Ultimate Ownership Structure Research Articles

Ownership Structure, Diversification, and Bank Performance: International Evidence

ABSTRACT This research utilizes ultimate controlling shareholders to examine whether ultimate ownership structure (bank, industrial company, mutual fund, financial company, and state) and/or income diversification affect bank performance via a total sample of 6,053 commercial banks in six regions (advanced countries, Asia, Latin America, the Middle East and North Africa, Sub-Saharan Africa, and Transit countries). First, taking the group of advanced countries for example, banks can increase their profit under the ownership types of banking institution, mutual fund, and financial company, whereas the interaction of income diversity and ownership is negatively linked with bank performance. Second, the ownership types of banking institution and state help reduce banks’ risk taking, but non-interest income diversity is adversely favorable for risk. Third, banks with mutual funds as controlling shareholders exhibit higher risk, while non-interest income diversity mitigates their risk-taking behavior.

Are insiders equal? Evidence from earnings management in closely held East Asian firms

In analyzing newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we contribute to international accounting research by providing evidence on earnings management in insider-controlled firms in this region. We find that family-controlled firms engage in less (more) accrual-based (real) earnings management than other insider-controlled firms. Our analysis suggests that controlling families, unlike other types of ultimate owners, tend to substitute real earnings management for accrual-based earnings management. To help empirically clarify the role that two incentives (entrenchment versus signaling) play in driving the substitution between real and accruals-based earnings management, we examine their valuation impact and find that both types negatively affect the future valuation of family firms. In another set of results consistent with expectations, we document that country-level investor protection and firm external financing demand shape the practice of earnings management in family-controlled firms.

Ultimate ownership, crash risk, and split share structure reform in China

Abstract This study investigates the relationship between ultimate ownership and stock price crash risk for Chinese firms and the impact on this relationship of the implementation of the split share structure reform, which rendered previously non-tradable shares freely tradable. We find that government-controlled firms, especially local ones, have a significantly higher crash risk than privately controlled firms. After the reform, crash risk of all firms decreases significantly, with a greater risk reduction for privately controlled firms than for government-controlled firms. Further evidence demonstrates that government-controlled firms with stronger political incentives tend to have higher crash risk.

Are Insiders Equal? Evidence from Earnings Management in Closely Held East Asian Firms

In analyzing newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we contribute to international accounting research by providing evidence on earnings management in insider-controlled firms in this region. We find that family-controlled firms engage in less (more) accrual-based (real) earnings management than other insider-controlled firms. Our analysis suggests that controlling families, unlike other types of ultimate owners, tend to substitute real earnings management for accrual-based earnings management. To help empirically clarify the role that two incentives (entrenchment versus signaling) play in driving the substitution between real and accruals-based earnings management, we examine their valuation impact and find that both types negatively affect the future valuation of family firms. In another set of results consistent with expectations, we document that country-level investor protection and firm external financing demand shape the practice of earnings management in family-controlled firms.

Family control and corporate social responsibility

Abstract We investigate the impact of family control on corporate social responsibility (CSR) performance. Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family-controlled firms exhibit lower CSR performance, consistent with the expropriation hypothesis of family control. The negative relationship between family control and CSR is robust to alternative measures of family control, different components of CSR, as well as to endogeneity tests, subsample tests, and alternative estimation methods. We further find that CSR underperformance concentrates in family firms with greater agency problems and in countries with weaker institutions. Moreover, the underperformance of East Asian family firms holds when controlling for the effects of other large shareholders and when comparing with family firms from other countries. These findings contribute to understanding the determinants of CSR and highlight the importance of corporate governance and the institutional environment in improving CSR performance of family-controlled firms.

Ownership, analyst coverage, and stock synchronicity in China

This study examines how ownership structure affects the information environment of publicly traded firms in China. We hypothesize that concentrated ownership and the associated separation of ultimate control and ownership rights create agency conflicts between controlling shareholders and minority investors leading controlling owners to withhold firm-specific information from the market. We test this hypothesis by analyzing the effect of ultimate ownership structure and analyst coverage on stock return synchronicity. We find that a greater separation of control and ownership rights increases the response coefficient of stock return synchronicity to analyst coverage. This result is robust to endogeneity, a series of robustness checks, and an alternative hypothesis based on noise trading. The incentive of controlling owners to limit firm transparency thus leads analysts to disseminate more market-wide information.

