Expropriation of Minority Shareholders

in East Asia
Stijn Claessens, Simeon Djankov, 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 rightsthrough the use of dual-class shares, pyramiding,
and cross-holdingsis 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.

World Bank, World Bank and CEPR, Hong Kong University of Science and Technology, and the
Chinese University of Hong Kong, respectively. Joseph P.H. Fan and Larry H. P. Lang gratefully
acknowledge the Hong Kong UGC Earmarked grant for research support. The opinions expressed do
not necessarily reflect those of the World Bank. We thank Lucian Bebchuk, Caroline Freund, Ed
Glaeser, Tarun Khanna, Tatiana Nenova, Rene Stulz, Raghuram Rajan, two anonymous referees,
seminar participants at the World Bank, the International Monetary Fund, the Federation of Thai
Industries in Bangkok, the Korean Development Institute, the Korean Finance Institute, Vanderbilt
University, University of Illinois, the 1999 NBER Summer Conference in Corporate Finance, and
especially Andrei Shleifer for helpful comments. Corresponding author: tel. 202 473 4748,
EM:sdjankov@worldbank.org

Expropriation of Minority Shareholders in East Asia

Stijn Claessens, Simeon Djankov, Joseph Fan, and Larry Lang

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
ones 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.
In this paper, we fill a gap in the existing literature by providing evidence to suggest that
controlling shareholders in some East Asian countries expropriate minority shareholders. Using a
large database of publicly-traded corporations in nine countries, we find a positive relationship
between expropriation and the separation of cash-flow from voting rights. We conclude that the
primary agency issue for large corporations in East Asia is limiting expropriation of minority

For a survey of the literature on the benefits of large shareholders, see section IV in Shleifer and

Vishny (1997). In the most extreme cases, Shleifer and Vishny (1986) show that large investors oust
management through proxy fights or takeovers if the latter pursue empire-building strategies at the
expense of equity holders.

shareholders by controlling shareholders, rather than restricting empire building by unaccountable

managers.
In previous work (Claessens, Djankov, and Lang, 2000), we have documented a large
divergence between cash-flow and voting rights for corporations across nine East Asian countries.
Control in these countries is often enhanced through the use of pyramid structures and crossholdings among firms. The analysis here suggests that for these corporations high cash-flow
rights in the hands of block-holders raise market valuation, consistent with the Jensen and
Meckling (1976) model. We also find, however, a negative effect of high concentration of control
on firm value. This is supportive of the argument that once large owners gain nearly full control
of the company, they prefer to generate private benefits of control that are not shared by
minority shareholders (Shleifer and Vishny, 1997, p.759). Separation of cash-flow from voting
rights is especially associated with lower market values, consistent with Grossman and Hart
(1988) and Harris and Raviv (1988).

We interpret the value discount as evidence of

expropriation of minority shareholders by controlling shareholders. Conversely, Morck et al.

(1988) show that when managers are also controlling shareholders, i.e., even when the possibility
of entrenchment is higher, firms trade at a premium within a certain range. This finding suggests
that when ownership and control go together, these is less incentive for non-value-maximizing
behavior, although the opportunity of engaging in such behavior increases.
The paper is structured as follows. Section II summarizes the existing literature on the
costs of large shareholders. Section III describes the data sample and the construction of the
ownership and control variables. Section IV shows the construction of the expropriation
measure. Section V investigates the evidence on small shareholder expropriation in East Asia.
3

and the effect of different types of ownership on expropriation. Section VI provides a robustness
analysis by reporting the regression results for each country. Section VII concludes.

II.

The Cost of Large Investors

The research on the topic of ownership structures and corporate valuation dates back to

Berle and Means (1932) and has found renewed interest following the contributions by Jensen
and Meckling (1976) and Morck et al. (1988). Berle and Means show that diffuse control rights
yield significant power in the hands of managers whose interests do not coincide with the interest
of shareholders.

As a result, corporate resources are not used for the maximization of

shareholders value. Jensen and Meckling conclude that concentrated ownership is beneficial for
corporate valuation, because large shareholders are better at monitoring managers (and because it
reduces transaction costs in negotiating and enforcing corporate contracts with various
stakeholders). Morck et al. suggests that the absence of separation between ownership and
control reduces conflicts-of-interest and thus increases shareholder value. Further empirical
studies on data for the United States (e.g., Lease et al., 1984; DeAngelo and DeAngelo, 1985;
Shleifer and Vishny, 1986; Holderness and Sheehan, 1988; Barclay and Holderness, 1989;
McConnell and Servaes, 1990) find a positive relation between ownership concentration (in
certain ranges) and corporate valuation.3

Other studies (Demsetz, 1983; Demsetz and Lehn, 1985) argue that the relation is spurious. While

greater ownership concentration results in stronger incentives to monitor, investors may be inhibited
from taking value-maximizing positions in firms if the costs associated with amassing large stakes are

There is recent empirical evidence that concentrated ownership can also harm market
valuation. Shleifer and Vishny (1997), La Porta et al. (1998), and Morck et al. (1999) study the
conflicts of interest between large and small shareholders. When large shareholders effectively
control a corporation, their policies may result in the expropriation of minority shareholders.
The conflicts of interest between large and small shareholders can include outright expropriation,
i.e., controlling shareholders enriching themselves by not paying out dividends, or transferring
profits to other companies they control; or de facto expropriation through the pursuit of
nonprofit-maximizing objectives by large investors. Such companies are unattractive to small
shareholders and their shares are valued less relative to their market peers. Morck et al. (1999)
show that, in the case of Canadian publicly traded companies, openness of capital markets
mitigates the ill effects of concentrated control.
To our knowledge, the expropriation-of-minority-shareholders hypothesis has not been
investigated directly. Several previous papers focus on the costs of large block-holdings,
interpreting the premium that shares with superior voting rights attract as evidence of private
benefits of control.4 Such premia vary between 3% and 5.2% for the United States, and are
about 81% for Italy. This set of papers either assumes or finds strong congruence of interests

high.

If transaction costs are low, each firm would have the optimal, but not necessarily

concentrated, ownership structure.

4

Studies include Bergstrom and Rydqvist (1990) for Sweden, Barclay and Holderness (1989) and

Zingales (1995) for the United States, Zingales (1994) for Italy, Megginson (1990) for the United
Kingdom, Robinson and White (1990) for Canada, Horner (1988) for Switzerland, and Levy (1982)
for Israel.

between large and small shareholders and argues that the voting premia reflect the expectation
that voting rights become important in takeover battles. Shleifer and Summers (1988) point more
specifically to the expropriation of extramarginal benefits to insiders, including incumbent
managers, if a hostile takeover succeeds. Morck et al. (1988) further suggest that takeovers limit
the extent of non-value-maximizing behavior on the part of insiders.
Another strand of the literature studies the link between ownership structures and
expropriation of different classes of stakeholders. Malitz (1989) examines debt restructurings in
the United States for evidence of expropriation of bondholders wealth by block-holders of
equity and rejects this hypothesis.

