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Separation of Control and Cash-Flow Rights of State Owned Listed Enterprises:
Channels of Expropriation following Discriminated Share Reform in China

Discussion Papers


by WATANABE Mariko
Revised June, 2010


Literature on agency problems arising between controlling and minority owners claim that separation of cash flow and control rights allows controllers to expropriate listed firms, and further that separation emerges when dual class shares or pyramiding corporate structures exist. Dual class share and pyramiding coexisted in listed companies of China until discriminated share reform was implemented in 2005. This paper presents a model of controller to expropriate behavior as well as empirical tests of expropriation via particular accounting items and pyramiding generated expropriation. Results show that expropriation is apparent for state controlled listed companies. While reforms have weakened the power to expropriate, separation remains and still generates expropriation. If the “one share, one vote” principle were to be realized, asset inflation could be reduced by 13 percent.

Keywords: corporate governance, concentrated owner, expropriation, state owned enterprises, China
JEL classification: G32, G34 ,K22、P31, P34

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