| The healthy development of capital market is closely related to the degree of protection for the investors of a country. The higher level to protect the interests of investors, the more perfect the development of capital market will be. And investors in the market will have much more confident, which will impact on the healthy development of capital market largely. Throughout the mature securities market development of Europe, legal protection system has become one of the means of protection of investors. Nowadays, the reform of non-tradable shares in China has basically completed. With the improvement of the stock market, the controlling shareholders of listed companies, senior managers, and institutional investors still have very obvious advantages, including equity, finance, professional techniques and information, which make the contradiction of China’s capital market information asymmetry more obviously. And medium and small-sized investors are difficult to participate in the company’s internal governance substantially, due to the smaller stakes and dispersion. When the major shareholders of corporations have the rights to control the cash flow, they maybe choose to damage the interests of small and medium investors in the process of operation and management(Franks,1997). Such infraction will make companies to operate inefficiently and inhibit the entry of potential investors, eventually will seriously affect the sustainable development of the capital market. Capital market system in China is not sound. Establishing legal protection can provide investors with a solid basis of China’s capital markets, ensuring equity finance of listed companies smoothly.The equity structure of listed companies is the basis of reasonable organization of company’s surplus controlling right, and residual claims. And that is also important for corporate governance. The size of shares held by a shareholder determines, to some extent, the fundamental nature of corporate governance. When the ownership structure scatters, the major contradiction of corporate governance structure concerns on the relationship between managers and shareholders. As shareholders’equity becomes more concentrated, agency problem between managers and shareholders would turn to the contradiction between controlling shareholders and minority investors, and correspondingly affects the performance of the company and the evaluation on corporate risk made by investors. From the point of legislation of medium and small investors, China has announced94laws and regulations related to the legal protection of the interests of medium and small investors by the beginning of2010, total of183articles, concerning information disclosure, cumulative voting, extraordinary general meeting convening authority, related party transactions, shareholder lawsuits, etcetera. The protection of medium and small investors in terms of legislation is increasing in China. Regarding the relationship between legal protections of investors and ownership concentration of research, there are mainly existing two views in the following:one is an substitute hypothesis, represented by LLSV(1998); another is the result model, the scholars holding the view argue that the condition of the legal protection for investors decides the size of controlling private benefits of insiders, which determines the concentration of corporate ownership(Bebchuck,1999). Substitution hypothesis focuses on the conflict between operators and shareholders, and ignores the interest conflict existing between holdings shareholders and small shareholders in most nations, especially in the countries where the capital market is not perfect. About the empirical research, many researchers prove negative related relationship between legal system legislation and equity concentrated degree to demonstrate the exits of substitution. However, the result model is mostly through descriptive statistics and the establishment of theoretical models to prove without sufficient evidence.The paper chiefly uses the theoretical analysis and empirical analysis to research. According to a series of researches on law, finance(LLSV,1997-2000), corporate governance, and ownership structure, my study tries to put ownership structure, legal protection of investors and private benefits of controllers into a theoretical framework for research.This paper is divided into five parts. The main content is summarized in the following sections: Part Ⅰ:Introduction. Provide the background, significance of this paper, framework, the used methods, innovations and insufficiencies.Part Ⅱ:Relate to ownership concentration and legal protection of investors documents. This section reviews the relevant literatures at home and abroad, and later further to the theoretical analysis of the groundwork.Part Ⅲ:Contain the institutional context of this paper, the theoretical basis and assumptions. According to the two types of agency theory, legal protection of ownership concentration, small and medium investors and private benefits of control are put in a theoretical framework, which lays the theoretical foundation for the empirical part.PartⅣ:Build models and beginning the empirical research.Part Ⅴ:The conclusions and recommendations.Conclusions:(1) From the perspective of legislation, whether ownership concentration is substituted for protecting investors mainly depends on the level of shareholders’ oversight.(2) From the angle of enforcement, governance structure problem of listed companies reflects in the second class agency problem, especially in the companies with high separation of ownership and cash flow.Described above, this article makes some innovations in the following three aspects:(1)1add two clauses related to legal protection of medium and small investors, namely the behavior management of acquisition and self-discipline. This paper is based on the legal protection scoring system of small and medium-sized investors from Shen Yifeng, systematically combing legal protection of small and medium-sized investors in China through2003to2010, a total of46departments of laws and regulations,91legal clauses. Length of small and medium investors to scores of legal protection is extended to2010. This extended samples are very significant for the study of legal protection of small and medium investors.(2) Based on China’s securities market, this paper studies the relationship of these two types of corporate governance mechanisms from the angles of the macro-legislative and micro-enforcement completely. From the perspective of legislation, whether ownership concentration can substitute for protecting investors mainly depends on the level of shareholders’oversight. I can draw a conclusion that ownership concentration substitutes for legal protection if controlling shareholders can monitor managers perfectly under the poor legislation and the first class agency problem.(3) From the angle of enforcement, governance structure problem of listed companies reflects in the second class agency problem, especially in the companies with high separation of ownership and cash flow. This study regards cash dividend distribution rate as the variable measuring the level of executing legal protection. Through empirical research, I find that the more poor legal protection is, the more concentrated ownership concentration will be. The concentration of equity is the result of controlling investors pursuing the private interests of controlling right.However, due to the author’s knowledge and capacity constraints, this study has the following disadvantages:(1) About the samples of filter, for substitution model, I filter out7,146samples, based on this samples volume. Then I research on the results model and introduce variables about Sep, Number and R, which are missing and lead the result model only to filter out2,950samples.(2) This index of legal protections is based on Shen Yifeng research index. I make further expansion for years, and join two legal and regulatory factors about the acquisition of behavior management and member of self-discipline. The identification for small investors may exist several limitations and biases, some legal and regulatory provisions may have not been taken into account.(3) Although I distinguish between state-owned and non-state-owned companies, this paper does not attempt to further subdivide them, which may generate some errors for research results. For example, listed companies may be as shell resources for acquisitions of other companies, and may be different from the other listed companies on internal agency problems. This article does not give further consideration about that situation. The companies with poor performances after listing would be as shell resources of other companies. Other scholars could do further research about that in the future. |
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