| China has witnessed rapid economic progress over the past three decades since the Reform and Opening-Up Policy. With the ever-increasing proportion of private enterprises in the entire national economy, people began to realize that private enterprises have become a substantial economic force in terms of creating wealth and offering employment opportunities and that equal competition among private corporations will accelerate the progress of SOEs as well. However, many problems with the private enterprises have surfaced: the wave of private enterprises and the ebb of SOEs have driven more and more listed companies to fall into the hands of individuals. Ever since the late 1990s, a system formation campaign occurred in China's capital market, considerable private enterprises getting involved. However, with the collapse of Brother Tangs'finance empire, the so-called Delong System, nearly all the famous roles in the System Formation Campaign such as Nongkai System, Top System, Hongyi System, Feitian System, Kaidi System, Kelinger System tumbled down because of the break of capital chain. Within a few years many big figures in the private enterprises system became things of the past. From the motive of these corporations initiating this campaign, with the defects in the laws of Chinese stock market and also the complicated shareholding relations among companies, quite a number of corporations tunneled the listed companies or controlled the share prices under the cover of corporate restructuring or industry diversity, which seriously hindered the stability and healthy progress of the securities market.As the recent researches indicate, the shareholding tends to be concentrated in most of the countries all over the world with only a few exceptions like U.S. and U.K and etc. In another word, most of the listed companies are controlled by family member or the state. This mode of concentration works better to restrain opportunism thus the agency issue between the manager and shareholders can be better addressed. However, the discord of interests between the majority and minority shareholders drives the majority shareholders to occupy the interests of the minor shareholders for their own benefit. Adopting Pyramid Structure is the common approach for the majority shareholders to control the listed companies: the actual controller has the listed companies placed at the bottom of the pyramid and exerts his control over them by indirect control of intermediary agent thus to realize the separation of controlling rights and cash flow rights. In this way, the actual controller is able to make profits from controlling rights with the extra rights he has secured.The private enterprises in China always control listed companies by building complex pyramid structure, and some of these enterprises even control more than one listed companies which resulted in various private business systems. The previous researches used to focus on one or several features of the pyramid structure as their only approach to describe the pyramid structure's impact on the embezzlement of the listed companies. Furthermore, previous studies failed to demonstrate with actual facts that the embezzlement is more serious when the private enterprise controls multiple listed companies than it controls only one.Taking the sample of 2001-2004 with the private enterprise as the actual controller, this paper begins with the study of pyramid structure and the internal management mechanism, studies the embezzlement of the listed companies by the majority shareholders of private enterprises and further studies its influence on the company's performance. We take the misappropriation of listed companies'funds by the actual controller and the guarantee for the actual controller offered by the listed companies as the embezzling methods adopted by the actual controller.By research, we learnt that whether to control multiple companies, level of tiers, and the number of chains under control are all positively connected with the embezzlement, while the cash flow rights is negatively connected. Therefore, the private enterprise with more listed companies in its control embezzles more funds than that with only one in control; the more complex the pyramid structure, the more serious the embezzlement. As far as the internal management mechanism is concerned, the more concentrated the stock ownership, the more serious the embezzlement of the listed companies'funds. If the general manager is one of the majority shareholders, or the general manager also holds the position of director of the board, it will make it possible for the actual controller to manipulate the board of directors which will lose its independence, thus the embezzlement would become even more serious.Also we studied the influence of pyramid structure on the guarantee-based embezzlement. We found that the private enterprise with more listed companies in control will offer more guarantee for the corporations within the group than that with only one listed company in control, meanwhile the private enterprise with multiple listed companies in control also bring a lot more risks to the listed companies. The level of tiers and the separation ratio is positively connected with the guarantee offered by the listed companies for their actual controller, which means the more complex the pyramid structure, the more serious the guarantee-based embezzlement. When it comes to the internal corporate management mechanism, the influence on the listed companies from the shares held by the No.1 shareholder is reflected by the interests convergence effect. With the increase of the shares held by the No.1 shareholder, the interests of the No.1 shareholder and that of the actual controller begin to converge. If the position of the general manager and the director of the board are held by the same person, the restraint between the two parties will become loose, which would result in more guarantee-based embezzlement of the listed companies by the actual controller. Therefore we can conclude that the embezzlement is more serious when the private enterprise controls more than one listed companies, and the more complex the pyramid structure adopted by the actual controller, the less effective the internal corporate management and the more embezzlement of the listed companies.Next we studied the influence of the majority shareholders'embezzlement on the companies'business performance. We found that either the fund misappropriation or the guarantee will remarkably downgrade the companies'business performance. Therefore, we have reason to believe that the actual controller will deprive the listed companies of their resources and bring great business risks to them by misappropriating funds and tunneling the companies. In this way, the business performance of the companies will degrade.We proposed that the actual controller exposure system should be further crystallized, that the listed companies should clearly reveal their actual controller or corresponding party and the ownership table of the actual controller. The internal corporate management mechanism should improve to the perfection; a solid market with external manager should be established, i.e. the position of general manager and director of the board are held by two persons which enables the independence of the board of directors, meanwhile the restraint on the No.1 shareholder should be strengthened by other majority shareholders who are responsible to serve as the supervising power. External corporate management mechanism should be established, relevant laws and regulations should be formulated, guarantee from the listed companies should be regulated, embezzlement of the listed companies by the actual controller should be strictly prohibited, supervision and restriction to the majority shareholders should be strengthened, and the act of tunneling the listed companies by the majority shareholders should be strictly forbidden from the start.The main contribution of this paper lies in that it makes a thorough study of the features of the pyramid structure, gives a systematical analysis of how the pyramid structure exerts its influence on the embezzlement of the listed companies by the actual controller, presents the influence of the internal management mechanism on the embezzlement by the majority shareholders, and finally discusses how the act of embezzling influences the business performance of the listed companies. This paper offers a theoretical support for the law-makers to formulate relevant laws and regulations regulating the act of listed companies and practically protect the interests of the investors. |