Slovin and Sushka (1997) study the expropriation of

shareholders in subsidiary companies by the parent company in listed stocks in the United States
and do not find sufficient evidence to suggest expropriation behavior. Weinstein and Yafeh (1998)
find that Japanese firms affiliated to bank-controlled groups pay higher interest rates on their
liabilities than unaffiliated companies, and interpret this result as evidence that banks expropriate
other classes of stakeholders. Other studies on corporate governance in Japan (Aoki, 1990;
Prowse, 1992; Hoshi, Kashyap, and Scharfstein, 1991; Kaplan, 1994) also find adverse effects of
group affiliation on market valuation of firms.
Few studies on ownership structure have investigated the effects of separation of cashflow and voting rights on firm value, even though the theoretical property rights literature
developed by Grossman and Hart (1988) and Harris and Raviv (1988) distinguishes ownership
and control. Burkart, Gromb, and Panunzi (1997) use the separation of ownership and control to
examine the trade-off between ownership structure and managerial initiative. They conclude that
concentration of voting rights is beneficial in terms of enhancing effective monitoring of managers,
6

but reduces their non-contractible efforts since it brings about an ex-ante expropriation threat to
managers. Burkart, Gromb, and Panunzi (1998) analyze the separation of cash-flow and voting
rights; they argue that the under-concentration of cash-flow rights increases moral hazard and
leads to inefficiencies. The model suggests expropriation of minority shareholders, as the
controlling party allocates some corporate resources to the production of private benefits.
Wolfenzon (1999) develops a model where the entrepreneur can decide between a horizontal (an
independent concern) or a pyramidal structure (as a subsidiary of a company he already controls)
for his newly-established firm. The model predicts a higher incidence of pyramidal structures in
countries with poor investor protection, as such structures can be used by the entrepreneur to
expropriate other shareholders. Finally, Bebchuk (1999) develops a model to show that when the
private benefits of control are large, as is the case in industries or countries with protected
markets, maintaining a lock on control through separation of ownership and control would enable
the initial shareholders to retain a larger share of the rents.
More recently, La Porta et al. (2000) document large differences between countries in the
breadth and depth of financial markets and the access of firms to external financing. They suggest
that a common element in explaining these differences is the extent to which investors, both
shareholders and creditors, are protected by law from expropriation by the controlling
shareholders or the managers of firms. La Porta et al. (1999b) provide direct support for the
quantitative importance of the expropriation of minority shareholders in many countries, as well
as the role of the law in limiting such expropriation.
An empirical literature on the separation of ownership and control has also recently
emerged. The seminal study on the means used to enhance corporate control is La Porta, Lopez7

de-Silanes, and Shleifer (1999a), who investigate the separation of ownership and control in over
600 corporations in 27 rich countries. They find that pyramid structures are the most effective
means used to enhance control, and that dual-class shares are rarely used, even in countries where
their usage has been allowed for a long time. Two case-studies on Italy (Aganin and Volpin,
1998; Enriques, 1998) use a similar methodology to document various means used to separate
ownership and control. 5
Claessens, Djankov, and Lang (2000) extend the analysis of ownership and control patterns
of La Porta et al. (1999a) to nine East Asian countries (Hong Kong, Indonesia, Japan, Korea
(South), Malaysia, the Philippines, Singapore, Taiwan and Thailand). They find large family
control in more than half of East Asian corporations.

Corporations in Japan are generally

widely-held, while corporations in Indonesia and Thailand are mainly family-controlled.

Separation of management from ownership control is rare, with management of two-third of firms
family-related to the controlling owner. The last finding suggests that the main principal-agent
problem is East Asia is not the conflict of interest between owners and managers, as those
frequently coincide even in the largest publicly-traded corporations.

III.

Measuring Ownership and Control Rights

Enriques (1999) is part of an on-going project funded by the European Corporate Governance

network. Working papers on other European countries include Gugler, Stomper, and Zechner (1999)
on the separation of ownership and control in listed Austrian companies; Becht and Chapelle (1999)
on listed Belgian companies; Bloch and Kremp (1999) on listed French companies; and De Jong,
Kabir, Marra, and Roell (1999) on public companies in the Netherlands.

The analysis is based on newly-assembled data for publicly-traded corporations,

including both financial institutions and non-financial institutions, in Hong Kong, Indonesia,
Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. As the starting point
for our data collection, we use the Worldscope database which provides the names and holdings
of the largest owners for most firm 79% of our sample. The database has been used in
previous studies of corporate ownership structure (La Porta et al. (1999a) and Lins and Servaes
(1999)).
We supplement the Worldscope data with ownership information from the Asian
Company Handbook 1999, the Japan Company Handbook 1999, Hong Kong Company
Handbook 1997, the Handbook of Indonesian Companies 1996, the Philippine Stock Exchange
Investments Guide 1997, the Securities Exchange of Thailand Companies Handbook 1997, and
the Singapore Investment Guide to complete the ownership profiles of the remaining 21% of the
sample (Table A1). We exclude companies which have proxy ownership that cannot be traced to
a specific owner. In all cases, we collect the ownership structure as of December 1996 or the end
of the 1996 fiscal year. Information on dual-class shares is provided in Datastream, as described
in Nenova (1999). We supplement these data with country-specific sources for Indonesia, the
Philippines, Singapore, and Thailand, where Datastream covers a smaller fraction of listed
companies. We also use various country sources on business group affiliation to study the
pyramid structures and cross-holdings among group-affiliated firms (Table A1). For the purposes
of this paper, we define groups as composed of all firms in which a given controlling shareholder
has an equity stake. This definition makes it easier to break ties when firms have multiple

controlling shareholders. We end up with 2,980 companies for which we can trace the ultimate
owners.
In all nine East Asian countries, members of a business group are required to report
separate accounting data. If inter-group ownership concentration is high, the group also has to
supply a consolidated account statement. For example, a Korean chaebol which has more than
30% inter-group holdings is required to report a consolidated statement. At the company level,
we use consolidated account data when it is disclosed. Information is provided by Worldscope
whether all subsidiaries are consolidated, whether consolidation covers only the most significant
subsidiaries, or whether the report is on a cost basis (unconsolidated). If a company changes its
consolidation practice, this change is also recorded in the data. We include all companies, both
with consolidated and unconsolidated reports, in the regression analysis. This is not a significant
problem here since we have the sales data for each segment of the company and consolidate up to
the level of the firm, as shown in Section IV. When we include only companies that report
consolidated data, as defined in Worldscope, we get qualitatively similar results.
Following La Porta, et al. (1999a), we analyze the ownership pattern of companies by
studying ultimate shareholdings.

