Summary:
A pyramidal ownership structure is quite typical of enterprise group organization in many countries and regions. A typical feature of this structure is the separation of control rights and cash flow rights as a means for strengthening control. Control rights reflect the influence of the ultimate controller on major decisions by voting at listed companies' shareholders' meetings, while cash flow rights denote the responsibility characterized by investment in capital contributions. The separation of the two is indicative of the asymmetry between taking responsibility and enjoying rights in a pyramidal ownership structure, and is often the source of negative economic externalities. The literature on the negative externalities of the pyramidal ownership structure focuses on “tunneling” by the ultimate controller of listed companies by means of capital occupation and other channels. Different from the negative externalities examined in other studies, this paper investigates the opportunistic tendencies of the ultimate controller's capital operations with the aim of revealing other negative externalities of the pyramidal ownership structure. In China's capital market, the pyramidal ownership structure is very common in both state-owned and non-state-owned firms. However,capital operations of state-owned listed companies are more influenced by national macroeconomic policies such as state-owned enterprise restructuring, industrial policy, and supply-side structural reform. As an example of the negative externalities of the pyramidal ownership structure, capital operation is more typical in non-state-owned listed companies. Therefore, this paper selects non-state-owned listed companies as the object for empirical research, using a sample from 2007-2017. This paper demonstrates that for listed companies characterized by a pyramidal ownership structure, with an increase in the pyramidal structural complexity, the listed companies' shares become more like “lottery shares,” non-financial enterprises' financial asset allocation becomes greater, and more related capital operations are implemented. These behaviors do not improve enterprise performance as expected; rather, they evolve into opportunistic capital operation behavior to realize the short-term rapid appreciation of the wealth of controlling shareholders and their ultimate controllers. This paper makes a novel contribution to the corporate governance literature, especially the literature on the negative externalities of the pyramidal ownership structure. First, in addition to the tunneling concept examined by the previous literature, this paper illustrates other negative externalities arising from the opportunistic capital operations behavior of firms' ultimate controllers.This paper constitutes an important expansion of the literature on the pyramidal ownership structure. Second, from the new perspective of the pyramidal ownership structure, this paper reveals the institutional incentives underlying the financialization of non-financial enterprises and the phenomenon of allocating capital from the real economy to the virtual economy. Affected by the incentive distortion of unequal rights and responsibilities, the controlling shareholders under a pyramidal ownership structure prefer to allocate financial assets to realize the short-term appreciation of the ultimate controllers' wealth in the face of uncertain industrial investment returns. Third, this paper shows that the opportunistic tendencies of controlling shareholders' capital operations under a pyramidal ownership structure attracts more investors to speculate in stocks. Therefore, companies under a pyramidal ownership structure characterized by “lottery shares” of listed companies have become a new influencing factor. Thus, this paper constitutes an important expansion of the literature on the factors influencing lottery stocks. This paper shows that the negative economic externalities of pyramidal ownership structure has become a potential institutional root of the trend whereby capital flows from the real economy to the virtual economy and the severe volatility of financial markets. Therefore, to promote the healthy future development of the capital market and real economy, restraining the disorderly expansion of the pyramidal ownership structure is an important issue that must be urgently confronted.
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