The accounting and trading information channels of excess control rights on IPO long-term return in China.

This paper investigates how excess control rights of the ultimate owners in pyramids influence corporate value. Analyzing a hand-collected cross-section of 1420 initial public offerings (IPOs) in China with family control from 2003 to 2016, we find that the impact of excess control rights on IPO long-term returns is significantly negative. The ultimate controlling owners can gain more private benefit of control via the account information channel and the trading information channel. Specifically, the accounting information channel is identified through fund occupation, capital expenditure reductions, and related-party transactions; and the trading information channel is established with stock price nonsynchronicity, turnover and volatility. Furthermore, we propose four mechanisms of corporate governance that mitigate the negative relationship between excess control rights and IPO long-term returns: (1) high analyst coverage, (2) low shareholding and high salary of top executives, (3) the non-duality of chairpersons and CEOs, and (4) CEO turnover. We also document that firms with excess control rights undertake poorer ex post operating efficiency than those without. Our results have policy implications for the role of large shareholders in the development of financial markets. [ABSTRACT FROM AUTHOR]