In the majority of cases, the principal shareholders are

themselves corporate entities, not-for-profit foundations, or financial institutions.

We then

identify their owners, the owners of their owners, etc. We do not distinguish among individual
family members and use the family group as a unit of analysis. We divide corporations into
widely-held and corporations with ultimate owners. A widely-held corporation is defined as a
corporation which does not have any owner who has 10% or more of control rights.

In an

alternative specification, we use a 20% cut-off for control rights in the hands of the largest block10

holder. Ultimate owners are further separated into four categories: families including individuals
who have large stakes, the state, widely-held financial institutions such as banks and insurance
companies, and widely-held corporations.
Our study of expropriation uses data on both cash-flow and voting rights. Suppose, for
example, that a family owns 11% of the stock of publicly-traded Firm A, which in turn has 21%
of the stock of Firm B. We then say that the family controls 11% of Firm Bthe weakest link
in the chain of voting rights. In contrast, we say that the family owns about 2% of the cash flow
rights of Firm B, the product of the two ownership stakes along the chain. We make the
distinction between cash-flow and voting rights by documenting for each firm pyramiding
structures, cross-holdings among firms, and deviations from one-share-one-vote rules.
To better understand the variety of ownership structures that determine the ultimate
control of companies, we provide an example. The example shows some of the complications in
the construction of ultimate ownership and the wealth of data necessary to ensure proper tracing
of the ultimate owners in East Asian corporations. For the remainder of the paper, we use only
the listed companies in the definition of a business group. Many companies affiliated with
business groups in East Asia are unlisted and are not covered in this paper. For example, at the
end of 1996 the largest three business groups in KoreaHyundai, Samsung, and
LuckyGoldstarhad 46, 55, and 48 affiliated firms respectively. Of those, only 16, 14, and 11
were publicly-listed companies, respectively. Since data on unlisted affiliates are unavailable, we
cannot extend our analysis to unlisted firms.

11

Figure 1 shows the main holdings of Yasuda Life Insurance, the principal shareholder in the
Fuyo group, which is the fourth largest keiretsu in Japan. Yasuda Life is a widely-held financial
institution, since its largest shareholder controls only 1.1% of the voting rights. Two of its
holdings, Marubeni Corporation and Showa Denko, have dual-class shares owned by Yasuda Life
Insurance. In the case of Marubeni Corp., a third of Yasuda Lifes shares have two votes each.
These are in fact the only superior-voting shares of Marubeni, enhancing the control rights of
Yasuda Life to 6.5% of all votes.6 A similar pattern is observed in the ownership structure of
Showa Denko Yasuda Life has about a fifth of its shares with superior voting rights, and these
are the only shares that deviate from the one-share-one-vote rule. Studying the ownership and
control stakes in Figure 1, it does not seem that Yasuda Life has control over 10% of any
company in the Fuyo group. This inference turns out to be incorrect, as we will show next.
Figure 2 shows one of the branches in the pyramid structure of the Fuyo group, by looking
at the holdings of Yasuda Trust Bank, the second largest member of the group in terms of market
capitalization. Two facts are worth noting. First, Yasuda Trust does not have superior-class
shares in any of its companies. This is typically the case in East Asian corporations, as
documented in Claessens, Djankov, and Lang (2000). Second, seven of the nine companies where
Yasuda Trust holds significant stakes are also companies directly controlled by Yasuda Life,
which constitutes an example of cross-holdings among group members. This provides an
additional conduit for Yasuda Life to concentrate control, and to separate it from ownership.

Note that one can also observe cash-flow rights in excess of voting rights, if some of the other

shareholders own superiorclass shares, or if the shareholder has non-voting shares.

12

Figure 3 provides the ownership and control stakes of Fuji Bank, the third largest member
of the Fuyo group in terms of market capitalization. As in the case of Yasuda Trust, Fuji Bank
holds stakes in seven of the companies under the direct ownership of Yasuda Life, another
example of cross-holdings among affiliates of the Fuyo group. Among the holdings of Fuji Bank,
we document both pyramidal structures (denoted with solid lines) and cross-holdings (denoted
with dotted lines). Fuji Bank has C&V 4.7% in Marubeni Corp., which in turn has C&V 32.4%
in Toyo Sugar. Similarly, Fuji Bank has C&V 5% in Yasuda Fire and Marine Insurance (Yasuda
F&M), which in turn holds C&V 12.6% in Tatamono Inc. Fuji Bank also holds C&V 16.8% in
Yasuda Trust, which in turn has C&V 6.3% in Toa Corporation. Fuji Bank also holds C&V 5.2%
in Toa Corporation directly, which is an example of a cross-holding.
The analysis in Figures 1-3 suggests that there exists a complex network of cross-holdings
among the members of the Fuyo group, which serve to enhance the ownership and control
concentration in the hands of Yasuda Life Insurance. We document the holdings of each of the
companies in the group and construct a cross-holding matrix for the nine major companies (Table
1). This table allows us to find the ultimate ownership and control structure of each major
company in the Fuyo group. In effect, the table is similar to an input-output matrix where the
owners are listed in the rows, and the owned firms are listed in the columns. A larger matrix (not
reported here) includes cross-holdings among all 42 Fuyo listed affiliates present in our sample.
The rows in the table indicate the ownership and control stakes in the company listed in
each column. For example, Yasuda Life holds C&V 4.4% in Fuji Bank, C&V 7.5% in Oki Electric,
C&V 8.6% in Yasuda Trust, etc. These numbers match the numbers reported in Figure 1.
Similarly, Yasuda Trust holds C&V 2.8% in Fuji Bank, C&V 4.9% in Oki Electric, etc., i.e., the
13

numbers reported in Figure 3. We use the information in Table 1 to calculate Yasuda Lifes
ultimate cash-flow and voting rights in Fuji Bank. Yasuda Life has a direct C&V stake of 4.4%,
and indirect stakes through Oki Electric, Yasuda Trust, Marubeni Corp., Yasuda Fire and Marine,
Nippon Seiko, Nihon Cement, and Showa Denko. The indirect stake in Oki Electric enhances
Yasuda Lifes cash-flow rights in Fuji Bank by 0.5625 percentage points (the product of 7.5 and
7.5) and voting rights by 7.5 percentage points (which is the minimum of the two 7.5 stakes).
The indirect stake in Yasuda Trust enhances Yasuda Lifes cash flow rights in Fuji Bank by
0.2408 percentage points (the product of 8.6 and 2.8) and voting rights by 2.8 percentage points
(the weakest link in the chain of voting rights). Once we sum up all the direct and indirect stakes
in Fuji Bank, we reach the conclusion that Yasuda Life owns 5.4469% of Fuji Bank and controls
19.9% of the voting rights. Using the cross-holding structure described in Figures 1-3, Yasuda
Life has almost quadrupled its control over Fuji Bank!
The examples in Figures 1-3 show that ultimate ownership and control are described both
by their level, and by the type of controlling shareholder.

