Control Rights, Pyramids and Expropriation of State-Owned Listed Enterprises: Evidence from the Dual Class Share Reform in China

Abstract

Literatures of corporate governance claim that expropriation by controlling owner towards the listed firm emerges when separation of cash flow and control rights exist, and that the separation emerges when dual class shares or pyramiding corporate structures exist. In China, dual class share and pyramiding coexisted in listed companies until the dual share reform was implemented since 2005. Exploiting this good exogenous change in the institution, which only resolve dual class share structure and pyramids remained, this paper tested how much the pyramiding allow the controlling owner to expropriate listed firm. Results show that: the larger control right and the Smaller cash flow right ear, size of expropriation becomes bigger; the expropriation is apparent For state controlled listed companies, though private owned firms do not. This is because level of control right ratio is higher than private though state firms's control-cash slow right ratio is Larger than a private one. While the dual class share reform weakened the power to expropriate, Separation still remains, and generates expropriation. Structural estimation shows the size of Expropriation to be 7 to 8 per cent of total assets at the main. If the one share one vote principle were to be realized, asset inflation could be reduced by 13 percent.