Expropriation Of Shareholders Research Articles

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)

Investor protection and audit fees: evidence from the E-interaction platform in China

This paper investigates the impact of investor protection on audit fees using a quasi-natural experiment provided by the introduction of the E-interaction platform in China. E-interaction provided investors with a platform to communicate directly with listed companies and participate in discussions of corporate matters, thereby enhancing the rights and interests of small and medium-sized investors, i.e. investor protection. Employing a difference-in-differences design, I find that, firms listed on the Shanghai Stock Exchange experienced a large reduction in audit fees after the adoption of E-interaction. The results are robust to changes in event windows and alternative research designs. Further analyses demonstrate that the reduction in audit fees was greater for firms with a higher level of expropriation of minority shareholders, i.e. tunnelling. I also find that controlling shareholders’ tunneling behaviours decreased after the introduction of E-interaction. Taken together, my results suggest that increased investor protection reduces audit fees by mitigating agency conflicts between the controlling shareholder and minority shareholders.

Does the fellow‐villager relationship between the independent director and the chairman of the board can inhibit the major shareholder expropriation? Evidence from China

We studied the influence of the fellow‐villager relationship between the independent directors and the chairman of the board and found that the above relationship significantly eased the shareholder's encroachment. Furthermore, the above suppression effect is more significant in the poor formal institutional environment, and higher equity balance will weaken the restraining effect. At last, we revealed that the reputation mechanism presented the key factor that urged independent directors to exert influence on the decision of the chairman through the fellow‐villager relationship and, in turn, inhibited the encroachment.

Culture and the Historical Persistence of Minority Shareholder Expropriation

Can historical culture explain persistent regional differences in economic expropriation? We document that the levels of tunneling and opacity of Chinese public firms are negatively associated with regional Confucian culture, captured by data from the Qing Dynasty of Imperial China (1644--1912 AD). The results are robust to controlling for local economic development, enforcement of property rights, and geography and to using two instruments constructed from data in the Ming Dynasty (1368--1644 AD). The findings suggest that culture represents a fundamental force that constrains economic expropriation, which has important implications for economic development (Acemoglu, Johnson, and Robinson, 2001; Rajan and Zingales, 2003).

The Effect of the Board Composition on Dividends: The Case of Brazilian and Chilean Family Firms

Based on the agency theory, this paper analyzes whether family firms pay more dividends compared to no-family firms and identifies whether the board composition affects the dividend policy. Brazil and Chile have established mandatory dividends, retain lower cash holdings, pay higher dividends compared with other markets in the region. The sample of study is composed by 853 observations from 49 Brazilian and 32 Chilean top publicly listed firms in terms of market capitalization over the 11-year period from 2004 to 2014. Using an unbalanced panel data, results indicate that family controlled firms distribute more dividends and board composition namely; board size and the proportion of women on the board have a significant and positive impact on the dividend policy of the firm. By contrast, COB-CEO duality has a negative effect. Thus, dividend policy constitutes an effective corporate governance mechanism in mitigating the family’ expropriation of minority shareholders’ wealth.

Do capital structure and cash holding expropriate minority shareholders? A case of non-financial concentrated firms in Pakistan

PurposeOne aspect of agency theory suggests that dominant shareholders use the firm’s assets for their personal benefits and 1thus expropriate minority shareholders (tunneling). Accordingly, this paper aims to examine the effect of capital structure and cash holding decisions on minority shareholders' expropriation for short and long periods.Design/methodology/approachData of 16 years (2000-2015) has been obtained from 200 non-financial firms registered at Pakistan Stock Exchange (PSX). The study used fixed effect and autoregressive distributed lagged to obtain the results.FindingsThe results suggest that the presence of more debts in capital structure is positively associated with minority shareholders' expropriation, whereas a negative association has been found between the level of cash holding and minority shareholders expropriation. These results have been observed as significant both for the short and long run.Research limitations/implicationsThis study also suggests some important measures to control minority shareholders' expropriation by the dominant shareholders and thus to protect their rights.Originality/valueThere is a lack of literature for this severe issue in the developing countries especially Pakistan, so this study narrates the potential measures to the regulatory authority of the market to curb tunneling and to protect minority shareholders.