Ultimate ownership structure and capital structure: evidence from Chinese listed companies

This study investigates the impact of the ultimate corporate ownership structure, particularly the divergence of ultimate controlling shareholder’s control rights and cash flow rights, on the capital structure decisions among firms listed in Chinese market where the legal protection for creditors and minority shareholders is weak. I find that firms with a wider divergence between the ultimate controlling shareholder’s control rights and cash flow rights have significantly higher leverage level of capital structure. I also identify factors that affect this relation, including state ownership, institutional ownership, the presence of large tradable shareholders and NTS reform. My results suggest that leverage-increasing motivation of ultimate controlling shareholders with the risk of expropriation dominates in Chinese market and raising debt is a tool for them to maintain control over resources and corporate decisions to facilitate their self-dealing expropriation

The Global Financial Crisis, Family Control, and Dividend Policy

Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family control is negatively related to the dividend payout ratio. Family firms are less (more) likely to increase (omit) dividends than non‐family firms. These negative associations between family firms and dividend policy are more pronounced during the recent global financial crisis, suggesting that controlling families have incentives to expropriate more firm resources during crises than in normal times.

Family Control and Corporate Social Responsibility

We investigate the impact of family control on corporate social responsibility (CSR) performance. Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family-controlled firms exhibit lower CSR performance, consistent with the expropriation hypothesis of family control. The negative relationship between family control and CSR is robust to alternative measures of family control, different components of CSR, as well as to endogeneity tests, subsample tests, and alternative estimation methods. We further find that CSR underperformance concentrates in family firms with greater agency problems and in countries with weaker institutions. Moreover, the underperformance of East Asian family firms holds when controlling for the effects of other large shareholders and when comparing with family firms from other countries. These findings contribute to understanding the determinants of CSR and highlight the importance of corporate governance and the institutional environment in improving CSR performance of family-controlled firms.

Nothing New Under the Sun: Revisiting the Impact of Family Ownership on Dividend Policy in East Asia

Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family control is negatively related to the dividend payout ratio. Family firms are less (more) likely to increase (omit) dividends than non-family firms. These negative associations between family firms and dividend policy are more pronounced during the recent global financial crisis, suggesting that controlling families have incentives to expropriate more firm resources during crises than in normal times.

Family Control and Corporate Social Responsibility: Evidence from East Asia

This paper investigates the impact of family control on corporate social responsibility (CSR) performance. Using Carney and Child's (2013) newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asia economies, we find that family control has a significantly negative impact on CSR performance, which is consistent with the entrenchment view of family ownership. Also, we find that the presence of multiple large shareholders helps to improve the CSR performance of family firms. Moreover, our results are robust to inclusion of other types of ownership, different CSR components, endogeneity tests, subsample tests, alternative estimation methods, and alternative definition of family firms. Our study contributes to our understanding of the corporate governance of family-controlled firms and the determinants of CSR.

Ultimate ownership, institutionality, and capital structure

Purpose – The purpose of this paper is to illustrate and examine the effects of ultimate ownership, institutionality and their interactions on capital structure in a unified framework, based on evidence from China. Design/methodology/approach – Using six years of panel data of Chinese non-financial listed firms between 2004 and 2009, this paper estimates with correlation analysis and multiple regression analysis. Findings – This paper finds that debt financing facilitates the ultimate owner's expropriation behavior. The separation of control rights and cash flow rights is positively related to capital structure, while cash flow rights negatively affect it. Compared with private ultimate owners, state ultimate owners have less incentive to reap the benefits of expropriation, implying that the separation of control rights and cash flow rights has a smaller effect on the capital structure of state-owned firms. The improvement of institutionality can restrain ultimate owners' expropriation behavior, and regional institutional development is negatively related to capital structure. The separation of control rights and cash flow rights has a smaller positive effect on capital structure in regions with better-developed institutionality. Originality/value – This paper incorporates ultimate ownership and institutionality into a unified analytical framework of capital structure. It not only enriches related studies on capital structure, but also helps us understand the institutional roots of irrational capital structure behaviors in China. This paper also provides further evidence on ultimate owners' expropriation of minority shareholders through debt financing.

Effects of dividend tax and signaling on firm valuation: Evidence from taxable stock dividend announcements

Our study aims to isolate the negative tax effect of dividends from their positive signaling effect. We explore the market valuation of taxable stock dividends in Taiwan because management's voluntary taxation makes these dividends a reliable signal. We find that controlling shareholders' shareholdings positively impact market reactions to announcements of taxable stock dividends, while shareholders' weighted average tax rates and the discrepancy between controlling shareholders' ownership and control rights have negative impacts. The integrated tax system that reduces investors' dividend tax burdens alleviates the effects of both tax and signaling. We contribute to the literature by determining the relative importance of tax and signaling effects on firm valuation and demonstrating a unique characteristic of the interaction between stock dividends and ultimate ownership structure.

Effects of ultimate ownership structure and corporate tax on capital structures: Evidence from Taiwan

Our study investigates how ultimate ownership structure and the corporate tax rate affect the equilibrium trade-off relation between manager ownership and debt in reducing agency costs. Considering the presence of the controlling shareholder, we find that higher corporate tax rates strengthen the trade-off relation between manager ownership and debt while higher control rights held by the controlling shareholder weaken it as well as the strengthening effect of corporate tax rate. Our study contributes to the literature by revealing tax and ultimate ownership structure dimensions and their interactions as additional determinants of corporate capital structure.

