Ultimate ownership, institutions and listed companies' debt financing

Yu Honghai (School of Management and Engineering, Nanjing University, Nanjing, China)
Xu Longbing (School of Finance, Shanghai University of Finance and Economics, Shanghai, China)
Chen Baizhu (Marshall School of Business, University of Southern California, Los Angeles, California, USA)

China Finance Review International

ISSN: 2044-1398

Publication date: 9 September 2011



The purpose of this paper is to study the capital structure of firms when controlling shareholders decide on the level of debt financing in an environment with poor legal protection.


Theoretically this paper uses a dynamic model to analyze how the controlling shareholder expropriates the firm's benefit through debt financing. Empirically this paper uses a sample of Chinese publicly listed firms from 2004 to 2007, through the method of OLS and panel data, to verify the theoretical predictions.


Theoretically this paper finds that firms with controlling shareholders will take excess debt financing in an environment of controlled interest rate and poor legal protection to minority shareholders. Government intervention exacerbates while controlling shareholder's cash flow rights constrains excess debt financing. The empirical results conclude that the improvement of the legal environment, limiting government intervention, and raising controlling shareholder's cash flow rights will effectively reduce excess debt level, as well as long‐term debt ratio.


First, this paper provides a theoretical model to explain the mechanism of how the ownership structure, legal environment and government intervention interact to impact debt financing. This result also provides a theory to explain the “paradox” in a transitional economy that better legal protection lowers debt level and long‐term debt ratio. Second, this paper provides further evidence on controlling shareholder's expropriation to minority shareholder through debt financing.



Honghai, Y., Longbing, X. and Baizhu, C. (2011), "Ultimate ownership, institutions and listed companies' debt financing", China Finance Review International, Vol. 1 No. 4, pp. 316-333. https://doi.org/10.1108/20441391111167469

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