Does regulatory reform of cumulative voting promote a more balanced power distribution in the boardroom?

In the presence of dominant shareholders, it remains uncertain whether the introduction of cumulative voting (CV) in board elections can elevate board representation of non-controlling substantial shareholders and curb the expropriation of minority shareholders by dominant shareholders. With hand-collected director-level data, we conduct DID-style analysis of China's CV reform. We find that non-controlling substantial shareholders cooperated in voting to raise their board representation, and CV implementation curbed tunneling activities and enhanced firm value. The results are especially strong in a subsample of firms whose second largest shareholder has a sufficiently large ownership proportion to elect her/his favored candidates onto boards.

The effect of family control on audit fees during financial crisis

Purpose The purpose of this study is to empirically examine the effect of family involvement in ownership, management and directorship on audit fees during the crisis and non-crisis periods. Design/methodology/approach Following Anderson and Reeb (2003), this paper uses a two-way fixed effect model to examine the impact of family control on audit fees in crisis and non-crisis periods. The fixed effects include dummy variables for each year and each industry code in the sample. Findings This paper finds that during normal economic periods, family firms pay lower audit fees relative to non-family firms because of the incentive alignment or monitoring effect. While, during crisis periods, family firms pay higher audit fees because of the shareholder expropriation effect. Research limitations/implications The results reported in this paper have both practical and policy implications for the demand and supply of audit services to firms having different ownership structures. Originality/value This is the first study of its kind to examine the effect of family ownership and involvement on audit fees during the crisis period.

Estructura de capital, concentración de propiedad y política de dividendos como factores determinantes de problemas de agencia en empresas chilenas

The objective of this paper is to analyze the capital structure, the concentration of property and the policy of dividends as determinants of the problems of agency in Chilean companies. As a measure of agency costs, the asset turnover ratio was used as a benchmark for management efficiency in the use of the company's assets, which is an inverse measure of agency costs.
 
 The results show that a higher level of indebtedness seems to favor the discretional behavior of managers. However, there is also evidence that when the debt is a short-term debt, the divergence of interest decreases between shareholders and managers.
 The concentration of property on the other hand has a non-linear effect on the costs of agency, which means that, first, it acts as a mechanism to attenuate managerial discretion, but when it reaches a certain level, an effect of expropriation of major shareholders over minor shareholders seems to be produced. In relation to the dividend policy, a positive relationship is observed with efficiency in the use of assets, mainly in the presence of high growth opportunities.

Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China

In response to corporate scandals in the early 2000s, the China Securities Regulatory Commission introduced a new reform requiring an increase in board independence. We find a significant decrease in tunneling by controlling shareholders for firms that are affected by this regulation, compared with firms that are exempt from it. The new added independent directors have an exclusively monitoring effect on controlling shareholders’ tunneling behaviors in state-owned enterprises. Furthermore, the decrease in tunneling behaviors is particularly pronounced in the subset of affected firms with less concentrated equity ownership, worse audit quality, and lower information processing costs. Our results suggest that controlling shareholders reduce the expropriation of minority shareholders under the monitoring of independent directors.

Blockholder Ownership as Governance Mechanism on Firm Performance: Evidence From Malaysia

We examined the relationship between blockholder ownership and firm performance in the context of high concentrated ownership in Malaysia coupled with weak regulatory framework. Blockholder ownership is used as monitoring device to verify the significant role in managerial decisions accordance with maximizing shareholders’ wealth. Consequently, blockholders may have personal incentive to the expropriation of minority shareholders’ wealth by exercising their corporate control. We found a positive significant relationship with small effect of beta coefficients by both market and accounting based measurements. The positive relationship of blockholders as institutions is the conformity of monitoring hypothesis. The results indicate a very week monitoring impact of blockholders on executives’ decisions that improve the firm performance by reducing the agency costs. Additionally, the significant low positive effect of profit volatility is representing the efficacy of blockholders until a certain level.

