2010 - Bany Arifin.pdf - The current issue and full text archive of this journal is available at www.emeraldinsight.com/1086-7376.htm Disentangling the

2010 - Bany Arifin.pdf - The current issue and full text...

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Disentangling the driving force of pyramidal firms’ capital structure: a new perspective A.N. Bany-Ariffin Department of Accounting and Finance, Faculty of Economic and Management, University Putra Malaysia, Serdang, Malaysia Abstract Purpose – The purpose of this paper is to disentangle the driving force of pyramidal firms’ capital structure from nine East Asian economies. Design/methodology/approach – To disentangle the driving force, this paper develops a new theoretical framework for the pyramidal firms’. Using panel regression, the new theoretical framework is tested on a set of 1,433 pyramidal firms covering a period from 1992 to 1997. Findings – The regression results reveal that the separation of cash flow rights and control rights in the pyramidal firms have led to high usage of leverage for the purpose of preserving the ultimate owners’ (UO) dominance in the pyramidal firms that he or she controls. Based on the findings, the study concludes that the actual driving force of the pyramidal firms’ capital structure is the UO non-dilution entrenchment motive. Originality/value – The main contribution of this paper is the new theoretical framework developed which enable us to disentangle the driving force behind pyramid firm’s capital structure. Keywords Capital structure, Corporate governance, South East Asia, Far East Paper type Research paper 1. Introduction It is said that the ultimate owner (UO) of a pyramidal firm have enormous power in influencing corporate policy (La Porta et al. , 1999; Claessens et al. , 2000). Capital structure decision being an important corporate policy is certainly affected by the UO influence. This study investigates whether the financing policy (capital structure) of the Asian pyramidal firm may have been influenced by the UO (herewith will be referred to as UO) preferences especially when there is a separation of cash flow rights (CFR) and control rights (CR)[1]. In the literature on this subject there are two explanations as two why the UO may want to influence the financing policy to suit his preferences and they are the non-dilution entrenchment effect and signaling effect. Both theories predict that the direction of the two effects on firm leverage is positive (Du and Dai, 2005; Campbell et al. , 2003). In other words, both effects would increase the use of leverage in the firm capital structure. Based on the non-dilution entrenchment effect argument, the UO would like to raise leverage as a source of funds in order to prevent the dilution of shareholder dominance. However,basedonthesignalingeffect,itissaidthatthecontrollingUOmaybemotivated to increase corporate leverage to show outside investors that its corporate governance is sound even in the presence of the diverse CFR and CR which evidently has been perceived leading to expropriation of the UO[2]. Similar to the non-dilution entrenchment effect, the signaling effect would also lead to higher consumption of leverage.
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