Does Mandating Cumulative Voting Weaken Controlling Shareholders?: A Difference-in-Differences Approach

36 Pages Posted: 1 Aug 2016 Last revised: 25 Sep 2017

See all articles by Yu-Hsin Lin

Yu-Hsin Lin

City University of Hong Kong (CityUHK) - School of Law; City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

Yun-chien Chang

Academia Sinica - Institutum Iurisprudentiae (IIAS); New York University School of Law

Date Written: June 23, 2017

Abstract

Corporate scholars have long championed the use of mandatory cumulative voting in developing countries. Yet, in comparison to majority or plurality voting, we know very little about its effectiveness. Even though cumulative voting is allowed in most jurisdictions, in practice it is not widely used. Taiwan stands out as a unique jurisdiction which mandates cumulative voting on all companies. Therefore, Taiwan is the only jurisdiction, to the best of our knowledge, that can be used to test the causal effect of cumulative voting on director election. Taking advantage of an exogenous legal change that occurred in Taiwanese corporate law in December 2011, we use panel data on 640 publicly traded companies from 2001-2015 in a difference-in-differences framework to tease out the effect of cumulative voting. From 2001-2011, cumulative voting was the default rule, and 20 companies opted for majority voting. While directors and supervisors are elected every three years, not all companies change boards in the same year. Fixed-effect panel regression models show that in the 2012 election — about six months after the legal reform — the cumulative voting rule appears to have weakened the controlling shareholders’ control of the companies that had previously opted for majority voting. The controlling shareholders’ control in the 2013, 2014, and 2015 elections, however, did not decrease. The take-away lesson is that mandating cumulative voting may not create a long-term effect because controlling shareholders find other means to maintain influence. Policymakers should leave the governance decisions to the firm and focus on rules that could restrain private benefits of control and enhance transparency to rein in controlling shareholders.

Keywords: Majority voting rule, cumulative voting rule, controlling shareholders, director election, difference-in-differences

JEL Classification: G32, G34

Suggested Citation

Lin, Yu-Hsin and Chang, Yun-chien, Does Mandating Cumulative Voting Weaken Controlling Shareholders?: A Difference-in-Differences Approach (June 23, 2017). 52 International Review of Law and Economics 111-123 (2017). Available at SSRN: https://ssrn.com/abstract=2816508

Yu-Hsin Lin (Contact Author)

City University of Hong Kong (CityUHK) - School of Law ( email )

Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www6.cityu.edu.hk/slw/people/people_Yu_Hsin.html

City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

83 Tat Chee Avenue
Room P5300, 5th Floor, Academic 1
Kowloon Tong
Hong Kong

Yun-chien Chang

Academia Sinica - Institutum Iurisprudentiae (IIAS) ( email )

128 Academia Sinica Rd., Sec. 2
Nankang
Taipei City, 11529
Taiwan

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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