The deviation of control right and cash flow right is a common problem of corporate governance in East Asian companies.With Taiwan's listed companies as samples, this paper discusses whether the degree of deviation of control right and cash flow right will affect the company’s earnings distribution policy. The results reveal that, regardless of using stock right or the number of directors to measure the control right, companies of higher degree of deviation of control right and cash flow right have higher proportions of employee bonuses against the shareholder dividends, In this case, the company is more biased in the care of the employees at the expense of the minority shareholders. The company is especially likely to exploit the minority shareholders by controlling the board of directors and paying cash dividends to employees. As investors believe that the controlling shareholders of companies with high degree deviation of control right and cash flow right, and high proportion of employee bonuses are intended to exploit the minority shareholders, such companies have significantly lower declared earnings distribution remuneration compared with companies with low degree of deviation and low employee bonuses.

This study analyses financial consequence of the moral hazard activities of the controlling shareholder. Using a sample of Chinese listed companies during 2002 to 2009, we find that firms with a wider divergence between the controlling shareholder’s control rights and cash flow rights are more financially constrained and the cost of equity is significant higher in these firms. Our results suggest that potential tunneling and other moral hazard activities of the controlling shareholder are facilitated by his excess control rights. These activities have a real impact on corporate financial outcomes.

This paper examines the effects of the agency costs on firm value in 156 Chinese publicly listed companies with individual ultimate owners between 2002 and 2007. The ultimate owners’ agency costs, as measured by the divergence between control rights and cash flow rights, are shown to negatively and significantly affect firm value, as measured by the market-to-book ratio of assets (an approximation of Tobin’s Q). As the agency costs grow, the stock returns decrease around the connected party transaction announcements, and firms are more likely to engage in value-destroying connected party transactions. These effects are particularly strong for some types of connected party transactions, notably loan guarantees and direct fund transfers. Further, as the agency costs grow, the firms violate laws more frequently and the nature of legal violations becomes more severe. Evidence from an exogenous policy shock, the non-tradable share reform confirms that higher agency costs cause more unfavorable stock market reactions to connected party transaction announcements.

This paper examines the effects of the agency costs on firm performance in 156 Chinese publicly listed companies with private ultimate owners between 2002 and 2007. The ultimate owners’ agency costs are measured by the divergence between cash flow rights and control rights. Agency costs are shown to negatively and significantly affect firm performance, as measured by Tobin’s Q. A major contribution of this paper is to identify connected party transactions as a channel through which such agency costs exert negative impact firm performance. Evidence from the public record of law violations of those firms lends further support to the “tunneling” view on the connected party transactions. The paper also shows that the larger the divergence, the less likely that firm managers will implement value-increasing industrial diversification. The last finding remains a puzzle.

This paper examines the relationship between private benefits and the discount of private equity offerings. Measuring private benefits in terms of both control rights and cash flow, we find that private benefits are primarily attributed to control right rather than ownership. By using a measure, the Banzhaf power index, that could better reflects the largest shareholder’s relative influence over the firm. We find that the largest shareholder’s control power decreases, even though her ownership increases after private placement. It indicates that the largest shareholder is willing to give up some control power in private placement. In addition, we find that motivation and the type of investors in private placements significantly influences price discount.

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 bonding role of debt and the fear-of-financial-distress entrenchment 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.