The impact of separation of ultimate control rights and cash flow rights on debt financing cost

2012 ◽  
Author(s):  
Xing-hua Dang ◽  
Yu-xiao Wang ◽  
Min-li Yang
Keyword(s):  
Cash Flow ◽  
Debt Financing ◽  
Control Rights ◽  
Financing Cost ◽  
Cash Flow Rights ◽  
The Impact ◽  
Ultimate Control

Ultimate ownership, institutionality, and capital structure

2013 ◽  
Vol 7 (4) ◽  
pp. 557-571 ◽  
Author(s):  
Kun Su ◽  
Rui Wan ◽  
Bin Li
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Institutional Development ◽  
Debt Financing ◽  
Unified Framework ◽  
Control Rights ◽  
Content Type ◽  
Ultimate Ownership ◽  
Cash Flow Rights ◽  
Ultimate Owners

Purpose – The purpose of this paper is to illustrate and examine the effects of ultimate ownership, institutionality and their interactions on capital structure in a unified framework, based on evidence from China. Design/methodology/approach – Using six years of panel data of Chinese non-financial listed firms between 2004 and 2009, this paper estimates with correlation analysis and multiple regression analysis. Findings – This paper finds that debt financing facilitates the ultimate owner's expropriation behavior. The separation of control rights and cash flow rights is positively related to capital structure, while cash flow rights negatively affect it. Compared with private ultimate owners, state ultimate owners have less incentive to reap the benefits of expropriation, implying that the separation of control rights and cash flow rights has a smaller effect on the capital structure of state-owned firms. The improvement of institutionality can restrain ultimate owners' expropriation behavior, and regional institutional development is negatively related to capital structure. The separation of control rights and cash flow rights has a smaller positive effect on capital structure in regions with better-developed institutionality. Originality/value – This paper incorporates ultimate ownership and institutionality into a unified analytical framework of capital structure. It not only enriches related studies on capital structure, but also helps us understand the institutional roots of irrational capital structure behaviors in China. This paper also provides further evidence on ultimate owners' expropriation of minority shareholders through debt financing.

scholarly journals Pyramiding effect on firm’s investment decision among Malaysian distress companies

2005 ◽  
Vol 3 (1) ◽  
pp. 163-172
Author(s):  
Fauzias Mat Nor ◽  
Amin Noordin Bany-Ariffin
Keyword(s):  
Cash Flow ◽  
Ownership Structure ◽  
Investment Decisions ◽  
Direct Result ◽  
Control Rights ◽  
Investment Activity ◽  
Pyramidal Ownership ◽  
Cash Flow Rights ◽  
The Impact ◽  
Retained Earnings

It is documented by La Porta, Lopez and Shleifer (1999) that ultimate owners, around the world usually control an array of affiliated companies through hierarchical intermediary corporations forming a Pyramidal Ownership Structure. A direct result of this pyramidal ownership structure is divergence of cash flow rights from control rights in the hand of the largest shareholders (Claessens, Djankov and Lang 2000). This paper investigate the impact of this separation of cash flow rights from control rights resulting from this pyramidal forms of ownership structure on firm’s investment decisions. In particular, our objective is to examine whether such separation affects the investment decisions among Malaysian listed distress Companies. Our findings lends support to the over investment problem, where by the separation of cash flow rights and control rights have led to the increase of inefficient investment among the distress companies. The main source of financing for this inefficient investment activity is the firm’s retained earnings. Consequently, the exploitation of such firm’s resources in order to finance these inefficient investment activities of the ultimate owner’s then lead to negative market valuation.

scholarly journals Does pyramiding have an impact on firm’s capital structure decision among Malaysian distress companies?

2005 ◽  
Vol 2 (4) ◽  
pp. 93-106 ◽  
Author(s):  
Fauzias Mat Nor ◽  
Amin Noordin Bany-Ariffin
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Ownership Structure ◽  
Direct Result ◽  
Control Rights ◽  
Financing Decisions ◽  
Pyramidal Ownership ◽  
Cash Flow Rights ◽  
And Control ◽  
The Impact

It is documented by La Porta, Lopez and Shleifer (1999) that ultimate owners around the world usually control an array of affiliated companies through hierarchical intermediary corporations forming pyramidal holdings. A direct result of this pyramidal ownership structure is divergence of cash flow rights from control rights in the hand of the largest shareholders (Claessens, Djankov and Lang 2000). This paper investigates the impact of this separation of cash flow rights from control rights resulting from these pyramidal forms of ownership structure on firm’s capital structure. In particular, our objective is to examine whether such separation affects the financing decisions among Malaysian listed distressed companies. Even though it is not conclusive our findings somewhat lend support to the leverage-increasing non-dilution entrenchment effect on corporate leverage, whereby the separation of cash flow rights and control rights leads to the increase of leverage among the distressed companies. Consequently, excessive use of leverage in order to protect ultimate owner’s dominance in these companies then leads to disastrous financial valuation.

scholarly journals IMPACT CASH FLOW RIGHT LEVERAGE OF CONTROLLING SHAREHOLDER ON PERFORMANCE IN INDONESIA

2017 ◽  
Vol 20 (3) ◽  
Author(s):  
I Putu Sugiartha Sanjaya
Keyword(s):  
Cash Flow ◽  
Agency Problem ◽  
Manufacturing Companies ◽  
Control Rights ◽  
Financial Service Authority ◽  
Controlling Shareholder ◽  
Controlling Shareholders ◽  
Agency Conflict ◽  
Cash Flow Rights ◽  
The Impact