Cost of equity capital, control divergence, and institutions: the international evidence

This study investigates the governance role of a country’s legal and extra-legal institutions in explaining the variations in firms’ cost of equity capital induced by concentrated ownership structures from 21 countries. Using four implied cost of equity proxies, the results show that the large ownership-control divergence of the ultimate owner has a positive and significant impact on the firm’s cost of equity capital. The finding lends support to the entrenchment effect in that the concentrated ownership structure increases the firm’s external financing cost. Further analyses demonstrate that the higher equity cost induced by the ultimate ownership structure is significantly reduced by a country’s stronger legal and extra-legal institutions, highlighting the governance role played by a country’s institutions in reducing the firm’s external financing cost.

Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks

This paper empirically investigates whether a bank's decision to adjust its capital is influenced by the existence of a divergence between the voting and the cash-flow rights of its ultimate owner. We use a novel hand-collected dataset on detailed control and ownership characteristics of 405 European commercial banks to estimate an ownership-augmented capital adjustment model over the 2003-2010 period. We find no differences in adjustment speeds when banks need to adjust their Tier 1 capital downwards to reach their target capital ratio. However, when the adjustment process requires an upward shift in Tier 1 capital, the adjustment is significantly slower for banks controlled by a shareholder with a divergence between voting and cash-flow rights. Further investigation shows that such an asymmetry only holds if the ultimate owner is a family or a state or if the bank is headquartered in a country with relatively weak shareholder protection. Moreover, this behavior is tempered during the 2008 financial crisis, possibly because of government capital injections or support from ultimate owners (propping up). Our findings provide new insights for understanding capital adjustment in general and have policy implications on the road to the final stage of Basel III in 2019.

Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks

This paper empirically investigates whether a bank's decision to adjust its capital is influenced by the existence of a divergence between the voting and the cash-flow rights of its ultimate owner. We use a novel hand-collected dataset on detailed control and ownership characteristics of 405 European commercial banks to estimate an ownership-augmented capital adjustment model over the 2003-2010 period. We find no differences in adjustment speeds when banks need to adjust their Tier 1 capital downwards to reach their target capital ratio. However, when the adjustment process requires an upward shift in Tier 1 capital, the adjustment is significantly slower for banks controlled by a shareholder with a divergence between voting and cash-flow rights. Further investigation shows that such an asymmetry only holds if the ultimate owner is a family or a state or if the bank is headquartered in a country with relatively weak shareholder protection. Moreover, this behavior is tempered during the 2008 financial crisis, possibly because of government capital injections or support from ultimate owners (propping up). Our findings provide new insights for understanding capital adjustment in general and have policy implications on the road to the final stage of Basel III in 2019.

Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks

We empirically investigate whether a bank’s decision to recapitalize is influenced by the separation between voting and cash-flow rights of the ultimate owner. We use a novel dataset on bank ultimate control and ownership structure of 442 European commercial banks to estimate an ownership-augmented capital adjustment model. We find that when the ultimate owner’s rights are identical, banks actively and equally adjust their capital upwards (i.e. raise equity) and downwards (i.e. repurchase equity) to reach their target. However, a gap between both rights makes banks reluctant to actively adjust their capital position upwards, presumably because they fear control dilution. Further investigation shows that such a behavior is more pronounced if the ultimate owner is a family or a state, or if the bank is headquartered in a country with weak shareholder protection. Our findings have several policy implications on the road to the final stage of Basel III in 2019.

Ultimate ownership structure and stock liquidity: empirical evidence from Tunisia

PurposeThe purpose of this paper is to study the ownership‐liquidity relation in the context of the Tunisian Stock Exchange.Design/methodology/approachIn particular, the paper examines two empirical relationships: the relationship between ownership concentration and stock liquidity and the relationship between the separation of ownership from control and market liquidity.FindingsThe empirical findings verify that the structure of ownership remains concentrated in the majority of the Tunisian firms. It is found that stock liquidity decreases significantly with concentrated ownership. Different devices are used to gain control and hence a significant separation of ownership from control affects liquidity in different ways. The results indicate that pyramidal structures have a significant negative impact on liquidity for all controlled firms. However, for family firms, non‐voting shares increase liquidity for minority shareholders by reducing the probability of informed trading.Originality/valueOverall, this study reports that non‐voting shares may be a liquidity enhancing device for family firms.

Ownership, control, and pyramids in Spanish commercial banks

Using the law and finance approach we analyze how the ultimate ownership and control structure influences the performance of Spanish commercial banks during the period 1996–2004. Our evidence shows that 96% of Spanish commercial banks have an ultimate controlling owner. Also, we observe that whenever there is a gap between the ultimate controlling owner’s cash flow and control rights, than the bigger the gap, the poorer the bank’s performance. We find that whenever there is no difference between the ultimate controlling owner’s cash flow and control rights, there is a non-monotonic relation between ownership concentration and the bank’s performance.