Multiple large shareholders and absinvestment among Chinese listed firms.
Data | 01 Abril 2023 |
Author | Yan, Caiyu |
Introduction
The multiple ownership structure has been highly praised by scholars in recent years. This kind of structure allows large shareholders to try to improve their control rights, stimulate supervision vitality, create a power balance, and curb insider tunneling behaviors with specific mechanisms related to firm value premiums (Maury and Pajuste, 2005; Laeven and Levine, 2008; Attig et al., 2009, 2013; Boateng and Huang, 2017). Thus, compared to companies with decentralized and concentrated ownership structures, firms with multiple ownership structures show better governance performance. However, in practice, shareholder "collusion and violation" incidents, such as the illegal "card raising" of S&P pharmaceuticals, have repeatedly emerged, and large shareholders often pursue excessive private interests by forming interest alliances. However, the existing literature mainly focuses on the checks and balances of large shareholders, but does not establish a valid framework to explain the collusion of shareholders (Su et al., 2008). In particular, there is a lack of empirical evidence on whether the multiple ownership structure has disadvantages or not. Therefore, our research attempts to fill this gap.
Agency theory argues that absinvestment is an important way for managers and shareholders to pursue their own private interests. According to the agent-principal problem, managers use control rights to pursue their private interests, such as seeking a "quiet life," salary manipulation, building a private empire, and increasing enterprise risk taking, which results in serious agency problems (Li and Tang, 2010; Stulz, 1990), thus reducing the efficiency of enterprise investment. According to the principal-principal problem, controlling shareholders can make their control rights deviate from their cash flow rights through a pyramid structure, cross shareholding, different rights of the same share and so on, so as to obtain control rights beyond ownership (Lemmon and Lins, 2003; Almeida and Wolfenzon, 2006). Considering the excessive control of resources (Wang, 2009), maintenance of control rights and holding costs (Filatotchev et al., 2008), lower investment barriers (Wu and Wang, 2005), the level of risk tolerance and other factors (Zhang, 1998), controlling shareholders with excess control rights have enough power and ability to drive enterprises to make absinvestment decisions, so as to obtain their own private benefits. Consequently, the essence of absinvestment is a redistribution behavior in which the subject with control rights can grab the controlling resources and expropriate the wealth of other interested subjects. Non-controlling large shareholders have the ability and opportunity to obtain excess control rights due to information asymmetry. In this context, would non-controlling large shareholders continue to mitigate the two kinds of agency problems to improve investment efficiency, or would they pursue private benefits through absinvestment activities as part of the subject with control rights? This is a topic worth exploring in depth.
In order to explore the relationship between the multiple ownership structure and absinvestment, this study uses a sample of Chinese listed companies and their unique governance characteristics to investigate the impact of multiple large shareholders on enterprise investment. First, as the largest developing country in the world, China's economy has been growing rapidly for a long time, and there are numerous investment opportunities in these listed companies. Second, although the ownership structure has changed from the traditional "yigududa to multiple large shareholders after the non-tradable shares reform, the current ownership structure is still relatively concentrated (Faccio and Lang, 2002; Sun and Tong, 2003), and controlling shareholders are still dominant in companies, which provides multiple large shareholders with the motivation and ability to supervise controlling shareholders so as to protect their own interests. Third, due to the imperfect protection mechanism for minority shareholders and the limited role of the takeover market and independent director system in restricting the tunneling behaviors of large shareholders (Jiang et al., 2010; Peng et al., 2011), multiple large shareholders may collude with controlling shareholders to expropriate minority shareholders' interests. In other words, these characteristics provide various opportunities for the multiple ownership structure to influence enterprise investment.
To explore the impact of the multiple ownership structure on enterprise investment, this paper conducts an in-depth study by answering the following two questions. First, do multiple large shareholders increase or decrease absinvestment? To answer this question, this study uses cash flow rights and contestability to measure the governance effect of multiple large shareholders and employs a prospective investment model to calculate absinvestment. The results show that multiple large shareholders can significantly improve absinvestment. Our findings are also robust to alternative dependent and independent variables and to different model specifications. Second, would controlling shareholders collude with multiple large shareholders to increase absinvestment? To answer this question, this paper introduces a threshold model to explore the impact of controlling shareholders on multiple large shareholders and absinvestment to determine whether controlling shareholders would collude with multiple large shareholders to seek excess private benefits. We show that controlling shareholder governance can strengthen the positive correlation between multiple ownership structure and absinvestment, which means that controlling shareholders would collude with multiple large shareholders to pursue their self-interests by increasing a firm's absinvestment.
This study contributes to the literature in several important ways. First, it shows a positive correlation between multiple large shareholders and absinvestment, which extends the research of Jiang et al. (2018), which found that multiple large shareholders can significantly improve investment efficiency. Second, this paper is the first to introduce a threshold model to study the impact of controlling shareholders on the relationship between multiple large shareholders and absinvestment, showing that the positive relationship between them is strengthened by promoting the governance effect of controlling shareholders. Third, this paper provides new evidence that controlling shareholders would collude with multiple large shareholders to seek excess private benefits by increasing enterprise absinvestment, which extends the research of Konijn et al. (2011), which proved that multiple large shareholders are entrenched against controlling shareholders.
The rest of this paper is organized as follows. Section 2 outlines the theoretical analysis and develops the hypotheses. Section 3 describes the methods and data. Section 4 reports the empirical evidence. Section 5 presents the iurther investigation. Section 6 presents our conclusions.
2 theoretical analysis and hypotheses
In a perfect market, an enterprise's optimal investment level should make the marginal income equal to the marginal cost (Modigliani and Miller, 1958). However, in practice, realistic frictions cause firms to exhibit absinvestment behavior (over-investment and under-investment), thus deviating from the optimal investment level. In order to explore the internal logic of absinvestment behavior, Jensen and Meckling (1976) started from the ownership decentralization assumption and pointed out that managers make decisions to maximize their own interests, which may go against the principle of investor interest maximization, resulting in "moral failure behavior." Jensen (1986) showed that managers would not distribute a large amount of free cash to shareholders, but would rather use it to expand the size of the firm in order to obtain more control rights and higher salaries, resulting in serious absinvestment behavior. Murphy (1985) proved that managers would blindly expand the size of the firm with the aim of obtaining excessive control over resources, resulting in serious absinvestment behavior. Morck et al. (1988) indicated that in addition to obtaining excessive control rights, managers are likely to prefer more resources for the projects that are beneficial to their own development in order to ensure job security, and these projects often do not aim at enterprise value maximization. Moreover, in order to seek excessive in-service consumption, some managers may also make absinvestment decisions (Stulz, 1990).
The above studies have shown that as ownership concentration increases, shareholders' monitoring of managers' control rights will also increase, which mitigates the enterprise absinvestment behavior caused by the agency conflict between shareholders and managers. However, Claessens et al. found that this is not the case. When ownership is highly concentrated, controlling shareholders can gain control over ownership by means of a pyramid structure, cross-shareholding and having the same share with various rights, which separates the control rights and cash flow rights of controlling shareholders, and controlling shareholders have the motivation and ability to seek private benefits with their excess control rights, resulting in absinvestment (La Porta et al., 1999; Dyck and Zingales, 2004; Aggarwal and Samwick, 2006). From the perspective of risk tolerance, Zhang (1998) demonstrated that risk-averse controlling shareholders would reduce enterprise investment efficiency. In addition, the maintenance of control rights and holding costs also lead to enterprise absinvestment (Filatotchev et al., 2008). These studies show that the agent-principal problem between shareholders in the mode of ownership concentration, and the private...
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