Cumulative Voting: Investor Protection or Antitakeover? Evidence from Family Firms in China

Manuscript TypeEmpirical Research Question/IssueThe Chinese government regulates on the adoption of cumulative voting (CV) in order to protect minority shareholders by allowing them to elect a dissident director. However, adopting CV may deter potential acquirers, reducing the effectiveness of corporate takeover as a governance mechanism. Even worse, lacking enforcement of CV adoption allows firms to adopt CV when they need to deter potential acquirers. Research Findings/InsightsFirst, we find CV adopters have better governance overall, but also have tightened control such as higher ownership concentration. This evidence hints that when a firm adopts better governance to signal the market, it may tighten control in other ways such as increasing shareholder power and adopting CV. Second, we distinguish the role of CV in investor protection by examining its competing effects on tunneling and antitakeover. We find that CV does not reduce tunneling but lowers the probability of CEO turnover and of the firm becoming a takeover target. These results indicate that CV is used as an antitakeover measure in family-controlled listed companies. Finally, we find that adopting CV has no impact on company performance. Theoretical/Academic ImplicationsOur evidence sheds light on the incentives embedded in the ownership structure that can determine the governance mechanism in family firms. Practitioner/Policy ImplicationsSince 2002, the Chinese Securities Regulatory Commission requires firms with a controlling shareholder holding more than 30 percent of shares to adopt CV. Our study shows that this policy has unintended consequences and does not always protect minority shareholders.