The Determinants And Implications Of Affiliated Management In Chinese Listed Companies

Affiliated management is one of the channels that large shareholder could use toenhance their control (La Porta et al，1999；Claessens et al，2000；Claessens etal，2002). Affiliated management is widespread in Chinese stock market. However,up to now, there is little study investigating the determinants or implications ofaffiliated management. Using the data of affiliated management from the Chineselisted companies, this paper will contribute to the study of affiliated management.Consistent with the literature (Claessens et al，2000；Claessens et al，2002),the management in listed company is defined as affiliated management if themanagement is the controlling shareholder, or the management is an employee of thecontrolling shareholder.The empirical evidences show that affiliated management is associated with highlarge shareholder ownership and low concentration of other shareholder holdings,which implies that large shareholder would like to use affiliated management toenhance their control and other shareholder would boycott such behavior. This paperalso finds that non-state-owned firms are more likely to appoint affiliatedmanagement probably due to high demand for control since the general property rightprotection is poor. Meanwhile, legal environment is associated with affiliatedmanagement. Further evidences from state-owned enterprises show that the layer oflisted company is also associated with affiliated management.This paper also finds that the companies with affiliated management are morelikely to conduct illegal activities, which is more severe in private companies. But thespecific kinds of illegal activities are different in private and state owned listedcompanies. The private listed companies with affiliated management are more likelyto manipulate information disclosure, deliberately change the use of funds, encounterexpropriations by the large shareholders and so forth; the state owned listedcompanies with affiliated management are more likely to misstate financialstatements and manipulate information disclosure. The evidence implies that the largeshareholder will use the affiliated management to conduct the illegal activities in order to get private benefit of control.The empirical evidence also illustrates that the market value of the listed firmswith affiliated managers will be significantly lower than the other listed firms. Furtherevidence shows that the size and frequency of the related party transactions in thefirms with affiliated management are significantly higher than the other firms, but theinformativeness of earnings in those two types of firms is almost the same. This mayimply that the large shareholder will use affiliated management to enhance the controlof listed firms, in order to obtain private benefit of control, which will in turn hurt thebenefit of minority shareholders and decrease the firm value.This paper provide evidence about the determinants and implications of largeshareholder control by the means of affiliated management, which will help thegovernment to regulate this widespread phenomenon in Chinese listed companies,and also contribute to the related academic literature.