Ultimate ownership and firm performance: evidence from Chinese private listed firms

Abstract

Compared with the traditional principal-agent conflicts which are investigated heavily in previous studies in developed countries, principal-principal conflicts between ultimate controlling shareholders and minority shareholders are much more important in emerging countries. From the perspective of ultimate ownership structure, by tracing the identity of large shareholders, we find that most of Chinese private listed firms have a ultimate controlling shareholder. This study investigates both the impact of cash flow right and the divergence between the control right and cash flow right of ultimate controlling shareholder on firm performance, and the constraint effect of free cash flows on ultimate controlling shareholders’ entrenchment behaviors. We find that the cash flow right and firm performance are significantly positively related, and there is an “incentive effect” for ultimate controlling shareholders; the divergence between the control right and cash flow right is significantly negatively associated with firm performance, and ultimate controlling shareholders have an “entrenchment effect” on firms; Further, we find that ultimate controlling shareholders’ entrenchment behavior occurs only when they have the “ability” and “motivation”, and the “opportunity” of having sufficient free cash flows. Therefore, lower free cash flows can efficiently constrain such entrenchment behaviors of ultimate controlling shareholders.

Keywords:

• ultimate control
• free cash flow
• firm performance
• P-P conflict