Ultimate Corporate Ownership Structures and Capital Structures: evidence from East Asian economies

Abstract

This paper studies the relationship between corporate leverage and the ultimate corporate ownership structure, particularly the separation of cash flow rights and control rights. We empirically disentangle the three potential effects of the divergence of control rights from cash flow rights on corporate leverage, i.e. the non-dilution entrenchment effect, the signalling effect of debt and the reduce-debt-for-tunnelling effect. Our evidence from the East Asian corporations mainly supports the notion that controlling shareholders with relatively small ownership share tend to increase leverage out of the motive of raising external finance without diluting their shareholding dominance. The separation of cash flow rights and control rights contributes to the risk-taking tendency of the large controlling shareholders in capital structure choice. We argue that the risky capital structure choice serves as one potential channel through which weak corporate governance contributes to the severity of corporate value losses during the Asian financial crisis. Copyright Blackwell Publishing Ltd 2005.

Impact Cash Flow Right Leverage of Controlling Shareholder on Performance in Indonesia

“…Pemagang saham biasa mempunyai beberapa hak seperti hak kontrol dan hak aliran kas. Hak kontrol adalah hak dari pemegang saham biasa untuk memilih dewan direktur dan kebijakan-kebijakan perusahaan seperti penerbitan saham, pemecahan saham, dan perubahan-perubahan operasi perusahaan (Du dan Dai, 2005). Hal aliran kas adalah klaim keuangan dari para pemegang saham terhadap perusahaan (La Porta et al, 1999).…”

“…The ownership of common stock has some rights such as control rights and cash flow rights. Control rights are the rights of common shareholders to elect board of directors and other company's policies, such as the issuence of securities, stock split and substansial changes in company's operation (Du and Dai, 2005). Cash flow rights are the financial claims of shareholders on the companies (La Porta et al, 1999).…”

Dividends and Problem of Separation of Ownership and Control: Theory and Evidence from French Firms

“…In a third step, we measure the impact of monitoring power of the other shareholders (Du and Dai, 2004) on the dividends yield ratios in a static framework, using the following system of equations:…”

The Inner Structure of Pyramid and Capital Structure: Evidence from China

“…However, due to their relatively small cash flow rights, once the company bankrupts the ultimate owner just has to bear a small loss that is disproportional to the benefit they have gained, which further reduces the ultimate owner's bankruptcy responsibility and perpetuates their motivation to expand debt financing (Du and Dai 2005). Furthermore, given the background of poor investor protection and the ineffective role of debt governance in transition economies, the ultimate owners with more excess control rights usually have an incentive to use more debt to expand their control of resources (Bany-Ariffin et al 2010), which further facilitate their expropriation behaviors without diluting their controlling rights over the company (Bunkanwanicha et al 2008;Paligorova and Xu 2012).…”

“…The premise of ultimate owners controlling large resources via a small amount of capital is thus to ensure effective control over the listed companies. Compared with equity financing, debt financing has the non-dilution effect of controlling rights (Du and Dai 2005); for this reason, ultimate owners may prefer debt financing under the pyramid structure.…”