The purpose of this study is to investigate the impact of cash flow rights leverage of controlling shareholder on performance. 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). Case in Indonesia, commonly there are differences between control rights and cash flow rights. It  is called cash flow right leverage. The large leverage indicates the large agency conflict between controlling shareholder and non-controlling shareholders. The low leverage indicates the low agency conflict. It will impact on performance. If the control rights are greater than cash flow rights, it indicates the larger agency problem. It indicates that the power of the controlling shareholder in the company is larger than claim to the firm. It is incentive for a controlling shareholder to expropriate non-controlling shareholders through utilizing assets of company for his/her private benefit. This study uses the sample of the manufacturing companies listed in the Indonesian Stock Exchange during the period 2001-2007. Performance is measured by Return on Assets (ROA). The results of this study show that the cash flow right leverage of controlling shareholder has negative impacts on performance. It means the large agency conflict (cash flow right leverage) between controlling and non-controlling shareholders reduce performance. The results of this study can give contribution for Indonesia Financial Service Authority (Otoritas Jasa Keuangan (OJK)) to monitor public companies in Indonesia. This institution more focus for companies which has large cash flow right leverage. Because, it indicates the large agency problem between controlling and non-controlling shareholders.

scholarly journals Ultimate ownership structure and capital structure: evidence from Chinese listed companies

2016 ◽  
Vol 13 (4) ◽  
pp. 297-306 ◽  
Author(s):  
Xie Lingmin
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Ownership Structure ◽  
Legal Protection ◽  
State Ownership ◽  
Minority Shareholders ◽  
Chinese Market ◽  
Control Rights ◽  
Cash Flow Rights ◽  
The Impact

This study investigates the impact of the ultimate corporate ownership structure, particularly the divergence of ultimate controlling shareholder’s control rights and cash flow rights, on the capital structure decisions among firms listed in Chinese market where the legal protection for creditors and minority shareholders is weak. I find that firms with a wider divergence between the ultimate controlling shareholder’s control rights and cash flow rights have significantly higher leverage level of capital structure. I also identify factors that affect this relation, including state ownership, institutional ownership, the presence of large tradable shareholders and NTS reform. My results suggest that leverage-increasing motivation of ultimate controlling shareholders with the risk of expropriation dominates in Chinese market and raising debt is a tool for them to maintain control over resources and corporate decisions to facilitate their self-dealing expropriation

Do Negative Corporate Social Responsibility Events Signal Financial Misreporting? — Empirical Finding from Taiwan

2021 ◽  
Vol 24 (01) ◽  
pp. 2150004
Author(s):  
Ching-Lung Chen ◽  
Hann-Pyng Wang ◽  
Hung-Shu Fan ◽  
Shiu-Chieh Chiu
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Cash Flow ◽  
Financial Reporting ◽  
Internal Control ◽  
Empirical Finding ◽  
Internal Controls ◽  
Control Rights ◽  
Cash Flow Rights ◽  
Corporate Social

This study examines whether negative corporate social responsibility events (NCSRs) signal potential firm misreporting and pending financial reporting restatements. Without formal opinions on the effectiveness of internal controls over financial reporting in Taiwan, we hypothesize NCSRs can represent and/or signal a firm’s internal control weakness, which may in turn result in poor financial reporting. Note that the concern with controlling owners expropriating wealth through ineffective internal controls is given important weight by investors and regulators. We further examine whether the signaling function of NCSRs is more pronounced in contexts with a serious agency problem, such as is found in the high divergence of control and cash flow rights case (denoted as high excess control rights) in Taiwan. Empirical results indicate that, as conjectured, incidence of NCSRs is positively associated with the likelihood of reporting restatements. Further evidence reveals that this result is particularly pronounced in the high divergence of control and cash-flow rights subsample test. We demonstrate several diagnostic tests and show the results are robust in various specifications.

Does opening high-speed railways affect the cost of debt financing? A quasi-natural experiment

2020 ◽  
Vol 10 (4) ◽  
pp. 473-496
Author(s):  
Hongling Guo ◽  
Keping Wu
Keyword(s):  
High Speed ◽  
Geographical Location ◽  
Debt Financing ◽  
Cost Of Debt ◽  
High Speed Railway ◽  
Content Type ◽  
Financing Cost ◽  
Debt Market ◽  
The Cost ◽  
The Impact

PurposeThis study aims to investigate how opening high-speed railways affects the cost of debt financing based on China's background.Design/methodology/approachUsing panel data on Chinese listed firms from 2008 to 2017, this study constructs a quasi-natural experiment and adopts a difference-in-difference model with multiple time periods to empirically examine the relation between the high-speed railway openings and debt financing cost.FindingsOur results show that opening high-speed railways reduces the cost of debt financing, and this negative correlation is more significant in non-state firms, firms with weaker internal control, and firms that hire non-Big Four auditors. Besides, we explore the impact mechanisms and find that opening high-speed railways improves analyst attention, institutional investor participation, and information disclosure quality, which in turn lowers the cost of debt financing.Research limitations/implicationsThe results imply that the opening of high-speed railways helps to alleviate the information asymmetry and adverse selection between firms and creditors and ultimately reduces the cost of corporate debt financing.Practical implicationsThis paper can inform firms and stakeholders about the impact of opening high-speed railways on debt financing cost: it improves the information environment, reduces the geographical location restrictions of debt financing, ensures the reasonable pricing of corporate debt, and thus promotes the healthy and sound development of the debt market.Originality/valueThis paper provides theoretical support and empirical evidence for the impact of infrastructure construction on the information environment of the debt market in China, which enriches the research on the “high-speed railway economy.” In addition, as an exogenous event, the opening of high-speed railways instantly shortens the time distance between firms and external stakeholders, which gives us a natural environment to conduct empirical research, thus providing a new perspective for financial research on firms' geographical location.

Sign in / Sign up

Export Citation Format

Share Document