In nine East Asian countries, higher cash-flow rights are associated with a higher market valuation and higher control rights with a lower valuation, especially when cash-flow rights are low and control rights are high. This suggests the expropriation of minority shareholders by controlling shareholders. The risk of expropriation is the chief principal-agent problem for large publicly traded corporations.
As many East Asian countries plunged into economic decline, the structure of concentrated ownership and associated corporate governance, along with weak corporate performance, have been blamed for the crisis. There is little empirical evidence, however, of the nature of ownership structures in East Asia and their relationship to corporate performance in the typical East Asian environment (where inefficient judicial systems, and weak property and shareholder rights are common).
Claessens, Djankov, Fan, and Lang examine evidence of the expropriation of minority shareholders for 2,658 corporations in nine East Asian countries in 1996. They distinguish control from cash-flow rights. They also distinguish between various types of ultimate owners, including family, state, widely held corporations, and widely held financial institutions.
Higher cash-flow rights are associated with higher market values, consistent with Jensen and Meckling (1976).
In contrast, deviations of control from cash-flow rights—through the use of dual-class shares, pyramiding, and cross-holdings—are associated with lower market values. This is especially true for corporations under family control and, in Japan, under the control of widely held financial institutions.
They conclude that the risk of expropriation is the major principal-agent problem for large corporations, as suggested by La Porta and colleagues (1999).
The degree to which certain ownership structures are associated with expropriation depends on country-specific circumstances. These may include the quality of banking systems, the legal and judicial protection of individual shareholders, and the degree of financial disclosure required.
This paper—a product of the Financial Economics Unit, Financial Operations Vice Presidency—is part of a larger effort in the vice presidency to study corporate performance patterns in East Asia. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rose Vo, room MC10-628, telephone 202-473-3722, fax 202-522-2031, Internet address hvo1@worldbank.org. The authors may be contacted at cclaessens@worldbank.org or sdjankov@worldbank.org. (33 pages)
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