A Research On The Expropriation And Propping Of Controlling Shareholders Under The Change Of Macroeconomy

The exploration of improving corporate governance and investor protection is under going with the generation of modern corporations.Researchers' research scopes have extended from the developed countries such as Britain and the United States to the many developing countries listed in the world.The perception of ownership structure of listed companies have extended from widely dispersed shareholdings to concentrated ownership structure.The issue of the principal-agent problem have extended from the managers and the owners to the controlling shareholders and the minority shareholders.The research of the controlling shareholders have extended from entrenchment effect such as tunneling or expropriation to convergence of interests effect such as propping.Our data contains the listed firms from Shanghai Exchange and Shenzhen Exchange from 2005 to 2013,aiming to investigate the tunneling and propping incentive of the controlling shareholders in China.The selected data cover the 2005-2007 boom time,2008-2010 crisis period,and 2011-2013 post-crisis period,leaving the opportunity to inspect the reaction of the controlling shareholders to the change of macro-economic.Basing on previous study,We present a new method to measure the tunneling and propping incentives.In addition,we use Guangdong Kingman Group Co.,Ltd as a sample to illustrate our method.We then develop our study in three aspects,including the impact of ownership structure and economic development on the tunneling,and the exploration of improving corporate governance and investor protection.First,we find the following information for ownership structure.1.By dividing ownership structure into three range: 0%-20%,20%-50%,and beyond 50%,we find that convergence of interests effect will be more significant with the increase of cash flow rights,and the propping incentive will be stronger with the increase of cash flow rights in financial crisis.2.The economic strength of state-owned enterprises is stronger than non-state-owned enterprises,they are more likely to receive financial and policy support.State-owned enterprises are responsible for stabilizing the social economy,therefore,state-owned enterprises will present stronger propping ability and propping incentive in the face of financial crisis.3.Institution shareholdings,to some extend,can restrain the tunneling incentive.Institution investors come for the pursuit of profit from the stock price and dividends,so they will keep eyes on the operation of listed firms while stock price and dividends will be affected by operating performance,and a reliable financial report is needed to confirm operation performace.Institution shareholdings can reduce the earinings management and places constraints on the tunneling incentive.However,the shareholdings of institution investors is still small proportion,they can only rely on their research reports and securities trading rather than directly determine the decision of listed companies,and their supervision role played in the crisis is limited.Second,empirical results imply that financial cisis deteriorates business environment,the controlling shareholder will show up propping incentive to ensure their future benefit when the listed firm facing moderated shock.The controlling shareholders' from different regions will have different reactions to financial crisis.A firm in a developed area may have more investment opportunities and enjoy sound financial condition.Their expropriation cost may be lower when compared to poor financial condition firms,because certain fraction private benefit diversion can be afforded when the firm performs soundly.With weak investor protection,GDP growth decreases tunneling merely due to offering the controlling shareholders with sufficient equity benefit in stable circumstance.When listed firms still run in order,however,the tunneling incentive of controlling shareholders in high GDP regions will increase under financial crisis because of their private benefit demand.Third,we study the impact of supervision intensity on tunneling in financial crisis,and supervision intensity can reflect corporate governance and investo protection.We find that supervision intensity help to prevent expropriation.Tunneling is influenced by the different auditors' appointment and their opinions.Big 4 auditors have positive relative to tunneling restraint and the unclean opinions from all auditors can detect tunneling.This is an important way to expose the tunneling,increasing the cost of expropriation and restraining the tunneling incentive.Besides,firms with penalties directly from regulators,undoubtedly,is a radical way to restrain the tunneling incentive.We conclude that stronger legal enforcement and better corporate governance thoroughly help to restrain the tunneling incentive.In general,tunneling and propping breed from poor corporate governance and weak legal enforcement,both of them are without the permission of minority shareholders.To improve investor protection and corporate governance,both tunneling and propping should be under supervision.