From a corporate governance

standpoint, the relevant indicator is the share of ultimate voting rights, as it enables owners to
determine dividend policies, investment projects, personnel appointments, etc. We start by
reporting the aggregate statistics on the distribution of ultimate control among the five ownership
groups identified in the previous section (Table 2). We study ultimate control at two cut-off
levels, 10% and 20% of voting rights. This allows us to describe the differences in the
concentration of control in the individual firms across the nine East Asian countries.
There are large differences across countries in the distribution of ultimate control at the
10% (benchmark) level. Japan, for example, has also only 13.1% of companies in family hands
14

as compared to over half of companies in most other countries (the Philippines has slightly over
40%). Japan has only 58% of companies which are controlled by a large shareholder, while the
remaining eight countries typically have almost all corporations under the control of large
investors.

Indonesia, for example, has more than two-thirds (68.6%) of its publicly-listed

companies in family hands, and only 0.6% are widely-held. Almost a quarter (23.6%) of the
publicly-traded companies in Singapore are state-controlled.
At the 20% cut-off level the differences across countries widen. Only 20.2% of Japanese
companies are controlled by a single large investor and less than one-tenth (9.7%) are controlled
by families. An even more dramatic change takes place in Korea, where only 56.8% of companies
are now controlled by large investors, and Taiwan, where 73.8% of companies now have a
controlling large shareholder. In the Indonesian sample, the share of family control increases at
the expense of state, widely-held financial, and widely-held corporate control. A similar pattern
can be observed for Thailand where family control increases from 56.5% to 61.6%, and Malaysia,
where family control increases from 57.5% to 67.2%. The most stable control structure between
these two cut-off levels is observed for the Philippines and Singapore.
Table 3 reports descriptive statistics on the concentration of cash-flow and voting rights of
East Asian corporations in the hands of the largest controlling holder, and the separation of
ownership and control. Only companies that have a large investor holding at least 10% of the
voting rights are included in panel A, while panel B includes companies where the largest
shareholder holds at least 20% of the voting rights. Among the 2,980 companies in the database,
2,371 companies, or 79.5% of the total sample, enter panel A, and 1,654 companies, or 55.5% of
the sample, are included in panel B. Of those, we document a difference between cash-flow and
15

voting rights for the largest shareholder for 1,101 and 674 companies, respectively. The remaining
companies do not have any deviations of voting from cash-flow rights. The least number of
companies where control exceeds ownership, both in absolute terms and relative to the size of the
country sample, are found in the Philippines and Thailand.
Thai corporations also display the most concentrated cash-flow rights, 36.577% on
average, followed by Indonesian companies, with 27.712%, and Hong Kong companies, with
27.519%. Japanese, Korean, and Taiwanese corporations have the least concentration of cashflow rights, 10.843%, 20.839%, and 20.215% respectively. The concentration of voting rights in
the hands of the largest block-holder is similar to the concentration of cash-flow rights, with Thai
and Indonesian companies having the highest concentration, 39.042% and 36.669% respectively,
followed by Malaysian and Hong Kong companies, 31.633% and 31.834% respectively. The
least concentration of control is documented in Japan, Korea, and Taiwan, 15.801%, 23.942%,
and 24.335% respectively. The last three columns show the ratio of cash-flow to voting rights,
which we use as the measure of separation of ownership and control in the regression analysis.
The separation of control from ownership is on average the highest in Japan (0.606), Indonesia
(0.758), and Singapore (0.742), and the lowest in the Philippines (0.892) and Thailand (0.941).
A similar pattern of concentration and separation of cash-flow and voting rights is observed in
panel B, except for Japan where the ratio of cash-flow to voting rights increases from 0.606 to
0.814.
The means by which cash-flow right are separated from control rights for the nine East
Asian countries have been previously documented in Claessens, Djankov, and Lang (2000).
Deviations from one-share-one-vote rules are rare across East Asian countries.
16

On average,

control of 20% of the vote can be received with 19.7% of the cash-flow rights.

Instead,

pyramiding is most frequently used to de-couple cash-flow and control rights. In particular, twothirds of Indonesian firms in the sample have pyramiding ownership structures, as have
approximately half of the firm in the sample in Korea, the Philippines, Singapore, and Taiwan.
The smallest share of firms involved in pyramiding structures is recorded in Thailand. Finally,
10.7% of the firms in the sample have cross-holdings in other firms. This percentage is the
highest for firms in Singapore, Malaysia, and Japan, 15.7%, 14.9%, and 11.7% respectively, and
the lowest for firms in Indonesia and Thailand, where less than 1% of firms have cross-holdings.

IV.

Measuring Expropriation
Researchers have employed Tobins q to measure the discount in market values resulting

from expropriation (Morck, Shleifer, and Vishny, 1988; Barclay and Holderness, 1989;
McConnell and Servaes, 1990; Zingales, 1994, among others). It is constructed as the market
value of assets divided by the replacement cost of assets. To net out industry-wide effects,
previous papers also make adjustments to firms Tobin's q. Specifically, they use the firms
primary sector code to find matching firms and compare the firms Tobins q with the median
Tobins q of the matching sample.
The financial data we have do not allow the computation of Tobins q, as the replacement
cost of assets is unavailable for all countries.7 Comparing a firms Tobin's q with its industry

We are also limited in other financial data we have on a consistent basis across all nine East Asian

countries.

Worldscope adjusts the reporting in the income statement and balance sheets of

corporations to make it consistent with international accounting standards. While this is generally

17

median is also inappropriate in case of East Asian corporations, since, as Lins and Servaes (1999)
and Claessens, Djankov, Fan, and Lang (1999) show, many East Asian firms have sales in
multiple segments. To overcome these difficulties and following the approach started by Berger
and Ofek (1995), we calculate an industry-adjusted, excess market valuation measure as the ratio
of the firms actual market value to its imputed value. This excess value measure has often been
used to evaluate the impact of firm diversification on market valuation. It is also appropriate as a
measure to study the effects of ownership structure on market values as it provides a relative
value, by taking the ratio of market value to sales or assets, while adjusting (by construction) for
industry differences. We first present the formal procedure for constructing the excess variable
measure and then follow with an example from the data.
Specifically, the excess value variable, EXV, is calculated as follows. First, we compute
the market-to-sales ratio as the firms market capitalization, the stock price times the number of
outstanding shares, divided by sales revenue.8

We then multiply the industry-median ratio,

defined as the median value of EXV among all single segment firms in the industry, by the level of
sales in each corresponding segment of a firm. The imputed value of the firm is then obtained by
summing the multiples across all segments. We hence rely only on stock market prices and sales

straightforward for income statement items, the assets and liabilities numbers may include different
categories across the nine East Asian countries.

