Excess Control Rights and Debt Maturity Structure in Family-Controlled Firms

摘要

Manuscript Type: EmpiricalrnResearch Question/Issue: Numerous studies have documented that the controlling shareholders in many firms worldwide possess control rights far greater than their cash flow rights. The excess of control rights over cash flow rights, hereafter referred to as excess control rights, leads to potential conflicts of interest between controlling and minority shareholders. The purpose of this study is to investigate the link between excess control rights and debt maturity structure in family-controlled firms, a topic that has yet to be addressed in the literature. We attempt to examine how controlling shareholders exploit the excess control rights in making debt maturity decisions at the expense of minority shareholders. Research Findings/Insights: Using panel data for 611 firms listed on the Taiwan Stock Exchange from 2002 to 2006, we found that a robust, significantly negative link exists between excess control rights and short-term debt. This is consistent with the hypothesis that the divergence of control rights from cash flow rights offers an opportunity for the controlling shareholders in family-controlled firms to entrench themselves and expropriate wealth from minority shareholders. Furthermore, by examining board structure, CEO duality, and ownership structure, we show how these factors work together with excess control rights to help determine the debt maturity structure in the sample firms.rnTheoretical/Academic Implications: The theoretical implication of this study is that corporate governance issues such as excess control rights in family-controlled firms are important in corporate decisions, and that studies on these issues enrich our understanding of corporate decision-making. Further studies along this line of corporate decisions - such as investment, leverage structure, and dividend policy - will be instrumental in the development of a comprehensive theory of how corporate governance influences a firm's valuation.rnPractitioner/Policy Implications: The fact that short-term debt is negatively linked to excess control rights suggests that short-term debt providers are an effective monitor for constraining entrenchment and expropriation activities of controlling shareholders. Investors who seek to invest in family-controlled firms, especially in, but not limited to, emerging markets, can benefit from being aware of this link and taking it into account in making investment decisions. Many corporate governance scorecards have emerged over the years to provide market participants a measure of a firm's corporate governance practice's soundness. In view of this study's findings, adding a new factor in measuring the monitoring level the providers of short-term debt can potentially increase its usefulness. Finally, policy makers, especially those in emerging markets, pursuing continuous reform to improve the functioning of their capital markets by improving the corporate governance landscape, should heed the findings and the aforementioned practical implications. This study also elaborates the actions they can take to help investors by effectively improving the transparency of financial information, through better disclosure of the debt maturity of publicly traded firms.