Divergence of Shareholder Rights and Corporate Risk-Taking

47 Pages Posted: 21 Mar 2011 Last revised: 28 Sep 2013

See all articles by Jiekun Huang

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Nianhang Xu

Renmin University of China - School of Business

Qingbo Yuan

University of Melbourne

Date Written: September 27, 2013

Abstract

Basic shareholder rights include control rights, cash flow rights, and the rights to transfer shares. We investigate the impact of the divergence of shareholder rights on corporate risk-taking by exploiting two regulatory reforms in China. First, the privatization of Chinese state-owned enterprises (SOEs) launched in the late 1990s conferred cash flow rights to the controlling shareholders of the privatized SOEs. Second, the Split-Share Structure Reform (SSSR) initiated in 2005 repealed the restrictions on the transferability of controlling shareholders’ shares. We report three main findings relating the divergence of shareholder rights to corporate risk-taking. First, corporate risk-taking is significantly lower for SOEs than for family-owned firms. This result is robust to propensity-score matching and various changes in the sample and specification. Second, corporate risk-taking increases significantly after SOEs are fully privatized to family firms. Third, the SSSR significantly increases corporate risk-taking for both SOEs and family firms, and more so for family firms than for SOEs. Our evidence highlights the importance of the alignment of control rights and cash flow rights and that of share transfer rights in inducing higher corporate risk-taking in value-enhancing projects.

Keywords: Ownership structure, share transferability, privatization, risk-taking

JEL Classification: G32, G38

Suggested Citation

Huang, Jiekun and Xu, Nianhang and Yuan, Qingbo, Divergence of Shareholder Rights and Corporate Risk-Taking (September 27, 2013). Available at SSRN: https://ssrn.com/abstract=1786581 or http://dx.doi.org/10.2139/ssrn.1786581

Jiekun Huang (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

Nianhang Xu

Renmin University of China - School of Business ( email )

Beijing
China

Qingbo Yuan

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

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