In Indonesia, Japan, Korea, and Thailand, for

example, companies are not required to report intra-group lending, which distorts the balance sheet
data.

18

data net of excise taxes in the construction of the valuation variable. These are all flow figures
and less affected by the differences in accounting standards across the sample countries. All
financial data are converted to US dollars using end-year exchange rates.
For the sales segment data we rely on the historical segment sales data collected by
Worldscope. If such information is not provided for a particular firm, we supplement the
segment data from various issues of the Asian Company Handbook and the Japan Company
Handbook. We exclude a small number of firms from the sample because they do not report
segment sales. For the remaining firms, we determine the industry sectors to which they belong
according to the two-digit Standard Industry Classification (SIC) system, and collect the sales
revenues from the firms activity in each sector. 9
We restrict the number of single-segment firms to be at least three when computing the
median market-to-sales ratio of an industry. When a two-digit SIC industry has fewer than three
single-segment firms, we use the median ratio of the corresponding broad industry group as

Berger and Ofek (1995) calculate market values relative to both assets and sales by segment. Asian

firms generally do not report assets breakdown by segments. We therefore can calculate the ratio of
market values to sales only (see also the discussion in Lins and Servaes (1999)).
9

If a segment can not be associated with a reported SIC code, we determine the segments SIC code

according to its business description. If a segment is associated with multiple SIC codes, it is broken
down equally so that each segment is associated with one SIC code. We classify firms as singlesegment if at least 90 percent of their total sales are derived from one two-digit SIC segment. Firms
are classified as multi-segment if they operate in more than one two-digit SIC code industries and
none of their two-digit SIC code segments accounts for more than 90 percent of total firm sales.

19

defined by Campbell (1996).10 When an industry, even defined broadly, has fewer than three
single-segment firms, we use the median of all firms in the country. This procedure avoids the
loss of observations but could introduce a bias in the excess value measure. The bias is inversely
related to the availability of single-segment firms. For most firms in our sample, we are able to
find matching single-segment firms at the narrow or broad industry group level. We therefore do
not expect such bias to be significant.
We use Amsteel Corporation BHD, the third largest steel producer in Malaysia, to
illustrate the excess value measure we construct (Table 4). The market-to-sales ratio of Amsteel
is 1.62, the ratio of total market capitalization (US$3,120 million) to total sales (US$1,929
million). We are able to identify nine steel producing Malaysian firms in the sample. Their
median market-to-sales ratio is 1.68. Dividing Amsteels ratio by the median industry ratio for
steel firms, we obtain the conventional industry-adjusted value, 0.96.

By this measure,

Amsteels performance is roughly comparable to the rest of the industry.

However, as shown in Panel B, steel sales accounts for only 24 percent of Amsteels total
sales revenues. The remaining 76 percent of revenues come from five other industries: retailing
and distribution (23%), motors (23%), food and agricultural products (12%), computers (11%),

10

The sectors are defined as follows: Petroleum industry (SIC 13 and 29); Finance and Real Estate

(SIC 60-69); Consumer Durables (SIC 25, 30, 36, 37, 50, 55, and 57); Basic Industry (SIC 10, 12, 14,
24, 26, 28, 33); Food and Tobacco (SIC 1, 20, 21, 54); Construction (SIC 15-17, 32, 52); Capital
Goods (SIC 34, 35, and 38); Transportation (SIC 40-42, 44, 45, and 47); Utilities (SIC 46, 48, and
49); Textiles and Trade (SIC 22-23, 31, 51, 53, 56, 59); Services (SIC 72-73, 75, 80, 82, 89); and
Leisure (SIC 27, 58, 70, 78-79).

20

and property development (7%). Using the conventional method of matching firms by industry
peers, the performance of the non-steel segments, which comprise three-quarters of the firms
revenues, is left unadjusted. Moreover, the matching firms could be diversified firms as well. In
fact, of the nine steel-producing firms in Malaysia, only four are single-segment firms. The
remaining five firms also operate in non-steel industries. The median ratio computed for these
firms thus does not properly reflect the valuation of the steel industry in Malaysia.
To mitigate these problems, we adjust industry performance at the segment level instead
of the firm level. For each of the Amsteels six segments, we restrict its industry-matching firms
to be single-segment firms. We first select firms that generate over 90 percent of revenues from
one 2-digit SIC industry. We find four such firms for the steel segment and five for the food and
agricultural segment. We are not able to find a sufficient number of single-segment firms for the
remaining four segments. For these segments, we search for single-segment firms within the
broad industry groups as defined by Campbell (1996). We are able to find at least three matching
firms for all four segments.
Once the appropriate matching firms are identified, we compute the median market-tosales ratios for each of the segments. These ratios are reported in the last column of Panel B. To
obtain Amsteels imputed market-to-sales ratio, we multiply each of the segment ratios by the
corresponding sales revenue fractions and sum the multiples across the six segments. The
imputed ratio is 2.50. It is substantially higher than 1.68, the median market-to-sales ratio
computed using the conventional method. The difference derives from two sources. First, the
steel segments market-to-sales ratio (2.35), estimated from single-segment firms, is quite
different from the ratio (1.68) computed in the conventional method which includes both single21

and multi-segment firms. Second, the six industries have different median market-to-sales ratios
which range from 1.65 (the Motors segment) to 4.96 (the Property segment). The weighted
average across the six segments is thus higher than the conventional measure. We next multiply
Amsteels imputed market-to-sales ratio by total sales revenue to obtain the imputed valuation,
US$4,823 million. Dividing actual value by imputed value, we obtain a revised value ratio of
0.65. By this measure, Amsteel has considerably under-performed its industry peers.11

V.

Evidence of expropriation of minority shareholders

We seek evidence for the following three hypotheses derived from the existing theoretical

literature. First, the value of the firm is expected to be increasing in the concentration of cashflow rights in the hands of block-holders, as suggested by Jensen and Meckling (1976). Second, a
negative effect is expected on firm value from concentrated voting rights. This is because once
large owners gain nearly full control of the company, they prefer to generate private benefits of
control that are not shared by minority shareholders (Shleifer and Vishny, 1997, p.759).
Finally, we expect to find that firm valuation is an increasing function in the ratio of cash-flow to

11

The market valuation variable, EXV, is a preferred measure compared to accounting variables in

measuring expropriation of minority shareholders. This is because accounting measures, such as net
income, will not capture the degree of expropriation currently taking place as well as the
expropriation expected to happen in the future. Expropriation would, however, be captured by the
net-income-to-price ratio. Morck et al. (1988) and McConnell and Servaes (1990) use a similar
measure to study the effect of management entrenchment.

