguish and evaluate “value” ST firms and “garbage” ST firms. It is unfair to warn and punish this two kinds of firms equally, so ST system should be improved. The authors also suggest that risk-seeking investor can choose ST firms that have a concentrated ownership structure and are controlled by the state or local government. These findings are not observed in previous studies.

Geographic location, excess control rights, and cash holdings

We assess the extent to which remotely-located firms are likely to discretionarily accumulate cash rather than distribute it to shareholders. We consider that these firms are less subject to shareholder scrutiny and, thus, will have high agency conflicts as the distance will facilitate the extraction of private benefits. Consistent with our predictions, we find a positive relation between the distance to the main metropolitan area and cash holdings, and this impact is more pronounced when the controlling shareholder has high levels of excess control rights (i.e., separation of cash-flow rights and control rights). Our results hold even after accounting for all control variables, including financial constraints, and suggest that geographic remoteness can be conducive to severe agency problems, particularly when there is a large separation of cash-flow rights and control rights.

Level of Cash Flow Rights of the Ultimate Owner on Value Relevance of Earnings Information of Pyramid Structure Firms

The objective of this study is to ascertain whether the higher level of cash flow rights (CFR) in the hand of ultimate owner help to improve the value relevance of earnings information in pyramid structure firms. The separation of cash flow rights (CFR) and control rights (CR) in pyramid structure firms has entrenched the ultimate owner and provide them with opportunities to manipulate earnings information, which in turn reduce the value relevance of the earnings information reported. This study hypothesizes that the higher level of cash flow rights (CFR) in pyramid structure identified will help to reduce the agency problem between ultimate owner and minority shareholder by reducing the opportunity of ultimate owner to manipulate earnings information, which will increase the value relevance of earnings information in pyramid structure firms. The sample of this study consists of pyramid structure firms in Malaysia for the period of 1990 to 2010, where the identity of the ultimate owner is pyramidal ownership. Earnings return model with the interaction between earnings information reported by pyramid structure firms and the level of cash flow rights (CFR) of ultimate owner is provided to show the effect on the earnings-return relationship in an attempt to measure the value relevance of earnings information reported. Positive earnings-return relationship and higher adjusted R2 indicate that earnings information is value relevant and vice-versa. Using Panel Generalized Least Square (GLS) estimation, the results show that the presence of higher level of cash flow rights (CFR) in pyramid structure is significant to minimize and mitigate the negative effects of the structure based on higher adjusted R2 reported within positive earnings-return relationship.

Disentangling the driving force of pyramidal firms' capital structure: a new perspective

PurposeThe purpose of this paper is to disentangle the driving force of pyramidal firms' capital structure from nine East Asian economies.Design/methodology/approachTo disentangle the driving force, this paper develops a new theoretical framework for the pyramidal firms'. Using panel regression, the new theoretical framework is tested on a set of 1,433 pyramidal firms covering a period from 1992 to 1997.FindingsThe regression results reveal that the separation of cash flow rights and control rights in the pyramidal firms have led to high usage of leverage for the purpose of preserving the ultimate owners' (UO) dominance in the pyramidal firms that he or she controls. Based on the findings, the study concludes that the actual driving force of the pyramidal firms' capital structure is the UO non‐dilution entrenchment motive.Originality/valueThe main contribution of this paper is the new theoretical framework developed which enable us to disentangle the driving force behind pyramid firm's capital structure.

Pyramidal structure, firm capital structure exploitation and ultimate owners' dominance

In this paper we investigate how pyramid structure, separating cash flow rights and control rights, allows ultimate owners to control the company's resources for the creation of private benefits and to avoid punishment for such conduct. Empirical tests are conducted using three-stage least squares regression. The estimated results provide support for the hypotheses proposed that the separation of cash flow rights and control rights have led to the use of excess leverage among pyramidal companies to preserve ultimate owners' control. High levels of leverage, affect the firm's valuation negatively because of the potential for financial distress. Thus, our findings may provide one additional explanation for the severity of the decrease in corporate value among the pyramidal companies in Malaysia as pointed out in the studies of Claessens et al. (2002), Lins (2003), and Lemmon and Lins (2003). Secondly, the empirical evidence from this study provides insight into the forces that influence corporate valuation of firms in developed countries particularly those that have pyramidal structure.

