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Blockholders and corporate governance

Blockholders and corporate governance
Blockholders and corporate governance
Blockholding has long been perceived as a harmful force to corporate governance due to its alleged exacerbation of minority expropriation, which is the core theoretical justification of recent worldwide ‘anti-blockholding’ regulatory movements. However, two facts should not be neglected that, first, although blockholding imposes risks of deepening Type II agency conflicts in public companies, it serves a crucial corporate governance role to minimise the Type I agency problem. Therefore, whether tightening rules that might disincentive blockholding is warranted can only be determined if the expected benefits outweigh associated costs. Second, while theories suggest that concentration empowers blockholders to expropriate minority shareholders’ interests, it is largely based on an over-simplified assumption that blockholders are homogeneous, sharing the same incentives and behaviours.
To this end, viewing corporate governance as the reflection of a firm’s agency conflicts, this thesis aims to facilitate a more balanced view with a focus on disentangling the interactions between corporate governance and the nature of blockholders; particularly effects from the most passive blockholder type – state, and the most active type – hedge fund activists.
Seeing audit fee as an indicator of firm’s extent corporate governance effectiveness, the thesis first examines the individual and joint impacts of the controlling shareholder’s (CS’s) three attributes – types, the level of control and control-ownership wedge – on audit pricing of Chinese public companies. Contrary to extant research suggesting that control concentration monotonically enlarges the agency problem and, eventually, audit fees, findings suggest such a relationship depends on the nature of control. It is interesting to find that the voting rights level of state CS is significantly negatively related to audit fee; whereas that of non-state counterparts is significantly opposite. This supports the view that auditors are likely to recognise incentive alignment as the dominant effect introduced by state control and entrenchment effect as the threat brought by non-state control. Furthermore, evidence suggests that auditors tend to perceive two-right divergence for non-state CSs as intentional and a risk indicator; but see that for state CSs as the expanding of control chain, which wears away the risk mitigation effects. To some extent, this thesis illustrates that control concentration, per se, does not necessarily impair corporategovernance; rather this impairment is caused by CSs’ unethical incentive and excessively large control without bonded ownership.
Moreover, using a proprietary dataset of hedge fund activists together with 2002-2014 SEC 13D(/A) filings in US markets, this study next examines the impact of hedge fund activism (HFA) on risk perception of auditors, proxied by audit fee. It proposes that there should be a ‘learning curve’ for stakeholders to recognise long-term corporate governance benefits brought by this new wave of shareholder activism. Consistent with expectations, results show that, relative to those of matched controls, audit fee for HFA-targeted companies exhibits no differences pre-intervention; however, these differences emerge and increase significantly in the first three post-intervention audit engagements, followed by a fall back to the fifth post-event year. Furthermore, findings suggest that the post-intervention fee drop is negatively associated with the auditor-HFA experiences/encounters. Findings also suggest that these audit fee dynamics do not result from indirect effects caused by changes of firm’s fundamentals. Taken together, the results suggest that policymakers should not be urged to tighten regulations on HFA but instead should allow more time for this new breed of activist blockholder to be understood.
Once the intangible perception gap between third party and presence of blockholders was addressed, in the final empirical analysis, this research further investigates tangible impacts of HFA on portfolio companies’ choice between real activity (REM) and accrual-based earning management (AEM) techniques as a result of their influences on the strategic aspect of corporate governance. Specifically, results suggest that target firms’ REMs via reducing/postponing R&D and SG&A expenses declined significantly during HFAs’ holding period; as well as after shares being withdrawn. This not only indicates that HFAs suppressed managers’ intention to deliver earnings at the cost of long-term performance; but also that such beneficial influences persisted in the short- and long-term periods after HFA’s disposal of shares. On the AEM side, the study reveals a significant increase in AEM after HFA intervention. This supports the expectation that targeted companies reallocate reduced earnings to AEM as a result of HFAs’ demand for balancing stakes among stakeholders and earnings-smoothing. Overall, these findings support the previous view that HFA serves as a remedy for extant corporate governance.
University of Southampton
Wang, Su
16f2b026-b3b1-4a26-a275-84283ad32034
Wang, Su
16f2b026-b3b1-4a26-a275-84283ad32034
Li, Pingli
a7bf0454-129f-46fa-bdf3-5bd940f569c4

Wang, Su (2018) Blockholders and corporate governance. University of Southampton, Doctoral Thesis, 213pp.

