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Taking Away the Voting Powers from Controlling Shareholders: Evidence from the Chinese Securities Market
Author(s) -
Yao Yi,
Xu Li,
Liu Zhiyuan
Publication year - 2010
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.2010.01040.x
Subject(s) - shareholder , voting , equity (law) , business , security market , monetary economics , stock (firearms) , stock market , agency cost , accounting , economics , finance , corporate governance , law , political science , politics , horse , biology , engineering , mechanical engineering , paleontology
Abstract The main agency problem in the Chinese economy comes from a conflict between strong controlling shareholders and weak minority shareholders. In such economy, seasonal equity offerings (SEOs) are used as a means to exploit minority shareholders. This paper examines the effects of a regulation (the classified voting system [CVS]) that attempts to protect the interests of minority shareholders by excluding controlling shareholders from the voting process of SEOs. This results show that the rejection rate significantly increases after the CVS comes into effect. SEOs proposals are more likely to be rejected when perceived private benefits are high and security benefits are low, and when minority shareholders have higher bargaining power. Further, investors receive significantly higher post‐SEO stock returns for SEOs approved under the CVS than for those approved before the CVS.