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1_5 - Controlling shareholders who often manage the finns...

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Controlling shareholders, who often manage the finns they control, can expropriate minority shareholders in many ways, which are usually referred to as "tunneling". One of these ways is for owners-managers to set the level of their own compensation. We test the relationship between ownership concentration and executive compensation, using panel data for a sample of 412 Hong Kong finns during 1995-1998. We find a positive relationship between managerial ownership and cash emoluments for levels of ownership of up to 35% in small and in family controlled finns, and for up to 10% in large finns. Our tests show that the observed relationships do not result from compensation serving as a proxy for managerial effort. We interpret these findings as suggesting that in the presence of infonnation asymmetry between entrenched managers and outside investors the fonner may use their ownership rights to extract higher salaries for themselves. The:t;.~-is also weaker evidence that top executives with larger shareholdings may be using dividends as a way of supplementing their cash salaries.
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1. Introduction Finns with concentrated ownership may be subject to conflicts of interest between majority and minority shareholders. Controlling shareholders, who often manage the ftrms they control, can expropriate minority shareholders in many ways, which are usually referred to as "tunneling" (Johnson et aI., 2000). In line with this literature, the focus of our paper is the extent to which ownership concentration affects executive compensation, since entrenched managers effectively decide on their own compensation. To this effect, we also examine the role of dividends as a form of executive compensation in ftrms with concentrated ownership. Previous studies of executive compensation have mainly examined the elasticity between top executive pay and ftrm performance (for a survey, see Bushman and Smith, 2001). The few studies that have examined the relationship between ownership structure and executive compensation report conflicting ftndings (Chung and Pruitt, 1996; Goldberg and Idson, 1995). Similarly, earlier studies that examine the relationship between ownership concentration and dividend payouts also report conflicting fmdings, and view dividends as a mechanism for reducing agency costs by disgorging cash to outside investors (Schooley and Barney, 1994; Moh'd et aI., 1995; Faccio et aI., 2001; Fenn and Liang, 2001). In contrast to the academic literature, however, the fmancial press has viewed the payment of large dividends, most of which accrue to controlling shareholders, as potential expropriation in countries with weak investor protection. 1 We analyse a sample of 412 publicly traded Hong Kong ftrms during the period 1995- 1998. Hong Kong is an appropriate market for conducting our study because it combines an Asian family-controlled business environment characterized by high family ownership of listed corporations, with an Anglo-Saxon legal and corporate governance system. From a methodological perspective, we use an approach similar to Himmelberg et al. (1999), estimating ftxed effects at the industry level.
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