The twin agency problems in corporate finance  [Elektronische Ressource] : on the basis of Stulz
208 Pages
English
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The twin agency problems in corporate finance [Elektronische Ressource] : on the basis of Stulz's theory / vorgelegt von Juan Du

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208 Pages
English

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The Twin Agency Problems in Corporate Finance - On the basis of Stulz’s theory - Von der Fakultät für Maschinenbau, Elektrotechnik und Wirtschaftsingenieurwesen der Brandenburgischen Technischen Universität Cottbus zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften genehmigte Dissertation vorgelegt von Master of Science Juan Du Geboren am 28. März 1978 in Hunan, China Vorsitzender: Prof. Dr. rer. pol. A. Pitsoulis Gutachter: Prof. Dr. rer. pol. K. Serfling Gutachterin: Prof. Dr. rer.pol.K. Schimmelpfeng Tag der mündlichen Prüfung: 27. Mai 2009 Contents List of Figures...................................................................................IV List of Tables ..................................................................................... V List of Appendixes.......................................................................... VII List of Abbreviations ....................................................................VIII List of Symbols .................................................................................IX 1 Introduction 1 1.1 The state of financial globalization ................................................................................... 1 1.2 Three puzzles in financial globalization............................................................................ 2 1.

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Published 01 January 2009
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The Twin Agency Problems in Corporate Finance
- On the basis of Stulz’s theory -




Von der Fakultät für Maschinenbau, Elektrotechnik und Wirtschaftsingenieurwesen
der Brandenburgischen Technischen Universität Cottbus zur Erlangung des
akademischen Grades eines Doktors der Wirtschaftswissenschaften
genehmigte Dissertation


