Does the Shareholding Proportion of Large Shareholders Affect the Horizontal Organizational Structure? Evidence from Listed Companies in China

ABSTRACT

This paper examines how the shareholding proportion of large shareholders affects the horizontal organizational structure of business groups. We empirically find that as the shareholding proportion of large shareholders increases, the number of subsidiaries decreases, which provides evidence of the alignment effect and risk aversion of large shareholders. Our results are robust to various robustness tests. The mechanism tests further verify the alignment effect and risk aversion of large shareholders, showing that as ownership becomes more concentrated, large shareholders tend to reduce agency problems and avoid risks. This study enhances the understanding of horizontal expansion in pyramidal organizational structures.

KEYWORDS:

• Horizontal organizational structure
• large shareholders
• shareholding proportion of large shareholders
• subsidiary numbers

JEL:

• G32
• G34
• M13

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2023.2270136

Notes

1. A more detailed discussion of Chinese business groups’ incentives to expand can be found in Appendix A.

2. According to Article 9, the following information should be disclosed in the notes to financial statements: (a) the name of the parent company and its subsidiaries; (b) the business nature, registered place, and registered capital (or paid-in capital and share capital) of the parent company and its subsidiaries and any changes in this information; and (c) the shareholding ratio and voting rights ratio between the parent company and its subsidiaries.

3. Article 9 states that if a business combination creates a parent – subsidiary relationship, the parent company should prepare a consolidated balance sheet, a consolidated income statement, and a consolidated cash-flow statement as of the date of the combination. The consolidated income statement should include the revenues, expenses, and profits of the companies involved in the consolidation from the beginning of the period of consolidation to the date of consolidation. The net profit of the companies before consolidation shall be reflected in a separate line item in the consolidated income statement.

4. Following Lei and Chen (2019), we use the following criteria to determine the number of subsidiaries: (a) If it is clearly stated in the footnotes to the financial statements that the company is a subsidiary, we include it; otherwise, (b) we use the shareholding proportion of the listed company to determine whether it is a subsidiary. If the shareholding percentage is equal to or greater than 50%, the company is considered a subsidiary. Otherwise, the company is not considered a subsidiary. (c) If the shareholding percentage is not given, the observation is excluded as such data are rare and have little effect on the analysis.

5. This is similar to the results of Lee and Swenson (2016), who find an average of 17.5 subsidiaries for publicly traded companies across 204 countries. However, the average number of subsidiaries among Chinese listed companies is lower than that in the United States. Ligon and Malm (2018) find that the average number of subsidiaries in the United States is 38.55, according to data for S&P 1500 companies from the U.S. Securities and Exchange Commission’s EDGAR database.

6. These results echo those of Fan and Wong (2002), who find that companies in East Asia have relatively strong control and cash-flow rights, at 30.44% and 25.84%, respectively.

7. A detailed discussion of the economic significance of the results can be found in Appendix C.

8. We also exclude three alternative explanations, which can be found in Appendix E.

9. The detailed calculation of all the mentioned above variables can be found in Appendix F.

10. We also conduct four additional analyses to further validate our logic regarding the alignment effect and risk aversion of large shareholders from the side, which can be found in Appendix G.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [No. 72072060, 71902043, 71602059].