Voluntary disclosure and free cash flow in family French firms

This research investigates the governance role of voluntary disclosures especially in reducing agency problems measured by the level of free cash flow (FCF). In addition, it also shows the moderating effect of family ownership and governance mechanisms on this relation. Our research was conducted on a sample of 138 listed French firms between 2009 and 2013. To avoid the endogeneity problem caused by the voluntary disclosure variable we used the 2SLS regression method. The results show, on the one hand, that transparency provided by voluntary disclosures reduces the level of FCF and by the way agency problems. But family owners tend to accumulate FCF. On the other hand, the governance role of voluntary disclosure turns to be ineffective in family firms. This suggests a high risk of expropriation of minority shareholders by family ones. In addition, we demonstrate that governance mechanisms, especially board independence, gender diversity and audit committee independence, contribute to the strengthening of the governance role of voluntary disclosure.

Comment Letters and Large Asset Transactions: Evidence From an Emerging Market

This paper investigates how communications between regulators and firms affect the outcomes of large asset transactions (“restructurings”) in China. Examining stock exchange-issued comment letters that target individual restructuring filings, I find that characteristics indicating controlling shareholders’ expropriation of minority shareholders are associated with the severity of comment letters (“Severity”). The market reacts negatively to Severity. Severity predicts voluntary deal cancellation by management, and indirectly increases the probability of deal withdrawal and lengthens the processing time for equity-funded deals through affecting the approving body’s scrutiny level. Severity is also associated with lower post-letter disclosure quality rating. Textual analysis reveals that more concerns about a disguised reverse takeover, appraisal valuation and target assets quality are the most impactful, and demand for more disclosures is associated with larger revisions to restructuring filings. These findings are opposite to those of studies on comment letters and mergers and acquisitions in the U.S. (Liu et al., 2020; Johnson et al., 2020), reflecting the different role of comment letters under different institutions.

Firm-level and Country-level Corporate Governance: Does One Substitute or Complement the Other?

In this paper, I examine whether firm-level and country-level corporate governance substitute or complement each other. In contrast to previous multi-country studies, I address this question using a within-country framework and show that the effect of firm-level corporate governance on performance decreased following major country-level investor protection reforms in Israel in 2011. Using a difference-in-differences design, I find that firms with poor governance prereform, reduced the volume (in NIS) and number of their related-party transactions and increased in value post-reform, thereby minimizing the differences between them and the wellgoverned firms. Moreover, using a two-stage approach I provide evidence that the decrease in the related-party transactions among the firms with the pre-reform poor governance was a possible channel for their post-reform increase in value. These findings are consistent with the substitution hypothesis. The rationale is that the reforms set a unified higher standard of investor protection that substituted for the governance mechanisms in the poorly governed firms. Accordingly, these firms curtailed shareholder expropriation and increased in value.

Expropriation Risk vs. Government Bailout: Implications for Minority Shareholders of State-Owned Banks

We investigate the implications of government versus private ownership for bank minority shareholders. Specifically, we use unique data to examine whether the stock prices of government-owned and family-owned banks, equally engaged in related lending, differently react to loan announcements. Our empirical findings show that the expected negative market reaction due to minority shareholder expropriation driven by related lending (grabbing hand effect), is offset by shareholders' expectations of future support from the government (helping hand effect). Positive announcement returns are also larger for new loans to state-owned firms than for those to private firms. Our findings support the view that in countries with weak shareholder protection, shareholders of state-owned banks rationally anticipate expropriation, but are willing to accept it in exchange for higher expectations of government support to state-owned banks and to state-owned firms. JEL Classification: G21, G28

