Controlling shareholders' influence on acquisition decisions and value creation: An empirical study from China

Controlling shareholders are capable of influencing major decisions in firms, and their existence may give rise to principal-to-principal conflict as minority shareholders may feel sidelined during decision-making. This study employs a proxy (the highest control right), which takes into consideration both direct and indirect controls to investigate the excess cash usage preference of controlling shareholders. Again, the study investigates how the background characteristics of different controlling shareholders influence their underlying firms' acquisition decisions. With observations from 13,293 Chinese firms and the random effect probit model, we find that controlling shareholders are more likely to influence the use of excess cash into acquisition activities other than to retain such cash in the firm possibly for the payment of a dividend. Furthermore, we observe that the traditional way of classifying firms into either private or state is misleading, and the use of excess cash is influenced by the unique characteristics of the true owner. We recommend that on-going reforms in China should consider encouraging more institutional investors to acquire shares as this will reduce the powers of controlling owners.

Automated summary

This study examines the influence of controlling shareholders on firm decisions and how their background characteristics affect acquisition decisions. It finds that controlling shareholders are more likely to use excess cash for acquisitions, and the traditional way of classifying firms is misleading.