Record type: Thesis (Doctoral)

Abstract

Blockholding has long been perceived as a harmful force to corporate governance due to its alleged exacerbation of minority expropriation, which is the core theoretical justification of recent worldwide ‘anti-blockholding’ regulatory movements. However, two facts should not be neglected that, first, although blockholding imposes risks of deepening Type II agency conflicts in public companies, it serves a crucial corporate governance role to minimise the Type I agency problem. Therefore, whether tightening rules that might disincentive blockholding is warranted can only be determined if the expected benefits outweigh associated costs. Second, while theories suggest that concentration empowers blockholders to expropriate minority shareholders’ interests, it is largely based on an over-simplified assumption that blockholders are homogeneous, sharing the same incentives and behaviours.
To this end, viewing corporate governance as the reflection of a firm’s agency conflicts, this thesis aims to facilitate a more balanced view with a focus on disentangling the interactions between corporate governance and the nature of blockholders; particularly effects from the most passive blockholder type – state, and the most active type – hedge fund activists.
Seeing audit fee as an indicator of firm’s extent corporate governance effectiveness, the thesis first examines the individual and joint impacts of the controlling shareholder’s (CS’s) three attributes – types, the level of control and control-ownership wedge – on audit pricing of Chinese public companies. Contrary to extant research suggesting that control concentration monotonically enlarges the agency problem and, eventually, audit fees, findings suggest such a relationship depends on the nature of control. It is interesting to find that the voting rights level of state CS is significantly negatively related to audit fee; whereas that of non-state counterparts is significantly opposite. This supports the view that auditors are likely to recognise incentive alignment as the dominant effect introduced by state control and entrenchment effect as the threat brought by non-state control. Furthermore, evidence suggests that auditors tend to perceive two-right divergence for non-state CSs as intentional and a risk indicator; but see that for state CSs as the expanding of control chain, which wears away the risk mitigation effects. To some extent, this thesis illustrates that control concentration, per se, does not necessarily impair corporategovernance; rather this impairment is caused by CSs’ unethical incentive and excessively large control without bonded ownership.
Moreover, using a proprietary dataset of hedge fund activists together with 2002-2014 SEC 13D(/A) filings in US markets, this study next examines the impact of hedge fund activism (HFA) on risk perception of auditors, proxied by audit fee. It proposes that there should be a ‘learning curve’ for stakeholders to recognise long-term corporate governance benefits brought by this new wave of shareholder activism. Consistent with expectations, results show that, relative to those of matched controls, audit fee for HFA-targeted companies exhibits no differences pre-intervention; however, these differences emerge and increase significantly in the first three post-intervention audit engagements, followed by a fall back to the fifth post-event year. Furthermore, findings suggest that the post-intervention fee drop is negatively associated with the auditor-HFA experiences/encounters. Findings also suggest that these audit fee dynamics do not result from indirect effects caused by changes of firm’s fundamentals. Taken together, the results suggest that policymakers should not be urged to tighten regulations on HFA but instead should allow more time for this new breed of activist blockholder to be understood.
Once the intangible perception gap between third party and presence of blockholders was addressed, in the final empirical analysis, this research further investigates tangible impacts of HFA on portfolio companies’ choice between real activity (REM) and accrual-based earning management (AEM) techniques as a result of their influences on the strategic aspect of corporate governance. Specifically, results suggest that target firms’ REMs via reducing/postponing R&D and SG&A expenses declined significantly during HFAs’ holding period; as well as after shares being withdrawn. This not only indicates that HFAs suppressed managers’ intention to deliver earnings at the cost of long-term performance; but also that such beneficial influences persisted in the short- and long-term periods after HFA’s disposal of shares. On the AEM side, the study reveals a significant increase in AEM after HFA intervention. This supports the expectation that targeted companies reallocate reduced earnings to AEM as a result of HFAs’ demand for balancing stakes among stakeholders and earnings-smoothing. Overall, these findings support the previous view that HFA serves as a remedy for extant corporate governance.

Text
Final submission of thesis - Version of Record
Restricted to Repository staff only until 28 June 2021.
Available under License University of Southampton Thesis Licence.

More information

Published date: April 2018

Identifiers

Local EPrints ID: 422198
URI: http://eprints.soton.ac.uk/id/eprint/422198
PURE UUID: be20c1b9-d6ff-46e0-a770-2a7d0973fdad
ORCID for Pingli Li: ORCID iD orcid.org/0000-0001-5020-9126

Catalogue record

Date deposited: 18 Jul 2018 16:31
Last modified: 27 Jul 2019 00:30

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