22

voting rights, as the benefits of expropriation rise with the wedge between cash-flow and voting
rights as argued in Grossman and Hart (1988) and Harris and Raviv (1988).
We start by regressing market valuation, EXV, on cash-flow and voting rights, focusing on
the pooled (across countries) results and using linear relations.

We employ the following

regression models:
(1)

EXV = Intercept + b1*CASH + b2*CES + u

(2)

EXV = Intercept + b1*VOTES + b2*CES + u

(3)

EXV = Intercept + b1*CASH + b2*VOTES + b3*(CASH/VOTES) + b4*CES + u

where EXV is excess value, CASH is cash-flow rights of the largest block-holder, VOTES is the
voting rights of the largest block-holder, and CASH/VOTES is the ratio of cash-flow to voting
rights of the largest block-holder. We include the capital expenditures over sales ratio, CES, as a
control variable, following Lang and Stulz (1994).

This ratio accounts for investment

opportunities available to the firm. Country dummies are not included since the valuation
measure is industry-adjusted using the firms within each country.

Thus, the median single-

segment firm in each country has an access value of zero. When we do include country dummies
to test the robustness of the estimation, however, they are jointly insignificant. We employ the
ordinary least-square (OLS) method in the regression analysis, since the dependent variable is not
limited.
We start with the sample of corporations which have a block-holder with at least 10% of
votes. We find that higher cash-flow rights by the largest block-holder are positively related to
excess valuation (Table 5, panel A). The coefficient on the CASH variable is 0.4984, and is
statistically significant at the 1% level. The concentration of voting rights of the largest block23

holder is negatively, but not significantly, related to excess valuation (column 2), with a
coefficient of 0.2116, suggesting that higher concentration of control leads to the expropriation
of minority shareholders. The separation of ownership and control yields a negative effect on
market valuationthe sign on CASH/VOTES is significantly positive (column 3), consistent
with the hypothesis that deviations of voting from cash-flow rights are associated with
expropriation. The parameter estimate is 0.5991 with a t-statistic of 10.9074. The regressions
result suggests that, at the margin, a 10 percentage points increase in the separation between
cash-flow and voting rights leads to a market discount of 6 percentage points.

In this

specification, voting rights continue to have a negative and significant effect on market valuation,
with a coefficient of 0.6057 (and a t-statistic of 4.5542).
We also find that market valuation is positively associated with higher investment, as
measured by capital expenditures over sales (CES), consistent with the findings in Lang and Stulz
(1994). In other regressions, we also included company size (the natural logarithm of total
assets) and operational performance (net operational revenues) as these have been found to be
significant in other studies. Neither of these variables was, however, statistically significant in
explaining the cross-sectional variation in market valuation in this sample.

We consequently

dropped them from the regression specification. The inclusion of the company size proxy does
not change the magnitude of the estimated coefficients in a significant fashion, suggesting that
excess valuation is not associated with economies of scale. Country dummies are also jointly
insignificant, as expected.

24

As a robustness check, we test whether these results are sensitive to the 10% cut-off in
voting rights. We use the 20% cut-off (panel B) and find that the magnitude of the coefficients
increases somewhat, but that none of the coefficients loses its statistical significance. Comparing
with Panel A, the voting rights variable becomes significantly negative at the 5% level. Therefore,
our findings do not depend on the particular cut-off chosen for voting rights; the higher
coefficients actually suggest that expropriation is more of an issue at higher levels of control.
Although consistent with the expropriation hypothesis, the findings so far do not shed
light on whether a particular type of owner, and not the separation of ownership and control per
se, is responsible for the results. We therefore study separately the effects of ownership by
families, financial institutions, corporations and the state on market valuation. We use a similar
regression as before and consider the effects of cash-flow and voting rights again separately, and
as a ratio.
As East Asian corporations are often characterized as family controlled, we start with
investigating whether families are a major factor behind our finding of expropriation for those
corporations where families are the largest control block-holder. The number of corporations for
which family is the largest block-holder is 1,138, or about half of the sample. We find that the
effect of family ownership concentration is qualitative very similar to those found for all classes
of ownership combined, although the statistical significance is diminished (Table 6). As before,
we find weak evidence of a positive impact of cash-flow rights, and strong evidence of negative
impacts on EXV of voting rights and the separation of cash-flow and voting rights. The higher
coefficients on VOTES and CASH/VOTES than for all ownership classes combined suggest that
expropriation may be a more serious issue for family controlled corporations.
25

We next study ownership by financial institutions. We find that cash-flow ownership by

financial institutions is positively associated with corporate valuation, and that the separation of
ownership and control brings about a valuation discount. Control alone does not appear to lead
to lower market valuation as the coefficient on VOTES is not significant. For corporate
ownership, we find, albeit somewhat weaker, evidence to suggest that corporations, in their role
as large shareholders, also generally use the separation of ownership and control to expropriate
minority shareholders. Control alone again does not appear to lead to lower market valuation, as
the coefficient on VOTES is not significant, and cash-flow rights are not positively and
significantly related to market values. The association between state ownership and market
valuation is, however, insignificant regardless of whether cash-flow or voting rights, or the ratio
between the two are used as independent variables. The lack of significance of the state
ownership variable suggests that two types of expropriation might be going on. The state might
be expropriating some value from public shareholders, but might also be expropriating value from
the taxpayers (the ultimate parent).

VI.

Country-Effects
To investigate differences across countries, and as a robustness check, we study the

effects of cash-flow and voting rights on market valuation by each country individually. Since the
Japanese sample accounts for a large portion of the data set and Japanese ownership structures
are quite different from that in the other East Asian countries, we investigate separately the
effects of different types of owners in Japan on market valuation. Since there are only 14

26

companies with significant state ownership in the Japanese sample, and since none of them have
a separation of control from ownership, we exclude this ownership category from the analysis.
Overall, higher concentration of cash-flow rights in Japan is associated with higher market
valuation, and the separation of ownership and control is associated with a value discount (Table
7). The results appear driven by ownership and control of financial institutions, where we find a
positive effect of cash-flow rights and a strong positive effect of the ratio of cash-flow to voting
rights. In contrast, none of the coefficients for family or corporate ownership regressions are
statistically significant. These findings support the results of Kang and Stulz (1998), who show
that Japanese firms whose debt had a high fraction of bank loans in 1989 performed worse from
1990 to 1993, possibly as Japanese financial institutions extract a rent from their borrowers; and
the findings of Morck and Nakamura (1999), who document that Japanese financial institutions
do not provide good corporate governance.
The results for the other countries show that the expropriation hypothesis is not
supported for the Malaysia, Singapore, and Taiwan samples, where none of the coefficients on
the separation of voting from cash-flow rights are statistically significant (Table 8). The results
for Korea are significant for the cash-flow over voting rights variable, but not otherwise. For the
Hong Kong sample, we find statistically significant results for the voting rights and the cash-flow
over voting rights variables.

