Ultimate Control and Expropriation of Minority Shareholders: New Evidence from Taiwan

This paper provides further evidence to identify the ultimate controlling structure and the degree of expropriation of minority shareholders of listed companies in Taiwan. Compared with previous research, we focus on analyzing the control (voting) and cash flow rights owned by the controlling shareholder. We further distinguish two opposite effects of the controlling shareholders: the positive incentive effect and negative entrenchment effect. The findings of this paper indicate that Claessens et al. (2000) underestimate the control rights and cash flow rights of controlling shareholders and the proportion of family controlled companies in Taiwan due to insufficient disclosure of ultimate ownership structure. We adopt a simultaneous equation model to examine the relationship between the degree of expropriation of minority shareholder and corporate value. Based on our empirical results, we suggest that the deviation of control from cash-flow rights and the degree of collateralization of the stock held by controlling shareholders are two important variables in measuring the expropriation of minority shareholders. The two measurements also have a negative relationship on corporate value, supporting the negative entrenchment effect. In addition, the more cash flow rights owned by the controlling shareholder lead to higher corporate value, supporting the positive incentive effect. Finally, we suggest the regulations covering disclosure of ownership structure should adopt the concept of the ultimate control. That is, companies should provide the complete information for investors to trace and identify who owns the most votes in the companies and how many votes the controlling shareholder owns to distinguish the positive incentive effect and negative entrenchment effect of controlling shareholders.