Do multiple large shareholders affect tax avoidance? Evidence from China

We examine the collusion versus monitoring effects of multiple large shareholders (MLS) on firms’ tax avoidance (TA). MLS can enhance the monitoring of the top shareholder and executives to restrain agency problems, or they can collude with the top shareholder to exacerbate the expropriation of minority shareholders. Using a sample of Chinese firms, we find that firms with MLS engage in less TA than their non-MLS counterparts do, supporting the monitoring hypothesis. The findings are robust after accounting for endogeneity concerns. Further tests show that the impact of MLS on TA is more pronounced when MLS have stronger power and when firms have severe agency problems. In addition, we find that effective external corporate governance can substitute for the monitoring effects of MLS. Most importantly, we find that TA activities are more likely to enhance value with the monitoring of MLS. In sum, our findings are consistent with the literature indicating that MLS make a positive contribution to firm value by reducing the nontax costs of TA.

Family control and ownership monitoring in Stakeholder-oriented corporate governance

PurposePrincipal–principal conflicts between family shareholders and other shareholders have been investigated in emerging economies, but fewer studies have examined the effect of concentrated ownership on firm profitability and dividend payout in stakeholder-oriented systems. The purpose of this paper is to examine whether family control leads to principal–principal conflicts resulting in wealth expropriation of minority shareholders by family owners in stakeholder-oriented systems.Design/methodology/approachThis study uses large listed firms of the Tokyo Stock Exchange (TSE) in Japan during 2007–2016. Using 14,991 firm year observations, the authors analyze the effect of family control on dividend payout and firm performance to test the possibility of exploitation by family owners.FindingsThe authors find that family board members do not exploit minority shareholders and rather behave as stewards of the firm. The authors also find that foreign shareholders interact with family control to increase firm profitability, suggesting that foreign shareholders enhance the role of family board members as stewards.Originality/valueExisting research on principal–principal conflicts tends to examine expropriation by family board members in emerging markets. This research reveals that family board members behave like stewards in the presence of stakeholder-oriented corporate governance mechanisms. In addition, foreign shareholders strengthen the stewardship role of family controlled firms.

Do large shareholders separate the roles of CEO and board chairman for expropriations? Evidence from pyramidal business groups in China

ABSTRACT This paper proposes that the separation of the roles of CEO and board chairman is a result of, rather than a solution to large shareholder agency problem. We support this view by examining the probabilities of CEO duality in pyramidal groups. We find that the probability of CEO duality is negatively associated with the number of pyramid layers and large shareholder expropriation, the number of pyramid layers and the level of large shareholder expropriation are positively related. Further analysis reveals that CEO duality improves (dampens) firm performance in cases of more (fewer) pyramid layers.

MANAGERIAL SHARE OWNERSHIP AND CAPITAL STRUCTURE DECISION OF NIGERIAN LISTED NON-FINANCIAL FIRMS

The paper examined the relationship between managerial share ownership and leverage of 35 non-financial firms listed on the floor of the Nigerian Stock Exchange. The study covered the period 2005-2014. Using panel data regression analysis and fixed effects model (with least squares as an estimation technique), result revealed a positive and significant relationship between leverage and managerial share ownership. This suggested that managerial share ownership, an important internal corporate governance mechanism, played an important role in a company’s capital structure decision. The outcome of this study was supported by some prior empirical studies and provided evidence of alignment of the interests of management and shareholders as proposed by the Agency theory. It is recommended that Nigerian companies should encourage management to own shares in companies where they serve as directors as this will reduce managerial incentives to consume perquisites and expropriation of shareholders’ wealth or investing in unprofitable projects. 
 
 

Foreign strategic ownership and minority shareholder protection

We show foreign strategic investors provide monitoring protection, by reducing tunneling through intercorporate loans. Further, foreign strategic investors mitigate minority shareholders expropriation through controlling excessive borrowing, whereas firms without foreign-founders channel excessive borrowing to controlling shareholders using intercorporate loans. The monitoring benefits are greater when corporate governance is weaker, and when foreign strategic investors are from English common law countries. Compared to foreign investor proxies typically used in Chinese studies, we use foreign-founder shareholders. As foreign-founders are long-term investors facing high liquidity risk, they are highly motivated to actively monitor and influence firm behaviours.