In case of the Indonesian, Philippine, and Thai samples,

the

coefficients for the cash-flow over voting rights variables are very large and significant, 1.5305,
1,4215 and 1.5562 respectively, suggesting a high degree of expropriation. This may be due to
the large role of families in ownership and, in Indonesia and the Philippines, the relatively large
separation between cash-flow rights and voting rights.
27

VII.

Conclusions
This paper documents the relation between concentration of ownership and control and

their separation, on the one hand, and market valuation, on the other hand. We find that higher
cash-flow rights are associated with higher market valuation, but higher voting rights with lower
market valuation. The separation of control from ownership is associated with lower market
values, which we interpret as evidence of expropriation of minority shareholders by controlling
shareholders. Studying individual ownership classes, we conclude that family control is an
important factor behind the negative relation between control rights and market valuation. In
contrast, we find no evidence of expropriation for state control and control by widely-held
corporations.

In Japan separation of cash-flow and voting rights in the hands of financial

institutions lowers market valuation. The results on expropriation are the strongest for the
Indonesian, Philippine, and Thai samples. We conclude that the risk of expropriation is the major
principal-agent problem for large publicly-traded corporations, as suggested by La Porta et al.
(1998), Bebchuk (1999), and Morck et al. (1999).
It is likely that the degree to which certain ownership structures are associated with
expropriation depends on country-specific circumstances. These may include the quality of
banking systems, the legal and judicial protection of individual shareholders, and the degree of
financial disclosure required. The exact magnitude to which these institutional variables affect the
degree of expropriation is an issue of important policy relevance and of potential future research.

28

Several interesting questions merit further investigation. First, what ways to restrict the
separation of ownership and control are most effective in balancing the effects of improved
monitoring, as a result of ownership concentration, with the risks of expropriation? Second, the
fact that expropriation exists leaves unanswered the question why minority shareholders invest
in companies if they fear expropriation. One answer could be that these shareholders face limited
investment opportunities. While they may fear expropriation, other investment alternatives do
not yield higher risk-adjusted returns. A financially repressed financial system, for example,
with low bank deposit rates and limited capital account convertibility might well mean that the
net returns on stocks are still attractive, even though there is (widespread) expropriation. These
and other issues are left unexplored here.

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35

Table 1: Cross-Holdings among the Main Companies in the Fuyo Group

(in percentage)
This table shows the cross-holdings among the main members of the Fuyo group, the fourth largest keiretsu in Japan. The rows show
ownership and control in the respective column entries. Cash-flow rights are denoted with C and voting rights are denoted with V.
For example, Fuji Bank has C&V 4.9% in Oki Electric, C&V 16.8% in Yasuda Trust Bank, etc. Marubeni Corporation has C&V 0.4%
in Fuji Bank, C&V 0.3% in Oki Electric, C&V 2.4% in Yasuda Trust Bank, etc.

Owner/Recipient

Fuji
Bank
Fuji Bank
-Oki Electric
C&V 7.5
Yasuda Trust Bank C&V 2.8
Marubeni Corp.
C&V 0.4
Yasuda F&M
C&V 1.2
Nippon Seiko
C&V 1.1
Nihon Cement
C&V 1.5
Showa Denko
C&V 1.0
Nippon Kokkan
-Yasuda Life
C&V 4.4
Insurance

Oki
Yasuda Trust
Electric
Bank
C&V 4.9
C&V 16.8
-C&V 3.4
C&V 4.9
-C&V 0.3
C&V 2.4
C&V 7.0
C&V 2.2
C&V 0.6
C&V 1.1
C&V 1.1
C&V 1.4
--C&V 1.0
C&V 1.0
C&V 7.5
C&V 8.6

Marubeni
Corp.
C&V 4.7
C&V 0.8
C&V 5.1
-C&V 3.9
C&V 0.3
C&V 0.2
C&V 0.4
-C 4.7; V 6.5

Yasuda Fire
and Marine
C&V 5.0
C&V 2.6
C&V 4.9
C&V 6.0
--C&V 0.9
C&V 0.6
-C&V 4.2

36

Nippon
Seiko
C&V 4.1
C&V 0.9
C&V 7.2
-C&V 6.2
---C&V 1.2
C&V 4.4

Nihon
Cement
C&V 4.8
C&V 1.0
C&V 2.9
-C&V 2.1
--C&V 0.9
C&V 0.7
C&V 5.2

Showa
Nippon Kokkan
Denko
C 4.1; V 5.3
-C&V 1.1
-C&V 2.3
--C&V 1.7
C&V 5.1
C&V 2.3
-C&V 1.9
C&V 0.9
C&V 1.4
-C&V 1.1
C&V 0.7
-C 4.8; V 5.6
C&V 5.1

Table 2: Control of Publicly-Traded Companies in East Asia

(percentage of the total number of companies in the sample)
Newly-assembled data for 2,980 publicly-traded corporations (including both financial
institutions and non-financial institutions) are based on Worldscope, supplemented with
information from the Asian Company Handbook 1999 (1998), the Japan Company Handbook
1999 (1998), the Securities Exchange of Thailand Companies Handbook (1998), and the
Singapore Investment Guide (1998). In all cases, we collect the ownership structure as of
December 1996 or the end of the 1996 fiscal year.
Country

Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand

Number of Share of Firms

Of which
Corporations
under
Family
State
Widely Held Widely Held
in Sample
Ultimate
Financial
Corporation
Control
10% cut-off for voting rights of the largest shareholder
330
99.4
64.7
3.7
7.1
23.9
178
99.4
68.6
10.2
3.8
16.8
1240
58.0
13.1
1.1
38.5
5.3
345
85.7
67.9
5.1
3.5
9.2
238
99.0
57.5
18.2
12.1
11.2
120
98.4
42.1
3.6
16.8
35.9
221
98.6
52.0
23.6
10.8
12.2
141
97.1
65.6
3.0
10.4
18.1
167
97.9
56.5
7.5
12.8
21.1
20% cut-off for voting rights of the largest shareholder
330
93.1
66.7
1.4
5.2
19.8
178
94.9
71.5
8.2
2.0
13.2
1240
20.2
9.7
0.8
6.5
3.2
345
56.8
48.4
1.6
0.7
6.1
238
89.6
67.2
13.4
2.3
6.7
120
80.9
44.6
2.1
7.5
26.7
221
94.5
55.4
23.5
4.1
11.5
141
73.7
48.2
2.8
5.3
17.4
167
93.5
61.6
8.0
8.6
15.3

37

Table 3: Separation of Cash-Flow and Voting Rights in East Asian Corporations (Largest Control Holder)
The newly-assembled data for 2,980 publicly-traded corporations (including both financial institutions and non-financial institutions) are collected from
Worldscope, the Asian Company Handbook, the Japan Company Handbook, the Securities Exchange of Thailand Companies Handbook (1998), the Singapore
Investment Guide (1998). In all cases, the data are as of December 1996 or the end of the 1996 fiscal year. A company needs to have an ultimate controlling
owner to be included in this table.