vorgelegt von


Master of Science

Juan Du

Geboren am 28. März 1978 in Hunan, China






Vorsitzender: Prof. Dr. rer. pol. A. Pitsoulis

Gutachter: Prof. Dr. rer. pol. K. Serfling

Gutachterin: Prof. Dr. rer.pol.K. Schimmelpfeng


Tag der mündlichen Prüfung: 27. Mai 2009
Contents

List of Figures...................................................................................IV
List of Tables ..................................................................................... V
List of Appendixes.......................................................................... VII
List of Abbreviations ....................................................................VIII
List of Symbols .................................................................................IX
1 Introduction 1
1.1 The state of financial globalization ................................................................................... 1
1.2 Three puzzles in financial globalization............................................................................ 2
1.3 “Twin Agency Problems” proposed by Stulz to explain the puzzles ................................ 3
1.4 Objectives of the Study .....................................................................................................7
1.4.1 Developing the model of Stulz’s theory and looking for theoretical solutions.......... 7
1.4.2 Researching the Chinese financial market and looking for empirical solutions ........ 8
1.5 The structure of the study ..................................................................................................8
2 Expropriators’ Decision on Expropriating the Existing
Company........................................................................................... 10
2.1 Assumptions and description of the model ..................................................................... 10
2.2 Firm value and expropriation by corporate insiders and state rulers............................... 13
2.3 Expropriation by corporate insiders ................................................................................ 14
2.3.1 Optimal fraction of expropriation by corporate insiders.......................................... 14
2.3.2 Important factors determining the fraction expropriated by corporate insiders....... 17
2.3.2.1 Impact of ownership concentration on expropriation by corporate insiders.... 17
2.3.2.2 Impact of expropriation by state rulers on expropriation by corporate insiders
....................................................................................................................................... 21
2.3.2.3 Impact of investor protection on expropriation by corporate insiders ............. 22
2.3.2.4 Impact of future profitability and capital cost on expropriation by corporate
insiders.......................................................................................................................... 24
2.4 Expropriation by state rulers ........................................................................................... 27
2.4.1 Optimal fraction of expropriation by state rulers ..................................................... 27
2.4.2 Impact of investor protection on expropriation by state rulers ................................ 29
2.5 Important factors determining firm value........................................................................ 30
2.6 Impact of investor protection on expropriators’ benefit.................................................. 32
2.6.1 Impact of investor protection on corporate insiders’ benefit ................................... 32
2.6.2 Imrotection on state rulers’ benefit............................................... 35
2.7 Impact of future profitability and capital cost on corporate insiders’ benefit ................. 37
2.8 Summary ......................................................................................................................... 38
3 Expropriators’ and Outside Investors’ Decision on Establishing
New Company .................................................................................. 42
3.1 Corporate insiders’ decision............................................................................................ 42
3.1.1 Corporate insiders’ financing decision..................................................................... 42
3.1.2 Corp investment decision .................................................................. 44
I3.1.2.1 Impact of investor protection on corporate insiders’ investment decision ....... 44
3.1.2.2 Impact of future profitability and capital cost on corporate insiders’ investment
decision ......................................................................................................................... 49
3.2 Outside investors’ investment decision ........................................................................... 50
3.2.1 Impact of investor protection on outside investors’ investment decision ................ 50
3.2.2 Impact of future profitability and capital cost on outside investors’ decision ......... 52
3.3 State rulers’ decision ....................................................................................................... 53
3.4 Summary ......................................................................................................................... 54
4. Possible Solutions Proposed by the Model to the Twin Agency
Problems ........................................................................................... 58
4.1 What should be done to solve the Twin Agency Problems? ........................................... 58
4.2 What could be done towy Problems?............................................. 59
4.3 Strategies should be taken by the state ............................................................................ 60
4.4 Summary..... 65
5 Practical Investigations in China................................................. 67
5.1 General description of financial market in China............................................................ 67
5.1.1 Development of Chinese financial market ............................................................... 67
5.1.2 Comparison of Chinese stock markets to other main stock markets........................ 74
5.2 Situation of ownership concentration in China 82
5.2.1 Construction of data ................................................................................................. 82
5.2.2 Proportion of ownership concentrated companies in China..................................... 85
5.2.3 Average degree of ownership concentration in China ............................................. 94
5.2.4 Most ownership-concentrated companies in China.................................................. 99
5.2.5 Most ow-dispersed companies in China..................................................... 101
5.3 Is listing abroad a good way for Chinese companies to become more ownership-
dispersed? ............................................................................................................................ 103
5.3.1 Comparison of ownership concentration between Chinese corporations listed in
mainland and those listed abroad .................................................................................... 103
5.3.2 Influence of state holding companies on the ownership concentration of companies
listed abroad .................................................................................................................... 105
5.3.3 Effect of the listing-abroad-age on ownership concentration of companies listed
abroad.............................................................................................................................. 107
5.3.4 Influence of great capital scale on ownership concentration of comp
abroad..... 108
5.3.4.1 Difference of ownership concentration between top 50 and bottom 50
companies.................................................................................................................... 108
5.3.4.2 Comparison of ownership concentration between companies listed abroad and
inland with the same capital scale .............................................................................. 115
5.3.5 Conclusion.............................................................................................................. 118
5.4 Relationship between profitability and ownership concentration ................................. 118
5.4.1 Relationship between ROE and ownership concentration for companies in different
industries ......................................................................................................................... 118
5.4.2 Relationship between profitability and ownership concentration for state holding
companies and non-state holding companies .................................................................. 124
5.4.3 Relationship betwee and ownership concentration for companies listed
abroad and listed inland................................................................................................... 127
II5.5 Measures taken by the ownership-dispersed corporations to solve the agency problems
............................................................................................................................................. 132
5.5.1 Effective ownership structure................................................................................. 132
5.5.1.1 Ownership structures taken by the ownership-dispersed companies.............. 132
5.5.1.2 The effect of different ownership structure on profitability ............................ 138
5.5.2 Lower separation of voting rights from cash flow rights ....................................... 142
5.5.3 Ownership encouragement to more top managers and employees ........................ 144
5.6 Suggestions indicated by the empirical data ................................................................. 147
5.7 Summary ....................................................................................................................... 150
6 Conclusion and Recommendations............................................ 154
6.1 Conclusion..................................................................................................................... 154
6.2 Recommendations ......................................................................................................... 157
Appendix......................................................................................... 162
References....................................................................................... 187

