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Ultimate ownership, institutions and listed companies' debt financing: Based on the perspective of controlling shareholders

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  • Yu Honghai
  • Xu Longbing
  • Chen Baizhu
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    Abstract

    Purpose–The purpose of this paper is to study the capital structure of firms when controlling shareholders decide on the level of debt financing in an environment with poor legal protection. Design/methodology/approach–Theoretically this paper uses a dynamic model to analyze how the controlling shareholder expropriates the firm's benefit through debt financing. Empirically this paper uses a sample of Chinese publicly listed firms from 2004 to 2007, through the method of OLS and panel data, to verify the theoretical predictions. Findings–Theoretically this paper finds that firms with controlling shareholders will take excess debt financing in an environment of controlled interest rate and poor legal protection to minority shareholders. Government intervention exacerbates while controlling shareholder's cash flow rights constrains excess debt financing. The empirical results conclude that the improvement of the legal environment, limiting government intervention, and raising controlling shareholder's cash flow rights will effectively reduce excess debt level, as well as long-term debt ratio. Originality/value–First, this paper provides a theoretical model to explain the mechanism of how the ownership structure, legal environment and government intervention interact to impact debt financing. This result also provides a theory to explain the “paradox” in a transitional economy that better legal protection lowers debt level and long-term debt ratio. Second, this paper provides further evidence on controlling shareholder's expropriation to minority shareholder through debt financing.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=2044-1398&volume=1&issue=4&articleid=1950930&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 1 (2011)
    Issue (Month): 4 (August)
    Pages: 316-333

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    Handle: RePEc:eme:cfripp:v:1:y:2011:i:4:p:316-333

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Capital structure; China; Debts; Government intervention; Legal protection; Shareholders; Soft budget constraint; Ultimate ownership;

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    References

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    1. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    3. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    4. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
    5. Giannetti, Mariassunta, 2003. "Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 185-212, March.
    6. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection and Corporate Valuation," NBER Working Papers 7403, National Bureau of Economic Research, Inc.
    7. Igor Filatotchev & Tomasz Mickiewicz, 2001. "Ownership Concentration, ‘Private Benefits of Control' and Debt Financing," Working Papers 4, CENTRE FOR THE STUDY OF ECONOMIC AND SOCIAL CHANGE IN EUROPE,School of Slavonic and East European Studies,University College London (SSEES,UCL).
    8. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    9. Harris, Milton & Raviv, Artur, 1988. "Corporate governance : Voting rights and majority rules," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 203-235, January.
    10. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
    11. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
    12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    13. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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