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How Do Agency Problems Affect Firm Value? Evidence from China

40 Pages Posted: 16 Jun 2011 Last revised: 12 Dec 2014

Sheng Xiao

Westminster College (Utah)

Shan Zhao

Grenoble Ecole de Management

Date Written: 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.

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

JEL Classification: G32, G34

Suggested Citation

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

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

HOME PAGE: http://sites.google.com/site/zhaoshan75/

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