IIIList of Figures

Figure 1: Relationship between determining factors and the fraction of profit expropriated by
corporate insiders and state rulers ............................................................................................. 58
Figure 2: Number of companies listed in China Mainland (1990-2008)................................... 68
Figure 3: Number of securities listed in China Main..................................... 69
Figure 4: Total stock issued capital in China Mainland (1990-2008) ....................................... 69
Figure 5: Stock market value in China Mainland (1990-2008)................................................. 70
Figure 6: Average market value of companies listed in China Mainland (1990-2008) ............ 70
Figure 7: Stock and non-stock securities listed in China Mainland (1999-2008) ..................... 71
Figure 8: Number of companies listed on main stock exchanges (2007).................................. 74
Figure 9: Market value of main stock exchanges (2007) .......................................................... 75
Figure 10: Average market value of companies listed on main stock exchanges (2007).......... 76
Figure 11: Number of listed companies on main stock exchanges (2001-2007) ...................... 77
Figure 12: Market capitalization of main stock exchanges (2001-2007) .................................. 77
Figure 13: Average market value of listed companies on main stock exchanges (2001-2007) 78
Figure 14: China vs. USA, Market capitalization / GDP (2001-2008) ..................................... 79
Figure 15: Ownership structure of Zhejiang Yankon Group Co. Ltd........................................ 84
Figure 16: Ownership structure of Shanghai Broadband Technology Co. Ltd. ...................... 133
Figure 17: Ownership structure of Jilin AoDong Medicine Industry Group Co. Ltd. ............ 134
Figure 18: Ownership structure of Tianjin Tasly Pharmaceutical Co. Ltd.............................. 135
Figure 19: Ownership structure of Zhuhai Zhongfu Enterprise Co. Ltd. ................................ 137


IVList of Tables

Table 1: Relativity between determinant factors and benefit of expropriators.......................... 59
Table 2: Overview of Financial Market in China (1990-2008)................................................. 72
Table 3: Number of listed companies on main stock exchanges (2001-2007).......................... 79
Table 4: Market capitalization of main stock exchanges (2001-2007) (US$ Mil.) ................... 80
Table 5: Average market value of companies listed on main stock exchanges (2001-2007)
(US$ Mil.).................................................................................................................................. 81
Table 6: China vs. USA, Market capitalization / GDP (2001-2008)......................................... 81
Table 7: Proportion of ownership concentrated companies in China (20% Cutoff) ................. 86
Table 8: Prowopanies in China (10% Cutoff) 87
Table 9: Comparison of proportion of ownership concentrated companies between different
stock exchanges ......................................................................................................................... 89
Table 10: Proportion of ownership concentrated companies on Shanghai Stock Exchange (20%
Cutoff) ....................................................................................................................................... 90
Table 11: Proportion of ownership concentrated compck Exchange (10%
Cutoff)............... 91
Table 12: Proportion of ownership concentrated companies on Shenzhen Stock Exchange
(20% Cutoff).............................................................................................................................. 92
Table 13: Proportion of ownership concentrated compock Exchange
(10% Cutoff)........... 93
Table 14: Average ownership concentration in China .............................................................. 95
Table 15: Cash-flow concentration in East Asia ....................................................................... 96
Table 16: Comparison of average ownership concentration between different stock exchanges
................................................................................................................................................... 96
Table 17: Average ownership concentration on Shanghai Stock Exchange ............................. 97
Table 18: Average ownership concentration on Shenzhen Stock 98
Table 19: Top 20 most ownership concentrated companies in China ..................................... 100
Table 20: 19 most ownership dispersed companies in China.................................................. 102
Table 21: Comparison of ownership concentration between companies listed abroad and in
China Mainland ....................................................................................................................... 103
Table 22: Difference of ownership concentration between companies controlled by state and
by family.................................................................................................................................. 107
Table 23: Effect of listing-abroad- age on ownership concentration of companies listed on
NYSE....................................................................................................................................... 108
VTable 24: Comparison of ownership concentration between top 50 companies ..................... 111
Table 25: Componcentration between bottom 50 companies ............... 111
Table 26: Componcentration between financial corporations............... 114
Table 27: Comparison of ownership c50 non-financial companies114
Table 28: Compncial companies listed in
mainland and listed abroad ...................................................................................................... 117
Table 29: Comparison of ownership concentration between non-financial companies listed in
maad. 117
Table 30: Comparison of ROE between companies ownership-concentrated and -dispersed
(20% cutoff)............................................................................................................................. 122
Table 31: Compn comp
(10% Cutoff)......... 123
Table 32: Comparison of CR between companies ownership-concentrated and -dispersed (20%
Cutoff) ..................................................................................................................................... 125
Table 33: Compcompanies ownership-cod (10%
Cutoff)............. 125
Table 34: Comparison of CR between companies with different ownership concentration ... 125
Table 35: Compcompanies listed abroad and listed inland (20% Cutoff)
................................................................................................................................................. 130
Table 36: Comparison of CR between compnd listed inland (10% Cutoff).................. 131
Table 37: Compcompanies listed abroad and listed inland with different
ownership concentration.......................................................................................................... 131
Table 38: Comparison of profitability between different ownership structures of ownership-
dispersed companies in China ................................................................................................. 138
Table 39: Comparison of ownership structure between effective and ineffective companies 141
Table 40: Separation of voting rights from cash flow rights for different ownership structures
................................................................................................................................................. 143
Table 41: Comparison of separation of voting rights from cash flow rights between effective
and ineffective companies ....................................................................................................... 143
Table 42: Comparison of ownership encouragement on top managers between different
ownership structures................................................................................................................ 145
Table 43: Compncouragement on top managers between effective and
ineffective companies .............................................................................................................. 146


