A Study On Private Benefits Of Control And Its Economic Consequences Based On Chinese Listed Companies

The early researcher on Agency Theory focused on studying the relationship between corporation manager and outside shareholders. Nearly all of them assumed that the outside shareholders shared common interests while the actual corporation shares are dispersed widely among the shareholders. However, Eugene Fama and Michael Jensen's researches showed that the most common share structure in contemporary world is relatively concentrated instead of highly fragmented. The institutions with large shares become the controlling shareholders. These controlling shareholders can use their share advantages to damage the interest of small and medium shareholders. To understand the controlling shareholders influence on corporation management and the effects on the company value are a hot research area in the corporate governance research society.There are many excellent papers which discuss the difference of interests between controlling shareholders and medium-small shareholders, the cause of the differences and its impacts on the corporate value and investment behavior. These researches, however, only focus on the level of single-term investment. No scholars consider the area of double-temporal investment and the expropriation of the controlling shareholder on each investment phase. This paper tries to use standardized methods to analyze the shareholding structure and corporate governess process. Its main focus is the study of expropriation behavior of controlling shareholders under double-temporal investment. The goal is to find out all the factors that influence the expropriation behavior and design procedures that can prevent its happening.There is also a practical reason to study the expropriation behavior of controlling shareholders in contemporary China. The widely used method to analyze the corporation capital allocation strategy nowadays is the single case analysis method. However this method only presents a static corporation feature at the time of analysis and it could not show the whole picture. This paper uses the real option theory to dynamically analyze the behavior of distorted and low-efficient capital allocation, thus provide a mechanism to improve the corporate financial decision making and protect the interests of medium and small shareholders.The contents are listed below:(1) This paper constructs an extended model of double-temporal expropriation by the controlling shareholder to extend the classical single-term expropriation model based on the given existence of new investment opportunities, and analyzes theoretically the private benefits of control from the aspects of cash flow rights proportion, legal protection of mid-small shareholders and new investment return rate. The conclusions show that: the level of private benefits of control are all negatively related to the cash flow rights proportion, legal protection of mid-small shareholders and the new investment return rate. And the shares diverts by controlling shareholders decrease when the cash flow rights, the strengthen of legal protection to mid-small shareholders and the new investment return rate all increase; other things being equal, the controlling shareholders'current first-best expropriation level is lower than in single-term model if given one of the cash flow rights proportion, strengthen of legal protection to mid-small shareholders or new investment return rate, while their future levels are the same; the current first-best expropriation level is negatively related to the future first-best level and the controlling shareholder is not short-sighted. Their ultimate goal is to maximize long-term private benefits of control. This goal is also the reason for their double-temporal expropriation behavior.(2) According to the unique institutional context and legal environment of Chinese listed companies, this paper examines empirically the relation between cash flow rights, legal protection of mid-small shareholders, new investment return rate and private benefits of control under the guide of the theoretic results summarized formerly, and the sample data come from the listed companies which controlling rights diverted in A stock markets of Shang hai and Shen zhen during 2000-2008. The results reveal that it is the negative relationship between the level of priate benefits of control and new investment return rate, and the increase of new investment return rate can decrease the level of priate benefits of control. It isn't verified that the negative relationship between the level of priate benefits of control and cash flow rights of controlling shareholders, but we find an inverted "U"-type relationship between them through adjusting the regression model. Although this conclusion is not significant, it is consistent with existing research findings. Furthermore, we examine the relation between the level of private benefits of control and legal protection of mid-small shareholders using the proportion of independent director in board of directors, and find it is not relational significantly between them, once again our independent director system in corporate governance is proved non-efficient. Finally, we also test the relation between the level of private benefits of control and other factors, for example, corporate size, corporate finance.(3) It discusses the economic consequences of private benefit of control from the perspective of inefficient investment and corporate value. Based on the assumption that the controlling shareholders seek the private benefits of control, this paper incorporates large shareholders'expropriation into real option model to analyze numerically the effect of the large shareholders' expropriation on the capital allocation strategy and firm valuations. The conclusions show that: controlling shareholder's expropriation is one of the most important reasons leading to distortion and inefficiency of capital allocation. The higher the level of private benefits is, the lower corporate investment efficiency is. The first-best capital allocation strategy under the large shareholder's expropriation is lower than the first-best capital allocation strategy under no large shareholder's expropriation during the whole investment interval. Meanwhile, the existence of large controlling shareholders clearly prevents the optimal allocation of capital. With the postponements of the investment, the enterprise's "squeeze" tendency becomes more and more obvious, leads to further lower investment efficiency; controlling shareholders'expropriation level is negative with the firm valuation during the whole investment interval, it can decrease the large shareholder's expropriation level from increasing the cash flow rights, hence to increase the firm value.(4) It puts forword a few recommendations to solve the private benefits of control, distorted capital allocation and corporate value problems in Chinese listed companies from the perspective of controlling shareholders, mid-small shareholders and the capital market according to the higher level of private benefits of control and the inefficient investment of Chinese listed companies. Finally, this paper summarizes the ideas in the previous chapters and gives the research limitations and future prospects.This article has the following research characteristics and innovations:(1) Most of previous studies on the large shareholders'expropriation behavior focused on single-term and the intertemporal expropriation behavior were also constrained in single-term application. The researcher builds a double-temporal expropriation model based on the intertemporal investments to extend the classical single period expropriation behaviour model. This model is created from double-temporal investment and large controlling shareholders.(2) According to the theoretically analytical conclusion under the double-temporal investment and the current situation of higher private benefits of control from Chinese listed companies, this paper utilizes the available corporation data to test the influence on private benefits of control by cash flow rights of controlling shareholders, new investment opportunity, strengthen of legal protection, legal protection of mid-small shareholders.meanwhile, based on above aspects the paper explors the cause of private benefits of control in the listed companies, to propose theory reference for policies making.(3) The exiting literatures about the effect of private benefits of control on corporate investment behaviors mainly study a generalizable level of equity structure, the deep study from the view of large shareholder expropriation has not been developed, and the study method is simplex. This paper, being in the framework of large shareholder expropriation, studys the combined investment of two assests, builds a corporate value model with large shareholder expropriation, dynamicly analyses the effect of private benefits of control on corporate investment decisions with the theory of real option, and based on this exploits the causes of corporate inefficient investment.