Expropriation of Minority Shareholders
in East Asia
Stijn Claessens, Simeon DjankovÙ, Joseph Fan, and Larry Lang1
This draft: December 9, 1999
Abstract
We examine the evidence on expropriation of minority shareholders in publicly-traded companies
in East Asia, by studying separately the effects of cash-flow and voting rights of the controlling
shareholder on market valuation. Higher cash-flow rights are associated with higher valuation,
consistent with the findings of Jensen and Meckling (1976) for the effects of concentration of
management control in the United States. In contrast, concentration of control rights has a
negative effect on firm value, consistent with Morck et al. (1988) and Shleifer and Vishny (1997).
Separation of voting from cash-flow rights¾through the use of dual-class shares, pyramiding,
and cross-holdings¾is especially associated with lower market values. We conclude that the risk
of expropriation is the major principal-agent problem for public corporations in East Asia.
I. Introduction
The benefits of large investors in enhancing the value of the firm have been the subject of
extensive research. Block-holders can alleviate one of the main principal-agent problems in the
modern corporation, i.e., the conflict of interest between shareholders and managers. Large
investors have the power and means to monitor managers and ensure that they act in the best
interest of shareholders. This monitoring is shown to result in higher firm value.2 There has been
less investigation on the costs associated with the presence of large investors and, in particular,
on their ability to expropriate other stakeholders. Expropriation is defined as the process of using
one’s control powers to maximize own welfare and redistribute wealth from others. Theory
suggests, however, that incentives for expropriation exist and are especially strong when control
rights exceed ownership rights.