VIList of Appendices

Appendix 1: Yearly Market Overview of Shanghai Stock Exchange (1990-2008) ................ 162
Appendix 2: Yearly Markof Shenzhen nge (1991-2008)................ 163
Appendix 3: Ownership concentration of public traded financial companies in China .......... 164
Appendix 4: oncentration of top 50 public traded non-financial companies in
China........................................................................................................................................ 165
Appendix 5: Data of 152 ownership-dispersed public traded companies in China................ 168

VIIList of Abbreviations

ASX Australian Securities Exchange
CEO Chief Executive Officer
CFO Chief Finance Officer
GDP Gross Domestic Product
HKEx Hong Kong Exchanges
KRX Korea Exchange
LSE London Stock Exchange
NASDAQ NASDAQ Stock Exchange
NSE India National Stock Exchange of India
NYSE New York Stock Exchange
OECD Organization for Economic Cooperation and Development
OLS Ordinary Least Square
ROE Return of Equity
SBT Shanghai Broadband Technology Co. Ltd
SET Stock Exchange of Thailand
SGX Singapore Exchange
SHSE Shanghai Stock Exchange
SZSE Shenzhen Stock Exchange
TSE Tokyo Stock Exchange
TSEC Taiwan Stock Exchange Corporation
TSX Toronto Stoc
WACC Weighted Average Capital Cost


VIIIList of Symbols

CR CR= ROE of the firm / ROE of the industry
e (q, k, s) Cost-of-theft function burdened by controlling shareholders
f Percent of the equity held by the controlling shareholders
g (p, k, h) Cost-of-grabbing function burdened by state rulers
G Payoff to the state rulers from a firm at the end of period t
∑G Payoff to the all the firms at the end of period t
Fraction of the profits expropriated by state rulers, 0 ≤h≤1 h
*h Optimal value of h, which is decided by state rulers
i Capital cost of the firm
i’ Market rate of return of the portfolio
I All the capital invested in the firm at period 0
DI Capital demanded to set up the firm at period 0
EI Capital invested by the entrepreneurs to set up the firm at period 0
MI Capital collected from the market to set up the firm at period 0
SI Capital supply on the market
k Quality of basic legal environment, called legal sense
p Quality of protection of all the investors, constraint on state rulers
q Quality of protection of outside shareholders
R Rate of return of the project
R ect at period t t
s Fraction of the profits expropriated by controlling shareholders, 0 ≤s ≤1
*s Optimal value of s, which is decided by controlling shareholders
U Wealth held by the entrepreneurs in the firm at the end of period t t
W Initial wealth owned by the entrepreneurs at period 0 0
W Total wealth held by the entrepreneurs at the end of period t t
ΔW Net value of starting a firm at the end of period t t



IX