Corporate value, ultimate control and law protection for investors in Western Europe

This paper analyses both ultimate ownership and investors’ protection in determining corporate value for a sample of firms from 12 Western European countries. The analysis is based on two data sets which consider the presence of an ultimate controller, as well as, the level of separation of cash flow rights and voting rights in the controlling stake. It examines the effect of the rights given to both creditors and shareholders, and the degree to which these rights are enforced with a measure of the efficiency of the judicial system. The main findings suggest that it is likely that firms tend to adjust their ultimate controlling structure to overcome the value-decreasing risks associated with country laws that offer low investors’ protection. This information is a valuable tool for managers in order to strategically adapt institutional corporate governance practices.

Dual‐Class Equity Structure, Nonaudit Fees and the Information Content of Earnings

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This paper examines the relationship between dual‐class share structure and the purchase of nonaudit services, and the extent to which the market's valuation of accounting information is influenced by the perception of auditing compromise resulting from such purchases.Research Findings/Results: Using a sample of Canadian companies from 2003–2004, we find that dual‐class firms pay a larger amount of nonaudit fees to the auditors, relative to single‐class firms, both in the absolute dollar amount and as a ratio of total audit fees. In addition, the returns‐earnings association is significantly lower for dual‐class firms than for their counterparts, and there is a further valuation discount as dual‐class firms increase nonaudit service purchases.Theoretical Implications: We argue that severe agency problems inherent from the deviation from the one‐vote‐per‐share structure lead to greater demand for economic bonding with the auditors via the purchase of nonaudit services. This study contributes to the growing body of nonaudit service literature by documenting the empirical link between ownership of control and nonaudit purchases.Practical Implications: The results indicate that investors believe a larger amount of nonaudit services highlights the underlying agency problems and compromises auditor independence for firms with a separation of cash flow rights and voting rights. The findings suggest that regulators in Canada and in other developed countries, when revising their future regulations on audit committees, may need to emphasize the role of restricted‐class shareholders in bolstering the audit committee function and the auditing process.

Effects of Controlling Shareholders Agency on Debt Financing Agency Costs: Analysis based on Real Options

Abstract By incorporating the factor of controlling shareholders into real options models, the effect of controlling shareholders on the agency costs of debt financing is analyzed synthetically. The result shows that the occurrence of controlling shareholders increases the information asymmetry between creditors and shareholders and induces more early investment. With the increase of cash flow of controlling shareholders, the agency costs of debt financing decreases, which testifies the “incentive effects” of controlling shareholders. With the increase of separation of cash flow rights and control rights, asset substitution problem becomes severe and the agency costs of debt financing increase, which testifies the “entrenchment effects” of controlling shareholders.

Corporate voluntary disclosure and the separation of cash flow rights from control rights

We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.

Separation of control rights and cash-flow rights in emerging economies: theory and Mexican evidence

Researchers have identified that corporate ownership structures appear to be quite different in developed and developing economies. For instance, Castañeda Ramos (1999) provides evidence of considerable separation of cash-flow rights and control rights accruing to inside and outside equityholders in publicly listed firms in Mexico. Insiders use mechanisms such as dual voting rights, majority rules and pyramids to maximise their control rights while holding minimal cash-flow rights. In contrast, there is a much closer alignment of cash-flow rights and control rights in developed countries such as UK or US. The purpose of this paper is to develop a game-theoretic model that explains these features. We argue that factors in emerging markets, such as large private benefits of control, extreme risk, low investor protection, inefficient capital markets, and governments sympathetic to incumbent management at the expense of outside investors, all contribute to insiders’ incentives to create a separation of cash flow and control rights. We present evidence from Mexico that supports our results

Pyramiding effect on firm’s investment decision among Malaysian distress companies

