The Excessive Authority of Related Shareholders

Extant literature has paid little attention to the authorities of non-controlling shareholders. But the authority allocation among non-controlling shareholders is important in learning how the controlling shareholders control their firms and how to monitor the expropriation behavior of controlling shareholders. This paper documents that controlling shareholders has the goal to maintain their control while facing financial constraint and legislation monitoring, thus they transfer part of the authorities to their related shareholders. Related shareholders widely spread in Chinese listed firms and involve themselves in the decision-making and management teams by holding large stake of shares and appointing directors, supervisors and managers. They obtain significant higher authorities than other non-controlling shareholders and even excessive authorities over their share stakes. The excessive authorities of related shareholders have stealthily and significantly enhanced the controlling power of controlling shareholders. Our findings imply that it is important to identify the identities and real authorities of non-controlling shareholders in the studies of ownership structure and corporate governance. Also, in practice and legislation it is important to prevent the power abusement or collusion of related shareholders, to fully disclose the information about related shareholders, to encourage minority shareholders to actively involve in corporate governance, and to improve the marketization in corporation reform.