Private Listed Companies In Control Of Private Benefits

Traditional corporate finance theory assumes all of the shares have the same rights and interests equally. With the development of research on largest shareholder, it is discovered that the largest shareholder can get some interests named private benefits of control with the exception of other shareholders. The concept of private benefits of control has been the one of core concepts in corporate finance and corporate governance, and the expropriation by largest shareholders also has been the one of the importance theses on investor protection and capital market development. Some oversea economists such as La Porta, Lopez-de-Silanes, Shleifer, Vishny and Zingales, etc, have acquired some important finds on private benefits of control. They keep researching on private benefits of control through expanding the research field. In these years, although some domestic economists also have made some contributions to the research of private benefits of control, there still are some shortages on current papers on private benefits of control.With the development of private economy in China, the private listed companies have been the focus of China's capital market. Just when the hopes of improving the quality of listed companies have been placed on private listed companies, some appalling cases about largest shareholder expropriating minority shareholders have exposed presently. These cases and some corporate governance problems behind these cases become the focus of investors, government and economists. What is the institutional foundation stone of these cases and problems? How to explain and analyze these case and problems? How to control these case and problems? Apparently, the research on these cases and problems theoretically and empirically has important theoretical and practical value.From the view of private benefits of control, this paper has a research on largest shareholder expropriating minority shareholders and largest shareholder's private benefits of control in China's private listed companies in order to propose some suggestions aim to improving the corporate governance and investor protection. This paper has some major conclusions as follows:Firstly, this paper finds the institutional foundation stone of private benefits of control in China private listed companies includes four aspects: 1. Because the largest shareholder has the control on listed companies through the collocation of control rights, so the largest shareholder has the power to get the private benefits of control. This paper finds the largest shareholder has more than 30% shares. Although this percent is less than 50%, it is enough to make the largest shareholder can control the listed companies since other shareholders are so small. In this case, the shareholder meeting will become the largest shareholder's tools to control listed companies. Some opportunistic behaviors of the largest shareholder will be passed in shareholder meeting, and become the corporate behaviors, so that the behaviors of expropriating private benefits of control will be viewed as legitimacy. Otherwise, because the managements of private listed companies are almost controlled by the largest shareholder, it will be easy to get collusion between the largest shareholder and the managements, so that the collusion can facilitate the largest shareholder to expropriate private benefits of control. 2. The corporate governance of China's private listed companies cannot restrict the largest shareholder, it even become the hothouse of largest shareholder's expropriation. When nonstandard corporate governance become the operating rules in private listed companies, the behaviors of expropriating private benefits of control should be inevitable. 3. Split of shares, the special institutional arrangement, makes the different between shareholder with listed shares and unlisted ones in the benefaction, and makes corporate governance lose the function of restricting the largest shareholder's expropriation. Under this institutional arrangement, it is ineluctable that the largest shareholder expropriates the interests of minority shareholders and expropriates private benefits of control. 4. The pan-family rule in China private listed companies is the deep-seated season of largest shareholder expropriating private benefits of control. The nature authority of family controlling shareholder, the family cliquism and the human relationship replacing the law will make the expropriation possible.Secondly, the instruments of the largest shareholder expropriating private benefits of control in China private listed companies can be classified to two types: 1. Spoliation directly. Spoliation directly can be represented as Johnson (2000) mentioned "tunneling" behaviors, such as unfair relevant transactions, etc. Through these instruments, the largest shareholder expropriates property from listed companies directly or makes the listed companies to take the cost of the largest shareholder. These instruments do not have Chinese characteristic, mainly include impropriating capital of listed companies free or cheaply, hypothecating for largest shareholder and expropriating private benefits of control through designing the Pyramidal Structure, etc. 2. Transfer indirectly. Transfer indirectly can be represented "High Premium Secondary Equity Offering", it has plenitudinous Chinese characteristic. Spoliation directly and transfer indirectly have