On Expropriation of Minority Shareholders: Evidence from East Asia

Abstract

We examine the evidence on expropriation of minority shareholders in publicly-traded companies in East Asia, by studying separately the effects of cash-flow and voting rights of the controlling shareholder on market valuation. Higher cash-flow rights are associated with higher valuation, consistent with the findings of Jensen and Meckling (1976) for the effects of concentration of management control in the United States. In contrast, concentration of control rights has a negative effect on firm value, consistent with Morck et al. (1988) and Shleifer and Vishny (1997). Separation of voting from cash-flow rights through the use of dual-class shares, pyramiding, and cross-holdings?is especially associated with lower market values. We conclude that the risk of expropriation is the major principal-agent problem for public corporations in East Asia.