It is documented by La Porta, Lopez and Shleifer (1999) that ultimate owners, around the world usually control an array of affiliated companies through hierarchical intermediary corporations forming a Pyramidal Ownership Structure. A direct result of this pyramidal ownership structure is divergence of cash flow rights from control rights in the hand of the largest shareholders (Claessens, Djankov and Lang 2000). This paper investigate the impact of this separation of cash flow rights from control rights resulting from this pyramidal forms of ownership structure on firm’s investment decisions. In particular, our objective is to examine whether such separation affects the investment decisions among Malaysian listed distress Companies. Our findings lends support to the over investment problem, where by the separation of cash flow rights and control rights have led to the increase of inefficient investment among the distress companies. The main source of financing for this inefficient investment activity is the firm’s retained earnings. Consequently, the exploitation of such firm’s resources in order to finance these inefficient investment activities of the ultimate owner’s then lead to negative market valuation.

Ultimate Corporate Ownership Structures and Capital Structures: evidence from East Asian economies

This paper studies the relationship between corporate leverage and the ultimate corporate ownership structure, particularly the separation of cash flow rights and control rights. We empirically disentangle the three potential effects of the divergence of control rights from cash flow rights on corporate leverage, i.e. the non-dilution entrenchment effect, the signalling effect of debt and the reduce-debt-for-tunnelling effect. Our evidence from the East Asian corporations mainly supports the notion that controlling shareholders with relatively small ownership share tend to increase leverage out of the motive of raising external finance without diluting their shareholding dominance. The separation of cash flow rights and control rights contributes to the risk-taking tendency of the large controlling shareholders in capital structure choice. We argue that the risky capital structure choice serves as one potential channel through which weak corporate governance contributes to the severity of corporate value losses during the Asian financial crisis.

Does pyramiding have an impact on firm’s capital structure decision among Malaysian distress companies?

It is documented by La Porta, Lopez and Shleifer (1999) that ultimate owners around the world usually control an array of affiliated companies through hierarchical intermediary corporations forming pyramidal holdings. A direct result of this pyramidal ownership structure is divergence of cash flow rights from control rights in the hand of the largest shareholders (Claessens, Djankov and Lang 2000). This paper investigates the impact of this separation of cash flow rights from control rights resulting from these pyramidal forms of ownership structure on firm’s capital structure. In particular, our objective is to examine whether such separation affects the financing decisions among Malaysian listed distressed companies. Even though it is not conclusive our findings somewhat lend support to the leverage-increasing non-dilution entrenchment effect on corporate leverage, whereby the separation of cash flow rights and control rights leads to the increase of leverage among the distressed companies. Consequently, excessive use of leverage in order to protect ultimate owner’s dominance in these companies then leads to disastrous financial valuation.

Private Benefits and Minority Shareholder Expropriation (or What Exactly are Private Benefits of Control?)

Our study examines private benefits of control in founding-family owned firms, by analyzing a unique sample of 105 IPOs of family firms on German stock exchanges from 1970 to 2011. First, we show that substantial private benefits of control exist in these firms and we empirically determine the nature of these private benefits. Second, we confirm that the separation of cash flow rights and voting rights via dual-class shares is used to create controlling shareholder structures in order to preserve private benefits of the family. In doing so, we analyze the effect of different types of private benefits on dual-class adoption. Third, we show that the market cares about private benefits of control and find a significant long-run underperformance by dual-class IPO shares.

Family Control and Corporate Governance: Evidence from Taiwan

A recent stream of literature shows that family control is central in most countries of the world, but little research exists regarding family control and corporate governance. This paper analyses family control and corporate governance using a sample of Taiwanese firms. The results suggest that family control is even more prevalent than previously suggested and that a non‐linear relation exists between family control and relative firm performance. Family‐controlled firms that have low levels of control have lower relative performance than both family‐controlled firms with high levels of control and widely held firms. This is consistent with the conflict of interest between majority and minority shareholders being the greatest when the majority shareholder’s level of control is high enough to influence a firm’s decision‐making process but ownership is low enough that the benefits of expropriation outweigh the costs. Furthermore, a positive valuation effect exists when controlling families hold less than 50% of a firm’s board seats. Taken together, the results in this paper suggest that when family control is central, high levels of family ownership and low levels of family board representation are effective ways of mitigating the separation of cash flow rights and control and, thus, decreasing the conflict of interest between majority and minority shareholders.