Study On Capital Structure, Manager Expropriation And Performance Of Listed Companies

Though to varying degrees, expropriation by professional manager is a commonplace in both Chinese and foreign companies. According to the principal-agent theory, as the interest of a company's manager is never perfectly aligned with that of its shareholders and creditors, the manager will more or less expropriate for its own good, the most typical expropriation behaviour is excessive"perquisite consumption". Excessive expropriation by the manager hurts the value of a firm, which concerns both shareholders and creditors, so they look for ways to restrain the manager from such behaviour.Jensen (1986) developed the cash flow hypothesis, which points out that debt can weaken the agency problem between the owner and manager of a business, to an extent keeps the manager from maximizing its own interest. This is called the contingent governance function of debts. When comparing expropriation by majority shareholders of listed companies in Europe and Asia, Faccio and Lang (2001) also suggests that debt financing can constrain the manager from expropriation, because his reputation and career prospect can be harmed if the company defaults on its debts. Empirical evidence tested by foreign scholars also indicates the presence of contingent governance of debt in foreign listed companies.Yet given that China does not have a developed creditors'market and creditor protection as compared with foreign institution, the primary interest of this paper is whether debt financing still works in the form of contingent governance in China.Since Modigliani and Miller (1958) proposed the theory of capital structure irrelevance under rigorous assumptions, scholars have established and improved the trade-off theory and dynamic trade-off theory by relaxing the assumptions. Yet the explanation power of trade-off theory on capital structure has been questioned since Baker and Murgler (2002) put forward the market-timing theory. Then, whether the former theory applies to Chinese listed companies becomes the second interest of this paper.To address these two interests, we have sampled 602 listed companies from 1997 to 2004 to constitute balanced panel data based on which a model of simultaneous equations is applied in accordance with the trade-off theory and agency theory. This is the first attempt to study the interaction among capital structure, manager expropriation and corporate performance within a systemic framework based on past research. Our empirical results show that such three-way interaction does exist: capital structure has a significant positive impact on manager expropriation, which suggests that instead of constraining the manager expropriation, debt financing encourages expropriation; capital structure has a non-linear, or a reversed U-shape correlation with corporate performance, which supports the trade-off theory and dynamic trade-off theory, manager expropriation has a significant negative impact on corporate performance, which supports the agency theory; corporate performance has a significant negative impact on capital structure, which supports the Pecking-Order Hypothesis.The empirical approach of a model of simultaneous equations basically answers the two core questions of this paper, i.e. instead of bringing contingent governance, debt financing results in more expropriation by manager in China; and that the trade-off theory on capital structure applies to Chinese listed companies. Yet the generality of the former conclusion becomes questionable when combined with the latter conclusion. Questions remain about whether an increased capital structure necessarily aggravates the expropriation behaviour in a low leveraged company, and whether an increased capital structure represents an adjustment towards the target capital structure for these companies, and whether an increased capital structure result in the more serious expropriation for high leveraged companies. Therefore, based on the two conclusions, this paper further researches the impact of capital structure changes on manager expropriation in low leveraged companies and high leveraged companies, which represents a dynamic perspective. Empirical tests have been carried out on sample companies of different levels of leverage under the multi-linear regression model and fixed-effect model respectively. Results suggest that capital structure change does have different effects on manager expropriation in the different leverage level. Specifically, greater change of capital structure does not exacerbate expropriation in low leveraged companies. In other words, such change is likely adjustment towards the target capital structure. On the other hand, greater capital structure change does lead to more serious expropriation in high leveraged companies. Moreover, the reinforcement is much bigger than that of relatively high leveraged companies. The robustness of these results has been tested under the Generalized Method of Moments. These results give the answer to the first interest.This paper goes further to study the impact of capital structure changes on the performance of companies in different levels of leverage. The same multi-linear regression model and fixed-effect model are used and results indicate that capital structure change has a significant negative impact on the performance of high leveraged companies, which means that for these companies heavier debt financing will cause performance to drop; and there is no evidence of the same negative effect for the low leveraged companies. These results to an extent validate the results of the model of simultaneous equations and confirm the trade-off theory from another perspective, which implies the existence of a target capital structure.As a single-equation model has been used to study the impact of capital structure changes on manager expropriation and corporate performance, it does not tell whether the impact of capital structure changes on corporate performance also includes the transmission or indirect impact of management expropriation. To further test the robustness of existing conclusions and to study the causality between capital structure change, manager expropriation, corporate performance including it's determinants we have tested in chapter 4 and 5, and the market reactions after annual report announcement on multiple dimensions, this paper first measures the cumulated abnormal return post annual reports by using the event method as a measure of market reactions, and then tests these causality under the path analysis. As an extension of regressive analysis, path analysis has been broadly applied to medical science and biology. Within one complex system, this method break down the total effect of independent variables on dependent variables to direct effect and indirect effect, which helps reach to the purpose of this paper. Empirical study shows that (1) for high leveraged companies, capital structure changes pass to business operations the information of manager expropriation which indirectly affects operations performance of corporation. The greater capital structure changes are, the more serious expropriation is, which leads to performance drop. In addition, capital structure changes transmit the message of manager expropriation to the market through two paths, influencing market reactions indirectly. First, the greater capital structure changes are, the more serious manager expropriation becomes, and the more negatively the market reacts. That is to say the reactions of the capital market directly absorb the information of manager expropriation sent by capital structure changes. Second, the greater capital structure changes are, the more serious manager expropriation becomes, the worse a company performs, and the more negatively the market reacts. That is to say the reactions of the capital market indirectly absorb the information of manager expropriation sent by capital structure changes through corporate performance. For low leveraged companies, capital structure changes do not imply the heavier manager expropriation and do not transmit the negative information to business operations and the capital market. (2) for high leveraged companies, capital structure changes has a direct negative impact on corporate performance and a direct positive impact on market reactions; for low leveraged companies, capital structure changes do not have an significant direct impact on corporate performance or on market reactions. (3) for both high leveraged and low leveraged companies, manager expropriation has a direct negative impact on corporate performance, which consistent with the agency theory.This paper has used manager expropriation indicator which certainly does not cover all manager expropriation behaviours in listed companies. But it is believed that the conclusions resulted from this paper will help enrich the theory of capital structure and direct the operations of listed companies and improve creditor protection in China.