tight relationship.Thirdly, based on the statements on the concepts of private benefits of control, this paper presents a basic model to analyze theoretically the intrinsic relationship between private benefits of control and control premium, and then this paper probes into the applicability of measuring model of private benefits of control pioneered by Barclay & Holderness (1989). Then, this paper brings forward an amendatory measuring model. Finally, based on the 58 controlling block trades from 1999 to 2003, this paper measures the average private benefits of control of China private listed companies. This paper finds the level of private benefits of control of China private listed companies is 0.0947. It shows the level of private benefits of control of China private listed companies has increased from 1999 to 2003. Otherwise, the level of private benefits of control of some private listed companies is very high, which indicates the expropriation by the largest shareholder is quite serious.Fourthly, by identifying the types of largest shareholders, this paper presents an analysis framework that analyzes theoretically the relationships between types of largest shareholders, allocation of real control rights and private benefits of control. Based on the 160 controlling block trades from 1999 to 2003, this paper tests empirically the relationship of types of largest shareholders and private benefits of control. This paper finds the private benefits of control expropriated by state asset-management bureaus (SAMB) is significant negative, the private benefits of control expropriated by state-owned enterprise(SOE) is zero nearly, and the private benefits of control expropriated by private enterprise(PE)is significant positive. In these types of largest shareholders, the level of private enterprise's private benefits of control is highest; state-owned enterprise is placed in the middle, the state asset-management bureaus are least.Fifthly, this paper has some conclusions of the questions about the influence of the separation between cash flow rights and control rights to the private benefits of control as follow: 1. Pyramidal Structure , Cross-Ownership and Dual -Class Equity can make the separation between cash flow rights and control rights. This paper presents a basic model to analyze theoretically the separation between cash flow rights and control rights under the pyramidal structure, which spirits up the expropriation of private benefits of control. Otherwise, this model also analyzes the preference of pyramidal structure through reviewing the ultimate return of investment. 2. This paper finds some characteristics about pyramidal structures in China private listed companies: A. It is a ubiquitous phenomenon that there are pyramidal structures in China private listed companies. B. The level of pyramidal structures in China private listed companies is normal. The level is 2.5 stories in average. C. The pyramidal structures in China's private listed companies are simple. Although there are some complex multi- catenulate, the simple single catenulate pyramidal structure is the main form. D. The top of pyramidal structure is the controlling family shareholder or family natural person. 3. The pyramidal structure also makes the separation between cash flow rights and control rights in China's private listed companies. This empirical examination shows the proportion of cash flow rights in China's private listed companies is 18.37% in average, the proportion of control rights is 28.61% in average, Separation Quantum of cash flow rights and control rights is 61.54%. Furthermore, this empirical examination shows the separation of cash flow rights and control rights ranks the highest in East Asia. 4. There is an unignorable phenomenon that the controlling family members take part in the managements of China's private listed companies. This empirical examination shows the phenomenon exist in 74.1% companies, and the chairman of the board is the controlling family members in 52% companies, the number of the controlling family members in China's private listed companies is 0.95 in average. 5. This paper analyzes the influence of the separation between cash flow rights and control rights to the private benefits of control. The empirical examination of influence factors to private benefits of control implies, private benefits of control is positive correlation between cash flow rights, and positive correlates statistically between control right. There is negative correlation between separation quantum of cash flow rights and control rights, corporation scales to private benefits of control. There is positive correlation between the stories of pyramidal structure, financial level and the cash flows controlled by the largest shareholder to private benefits of control.Finally, based on the conclusion above, this paper proposes five suggestions aim to improving the corporate governance and investor protection: 1. Improving the cumulative voting; 2. Strengthening the independence of board; 3.Improving the construction of modern business culture in private listed companies; 4. Strengthening the supervision on private firms merger other listed companies; 5. Strengthening especially the supervision on the private listed companies with high level of separation quantum of cash flow rights and control rights. At last, this paper prospects some new problems about the private benefits of control after the split of shares reform.