The Impact of the Difference between Cash Flow Rights and Voting Rights on R&D Investments : Connected to the Level of Cash Flow Rights

ABSTRACT: This study investigates whether the agency conflicts inherent in a dual class ownership structure are associated with the level of firms' tax avoidance. Dual class ownership presents a unique agency problem because insiders control a majority of the votes of a firm despite having claims to a minority of the firm's cash flows. We examine the level of tax avoidance for a sample of dual class firms and find that the extent of tax avoidance declines as the difference between voting rights and cash flow rights increases. We also compare the level of tax avoidance of dual class firms to a sample of propensity matched single class firms and find that dual class firms engage in less tax avoidance as the wedge between insiders' voting rights and cash flow rights increases. These findings are consistent with dual class ownership entrenching managers and allowing them to perform at a suboptimal level. Data Availability: Data used in this study are available from public sources identified in the paper.

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Evolution of ownership and control in Italian IPO firms

Corporate Ownership and Control ◽

10.22495/cocv6i2c2p6 ◽

2008 ◽

Vol 6 (2) ◽

pp. 312-333 ◽

Cited By ~ 5

Author(s):

Silvia Rigamonti

Keyword(s):

Cash Flow ◽

Ownership Structure ◽

Voting Rights ◽

Set Up ◽

Cash Flow Rights ◽

And Control

This article examines the evolution of ownership of cash flow rights and control of voting rights of firms that went public in Italy over the period 1985-2005. At the IPO, the ownership structure does not evolve towards a dispersed one. Even 10 years after the flotation, the initial ultimate shareholder retains the majority of voting rights. Though control is valuable, original owners do not systematically set up structures that dissociate cash flow from voting rights.

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Earnings and dividend informativeness when cash flow rights are separated from voting rights

Journal of Accounting and Economics ◽

10.1016/j.jacceco.2005.01.001 ◽

2005 ◽

Vol 39 (2) ◽

pp. 329-360 ◽

Cited By ~ 184

Author(s):

Jennifer Francis ◽

Katherine Schipper ◽

Linda Vincent

Keyword(s):

Cash Flow ◽

Voting Rights ◽

Cash Flow Rights

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Product market competition, cash flow and corporate investments

Managerial Finance ◽

10.1108/mf-03-2017-0072 ◽

2018 ◽

Vol 44 (2) ◽

pp. 207-221 ◽

Cited By ~ 1

Author(s):

Hussein Ali Ahmad Abdoh ◽

Oscar Varela

Keyword(s):

Cash Flow ◽

Market Competition ◽

Product Market ◽

Product Market Competition ◽

Content Type ◽

Growth Firms ◽

Capital Spending ◽

The Difference ◽

The Impact

Purpose The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects. Design/methodology/approach The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method. Findings The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms. Practical implications The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency. Originality/value Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

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The effect of ownership-control disparity on the Chinese firm’s real activity earnings management

Pacific Accounting Review ◽

10.1108/par-01-2018-0003 ◽

2018 ◽

Vol 30 (4) ◽

pp. 482-499 ◽

Cited By ~ 1

Author(s):

Sang Ho Kim ◽

Yohan An

Keyword(s):

Earnings Management ◽

Cash Flow ◽

Capital Markets ◽

Chinese Firms ◽

Real Activity ◽

Content Type ◽

Controlling Shareholders ◽

Cash Flow Rights ◽

The Impact ◽

Ownership Control

Purpose This paper aims to investigate the impact of the separation between control and cash flow rights (control-ownership disparity) on the earnings management practices of Chinese firms. The notable features of Chinese firms are those of concentrated ownership and the severe disparity that exists between the control and cash flow rights of controlling shareholders. Design/methodology/approach This study measures the level of Chinese firms’ earnings management by adopting two different methods of measurement: accrual-based earnings management (AEM) and real activity earnings management (REM). The authors also consider the possible trade-off effects between these two types of measurements. The data set in this study encompasses over 2,000 Chinese firms, using data from 2003 to 2015. Findings The results indicate that controlling shareholders are more likely to engage in AEM as their cash flow rights are more concentrated, while they are less likely to use REM as the disparity of control-cash flow rights increases. Further, this inverse relationship between REM and control-cash flow rights disparity becomes more pronounced in the case of a low cash flow rights group. As REM generally causes distortions in firms’ operations, it is possible that the controlling shareholders are more likely to constrain the use of REM as the disparity is perceived to grow. This result may indicate a reduced agency problem between controlling and minority shareholders due to the developing and/or existing ownership dispersions, which are mainly driven by recent reforms applied to Chinese capital markets. However, we do not entirely exclude the possibility of other types of expropriations by the controlling shareholders. It appears that the controlling shareholders are still able to exert a significant level of control, even following a substantial ownership dispersion, and they may seek alternative expropriation methods, including but not limited to intercorporate loan or related party transactions as the disparity of control-cash flow rights increases. Originality/value Although the Chinese economy is experiencing a series of reforms to infuse market forces into capital markets, little has been known about the effects of ownership-control disparity in Chinese firms. Our findings highlight the importance of the country specific context in this vein of research.

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