The Effect Of The Pyramid Ultimate Control To Capital Structure

In1999, three scholars such as La Porta first proposed the concept of ultimate control right and pointed out that there is a conflict of interest between the controlling shareholder and minority shareholders and the controlling shareholder will encroach the interests of minority shareholders because of its control right. Since then, the agency problems between the controlling shareholder and minority shareholders became principal agent problem and not just the agency problem between manager and owner.In China, Equity Capital Markets started late and the development of the capital market is not perfect, so there are a variety of defects, such as:the unsound legal mechanisms for protection of the interests of minority shareholders, which the behavior of the major shareholders cann’t be effectively constrained. Especially the problem of financing difficulties is common phenomenon in Chinese private enterprises,significantly the enterprise for its own development and financial intermediation to expand the enterprise group using the methods of the pyramid holdings and cross-holdings and other means for the formation of the internal capital market. In China’s listed companies ultimate control and the ultimate controlling shareholder of the phenomenon is widespread, this phenomenon is more prevalent especially in China’s private enterprises.In this paper, the conclusion using the method of the theoretical analysis and empirical research as follows:(1) Compared with private listed companies which have non-pyramid structure, private listed companies that have pyramid shareholding structure the scale of the debt financing is larger.(2) The degree of deviation to cash-flow right and control right in the Private Listed Companies and the scale of liabilities are positively related; The degree of deviate from the two right and the company’s asset-liability ratio was significantly positively related in the company which the ultimate controlling shareholder have a higher proportion of control right, and the degree of deviate from the two right takes no significant impact on the asset-liability ratio in the company which the proportion of control right is lower.(3) In the pyramid companies, the composite multiplier both the degree of deviation and the company’s asset-liability ratio and the value of the company are negatively correlated, that is, high debt can reduce the company’s agency problems; The high debt does not have a significant impact on reducing the agency costs because of the deviation from the two right in the company that free cash flow is higher which does not increase the performance of listed companies. The high debt have a significant impact on reducing agency costs in the company that free cash flow is less which will increase the performance.(4) The higher the level of complexity dimension of the ultimate controlling shareholder, the private higher the listed company’s asset-liability ratio; the complexity of company’s control chain and the company’s asset-liability ratio was significantly positively related in the company that the ultimate controlling shareholder has a higher proportion of the control right, in contrast, the complexity of the control chain does not have a significant impact on asset-liability ratio in the company that the ultimate controlling shareholder has a lower proportion.Based on the conclusions,this paper presents a number of recommendations, such as, Strengthening the equity of checks and balances, promoting the healthy and stable development of the capital markes, and strengthening creditor governance function.