Expropriation Of 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.

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

This research investigates how investor base 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 COE.

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.

Mandatory corporate social responsibility disclosure and financial constraints: Evidence from China

We investigate the impact of mandatory CSR disclosures on firms' financial constraints in China, where CSR reporting is mandated for a subset of listed firms. Employing a difference-in-differences approach, we find that mandatory CSR reporting firms experience greater financial constraints after the mandate. We identify controlling shareholder expropriation as a plausible channel through which the mandate affects financial constraints. Further analyses reveal that mandatory CSR reporting firms with political connections or located in more marketized regions/provinces can alleviate their financial constraints. Our findings add evidence to the economic implications of CSR disclosure mandates. Given the prevailing global trend toward enforcing CSR disclosures and the call for more research on mandatory CSR reporting, our study sheds light on how these mandates shape firms’ access to finance.

Hastily announced: Mergers and acquisitions with pledging shareholders

This study examines how controlling shareholders’ pledging behavior influences firms’ acquisition decisions. Employing a sample of Chinese listed firms from 2010 to 2018, we find that firms with pledging controlling shareholders are more likely to announce merger and acquisition (M&A) deals than firms with non-pledging shareholders. The positive relationship between share pledging and M&A announcements is more pronounced when the margin call pressure is higher. We show that the link between share pledging and M&As is best explained by the controlling shareholders’ fear of losing control, and is unlikely due to shareholder expropriation or optimism. Further analyses indicate that pledge-related acquisitions are associated with a lower success rate, longer trading suspension periods, and smaller (yet positive) market returns.

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.

Controlling shareholder expropriation and labor investment efficiency

In this paper, we find that severer controlling shareholder expropriation is associated with higher deviations of labor investment from the level justified by economic fundamentals, i.e., lower labor investment efficiency. Under the pyramid-like ownership structure, this relation is more pronounced for non-state owned enterprises (non-SOEs) under higher expropriation risk (with more intermediate layers) and state-owned enterprises (SOEs) subject to stronger government intervention (with fewer intermediate layers). Moreover, the main effect is largely driven by either over-firing in non-SOEs or under-firing in both non-SOEs and SOEs. Overall, this paper reveals a specific channel through which controlling-minority shareholder conflicts reduce real economic efficiency.

Multi-Factor Collaborative Governance of Controlling Shareholder Expropriation Behavior in Emerging Economies: A Perspective of Double Principal-Agent Conflicts

Controlling shareholder expropriation is an important issue in corporate governance in emerging economies. The existing literature discusses the effects of minority shareholder legal protection, controlling shareholder ownership, and managerial shareholding on controlling shareholder expropriation, which is mainly empirical research with insufficient attention to the internal relationships among the governance factors. This research builds theoretical models to study the interactive mechanisms between minority shareholder legal protection, controlling shareholders’ initial shareholding ratios, managerial shareholding, controlling shareholder expropriation, and management effort. Furthermore, setting reasonable ranges for parameters, we use MATLAB to conduct numerical simulations and expand the detailed analyses to quantitatively reveal the degrees of influence of the governance factors. Our results show that controlling shareholder expropriation is negatively related to the degree of minority shareholder legal protection and controlling shareholders’ initial shareholding ratios, while the optimal managerial shareholding ratio is positively related to the degree of minority shareholder legal protection and controlling shareholders’ initial shareholding ratios. The findings enrich the literature on the governance of controlling shareholder expropriation and provide new approaches to and theoretical explanations for the governance of controlling shareholder expropriation toward sustainability in emerging economies.

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

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.

RELATED PARTY TRANSACTIONS AND EARNINGS MANAGEMENT IN MANUFACTURING COMPANIES IN INDONESIA

This study examines the effect of the number of related party transactions (RPT) on earnings management through accruals and real earnings management in manufacturing companies listed on the Indonesia Stock Exchange (IDX). The effect of RPT is seen from the entire amount of RPT recorded in the company's financial statements divided by the company's total assets (RPTOTAL). This study uses secondary data from the S&P Capital IQ and company annual reports that the public can access on the IDX website. The sampling technique used purposive sampling. There were 732 observations from 164 manufacturing companies during the 2014-2018 period—data analysis using multiple regression with the fixed-effects model. The results showed that the amount of RPT has a significant positive effect on accrual earnings management. However, there is no effect of the RPT amount on real earnings management. RPT is a transaction carried out for expropriation of minority shareholders, and to cover RPT losses, management has an incentive to manipulate through earnings management. This study contributes to the effect of RPT on earnings management in manufacturing companies in Indonesia. This study is a valuable starting point for similar research in other developing countries.

Earnings management, Ownership concentration and Capitalization of Research & Development expenditure

ABSTRACT This study investigates the relationship between earnings management (EM) and capitalization of research and development (R&D) expenditure from the perspective of major shareholders expropriation, using Modified Jones Model and Bidirectional Fixed Effect Model for the period 2009–2018. And the study further discusses the moderating effect of ownership concentration on the relationship between earnings management (EM) and capitalization of research and development (R&D) expenditure. Our results confirm that the level of accrued earnings management (EM) presents a positive impact on capitalization of research and development (R&D) expenditure. The effect of the shareholding ratio of the biggest shareholder on the relationship between accrued EM and capitalization of R&D expenditure is inverted U-shape.

Common Ownership in America: 1980–2017

We empirically assess the implications of the common ownership hypothesis from a historical perspective using the set of S&P 500 firms from 1980 to 2017. We show that the dramatic rise in common ownership in the time series is driven primarily by the rise of indexing and diversification and, in the cross section, by investor concentration, which the theory presumes to drive a wedge between cash flow rights and control. We also show that the theory predicts incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the widely held firm. (JEL D22, G32, G34, L21, L25)