Study On Company Group’s Internal Capital Allocation Behavior Under The Large Shareholder Control

In recent decades,with the rise of corporate diversification strategy,mergers andacquisitions have become more frequent.China emerged a large number of enterprisegroups and "factual" company groups（such as family enterprise）.In this context,theinternal capital market has been widely used in the company groups in China.A lot ofcapital allocation between member companies is carried out under the control of largeshareholder.However,most of the domestic relevant research still follow the "traditional"principal-agent thinking,has not yet fully been concerned about the impact of theself-serving motives and behavior characteristics of the large shareholders and theiragents on capital allocation decisions of company groups.To this end,this paperexplore the mechanism and features of the enterprise group’s internal capitalallocation behavior from the perspective of a combination of governance mechanismsand behavioral characteristics of financial decision-making body.Specifically,thispaper first outlines the theoretical basis from the internal capital market,the internalcapital market governance and major shareholders control of three aspects,and build arealistic basis for this article from institutional background of internal capital marketof enterprise groups in China and the current characteristics of the internal capitalallocation of two paths.And then,around the impact of interest conflicts between thelarge and small shareholders,and between the largest shareholder and CEO on thebehavior of internal capital allocation,this paper used Kuhn-Tucker method andevolutionary game theory to build a theoretical model of internal capital allocationbehavior,focusing on the impact of large shareholders control and their agents’self-interested behavior in order to fully understand the role of large shareholders incorporate governance.On this basis,the empirical research of internal capitalallocation behavior under the control of large shareholders has been done.Thisempirical research included three progressive levels of the existence of the enterprisegroup’s internal capital allocation,effectiveness,and its influencing factors.Finally, theauthor explored the root cause of opportunistic capital allocation behavior of largeshareholders and used complete information static game and evolutionary game theory build a theoretical model for regulatory mechanism And the author proposedcountermeasures to optimize the internal capital allocation behavior of companygroup in China from five levels including the large shareholder monitoring, managerselection and incentives, the legal protection of minority shareholders, the capitalmarket supervision and internal control and its disclosure mechanism.The basic conclusion of this paper is as follows:(1)Internal capital allocation in China’s enterprise groups shows a "motivationalcomplex,multi-functional and multi-goal" feature. When China’s legal and regulatorymeasures are not perfect,the function of internal capital market may be alienated.(2)Internal capital allocation results in Chinese enterprise groups is diverse andcomplex,showing invalid,effective and optimal state,and have different effects ondifferent member corporate welfare.Under the framework of the large-minorityshareholders agent,this paper use the Kuhn-Tucker method to construct internalcapital transactions optimization model to study the impact of large shareholders andminority shareholders agency conflicts on the behavior of internal capitaltransfers.The results show:①there are capital allocation optimization and socialwelfare maximization in the ideal internal capital transactions.It results in a“win-win” situation,and the company also achieved group financial goals.While theinternal capital transactions can be kept and financial goals can be met in the internalcapital transactions with conflicting costs.But it results in insufficient capitaltransfers.And an excessive capital transfer would happen in the infringed internalcapital transactions.The internal capital allocation was not sustainable.Financial goalscan only be the pursuit of shareholder wealth maximization by damaging stakeholders.②Optimal internal capital transfer amount is closely related to the equity ratio of theparent company in the subsidiary,output efficiency,parent company’s control,conflictof interest cost,occupation costs,and occupation ratio.While these factors are closelyrelated to the internal and external environment of corporate governance,the majorshareholder ownership structure and control structure.(3)Output efficiency,incentives,centralization degree,management costs,and theCEO’s non-cash preferences affect the result of the internal capital allocation. Underthe framework of the large shareholder-manager conflict of interest and collusion rent-seeking,this paper construct an evolutionary game model to analyze the impactof ultimate controller and manager self-serving motives on the behavior of internalcapital transfers.Ultimate controller of the corporate group controls listed companiesthrough the pyramid structure.Ultimate controller have different optimal managementsystem in a different environment.Output efficiency,incentives,centralizationdegree,management costs,and the CEO’s non-cash preferences affect internal capitalallocation behavior and its long-run equilibrium trend.(4)Empirical studies show that:there is active internal capital markets in enterprisegroups in China,but its overall allocation efficiency is not high. Value creation ofinternal capital allocation is mainly affected by the ownership structure and controlcharacteristics of the larger shareholder. Firstly, the author uses the cash flowsensitivity coefficient method to measure the efficiency.The results show that onlyabout half of family groups’ internal capital markets of the sample areefficient.Private family groups allocation efficiency is far lower than the state familygroups. The excess value of family groups’ internal capital markets is generally low.53.4%of the excess value of family groups’ internal capital markets is negative.Theexcess value of internal capital allocation is positively correlated with the largestshareholder equity ratio,control rights and cash flow rights separation degree,topmanagement shareholding proportion,ratio of independent director,was negativelycorrelated with the size of the family groups.(5)Unsound internal and external governance mechanisms of listed companies,financial repression environment,weaker investor legal protection system and publicgovernance functions of local government together constitute the root causes ofopportunistic behavior characteristics of our company groups’ internal capital market.Not one-sided heavy penalties but the frequency of supervision,reasonable litigationcompensation fines and control benefits must be taken into account in order toeffectively supervise the ultimate controlling shareholders’ opportunistic behavior.Toreduce monitoring costs,to improve supervision level,and to enhance the learningability of regulators are also important measures to effectively curb the opportunisticbehavior of shareholders.