Abstract

http://ssrn.com/abstract=1865306
 
 

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How Do Agency Costs Affect Firm Value? Evidence from China


Sheng Xiao


Westminster College (Utah)

Shan Zhao


Grenoble Ecole de Management

June 15, 2011


Abstract:     
Using newly available data, we examine the effects of the agency conflicts between ultimate controlling shareholders and minority shareholders in China’s publicly listed firms between 2004 and 2009. We measure the severity of these agency problems by the excess control rights of the ultimate controlling shareholders. We show that higher excess control rights are associated with significantly lower firm value. We identify two channels through which the excess control rights affect firm value: (1) related-party loan guarantees, and (2) legal violations. We find that higher excess control rights are associated with significantly larger amounts of related-party loan guarantees (scaled by assets) for non-state and private firms, but not for state-owned firms. We find that, for non-state and private firms, the excess controls rights are associated with (1) significantly higher probability that the firm will issue value-destroying related-party loan guarantees and (2) significantly worse stock market reactions the announcements of related-party loan guarantees. However, these results do not hold for state-owned firms. We also find that higher excess control rights are associated with significantly higher probability, frequency and severity of legal violations for non-state and private firms, but not for state-owned firms.

Number of Pages in PDF File: 40

Keywords: Corporate governance, ultimate control, agency costs, connected party transactions, fraud, firm value

JEL Classification: G32, G34

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Date posted: June 16, 2011 ; Last revised: November 15, 2013

Suggested Citation

Xiao, Sheng and Zhao, Shan, How Do Agency Costs Affect Firm Value? Evidence from China (June 15, 2011). Available at SSRN: http://ssrn.com/abstract=1865306 or http://dx.doi.org/10.2139/ssrn.1865306

Contact Information

Sheng Xiao (Contact Author)
Westminster College (Utah) ( email )
1840 South 1300 East
Salt Lake City, UT 84105
United States
Shan Zhao
Grenoble Ecole de Management ( email )
Grenoble, 38003
France
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