Panel A: Companies With an Investor Who Holds at Least 10% of Voting Rights
Country

Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
East Asia

Number of
Number of
Corporations Corporations
Where Voting
Exceed CashFlow Rights
327
89
177
108
706
454
293
80
237
94
117
40
215
150
135
61
164
25
2,371

1,101

Cash-Flow Rights

Voting Rights

Ratio of Cash-Flow to Voting Rights

Mean

Standard
Deviation

Median

Mean

Standard
Deviation

Median

Mean

Standard
Deviation

Median

27.519
27.712
10.843
20.839
26.245
25.068
23.009
20.215
36.577

11.878
13.264
10.608
9.533
12.289
12.202
11.492
10.335
13.294

26.000
26.000
8.000
20.000
24.000
23.000
22.000
21.000
36.000

31.834
36.669
15.801
23.942
31.633
27.894
30.395
24.335
39.042

11.335
11.692
8.624
9.334
11.110
11.354
10.364
9.612
12.779

29.000
36.000
12.000
23.000
32.000
25.000
31.000
23.000
42.000

0.873
0.758
0.606
0.882
0.831
0.892
0.742
0.815
0.941

0.225
0.248
0.350
0.216
0.232
0.197
0.221
0.225
0.161

1.000
0.809
0.600
1.000
1.000
1.000
0.750
1.000
1.000

21.296

13.794

20.000

26.173

12.928

24.000

0.773

0.291

1.000

Panel B: Companies With an Investor Who Holds at Least 20% of Voting Rights
Country

Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
East Asia

Number of
Number of
Corporations Corporations
Where Voting
Exceed CashFlow Rights
303
88
166
107
238
84
195
64
212
89
94
36
195
137
98
45
153
24
1,654

674

Cash-Flow Rights

Voting Rights

Ratio of Cash-Flow to Voting Rights

Mean

Standard
Deviation

Median

Mean

Standard
Deviation

Median

28.554
28.698
21.293
24.738
27.797
28.181
24.369
23.888
38.264

11.711
13.077
11.912
9.251
12.051
11.604
11.162
9.528
12.095

26.000
26.000
20.000
24.000
26.000
25.000
22.000
23.500
36.300

33.194
38.195
25.356
28.907
33.737
31.524
32.143
28.551
40.874

10.634
10.383
8.771
7.360
9.784
9.594
9.214
7.846
11.154

31.000
41.000
20.000
26.000
32.000
31.000
32.000
25.500
42.000

0.864
0.747
0.814
0.857
0.817
0.879
0.743
0.829
0.942

0.231
0.244
0.301
0.229
0.238
0.208
0.220
0.203
0.164

1.000
0.781
1.000
1.000
1.000
1.000
0.750
1.000
1.000

27.084

12.302

25.000

32.348

10.541

31.000

0.829

0.241

1.000

39

Mean

Standard
Deviation

Median

Table 4: Construction of the Valuation Measure

Panel A reports basic statistics of Amsteel Corporation and the Malaysian steel industry. Total
capitalization is the market value of common equity plus the book value of debt. The market to
sales (MTS) ratio is total capitalization divided by total sales. The imputed capitalization is the
firm's total sales multiplied by its imputed MTS ratio. The calculation of the imputed MTS ratio
is illustrated in Panel B.
Panel A: Industry-adjusted performance of Amsteel Corporation
Total capitalization of Amsteel Corporation (US$ million)
Total sales of Amsteel Corporation (US$ million)
Market-to-sales ratio of Amsteel Corporation
Median MTS ratio of steel producing firms in Malaysia
(4 single-segment and 5 multi-segment firms)
Conventional industry adjusted value of Amsteel
(MTS ratio of Amsteel / Median MTS ratio of steel firms)
MTS ratio of Amsteel imputed from single-segment comparables (See Panel B)
Imputed capitalization of Amsteel (Imputed MTS ratio*Total sales; US$ million)
Excess value, EXV, of Amsteel (Actual capitalization / imputed capitalization)

3,120
1,929
1.62
1.68
0.96
2.50
4,823
0.65

Panel B: Imputing Amsteel's market to sales ratio from single-segment peers

Segment Name

Steel
Retail & Distribution
Motors
Food & Agricultural
Computers
Property
Firm-level value

SIC
code

33
54
55
20
35
67

Segment Fraction
Sales
of Total
US$ million Sales

462
445
442
236
215
129

0.24
0.23
0.23
0.12
0.11
0.07

1,929

1.00

40

Single-segment
peers 2-digit SIC
industry

Broad industry
group (Campbell,
1996)

Number
of firms

Median
MTS

Number
of firms

Median
MTS

4
0
0
5
1
1

2.35
N.A.
N.A.
2.20
N.A.
N.A.

9
8
5
8
6
22

3.03
2.51
1.65
2.51
3.35
4.96

Imputed
MTS of
Amsteels
segments

2.35
2.51
1.65
2.20
3.35
4.96
2.50

Table 5: Cash-Flow Rights, Voting Rights, and Firm Value

This table presents the regression results for the relationship between excess valuation (EXV) and the
distribution of cash-flow and control rights. The independent variables include the share of cash-flow
rights held by the largest block-holder (CASH), the share of voting rights held by the largest blockholder (VOTES), and the ratio of cash flow to voting rights (CASH/VOTES). Total capital
expenditures over sales (CES) is included as a control variable. The regressions are performed on the
full sample using the ordinary least-square method. All data are for 1996. Companies which do not
have a block-holder with at least 10% of the vote or which do not report capital expenditures are
excluded from Panel A. Companies which do not have a block-holder with at least 20% of the vote
or which do not report capital expenditures or stock prices are excluded from Panel B. Absolute
values of t-statistics are reported under the coefficients.

Panel A
Explanatory Variable
Intercept
CASH

EXV

EXV

EXV

1.0764**
33.0421
0.4984**
3.9541

1.2492**
30.2411

0.8969**
19.5351

-0.2116
1.5829

-0.6057**
4.4554
0.5991**
10.9074
0.1705**
4.6792

VOTES
CASH/VOTES
CES

0.1299**
3.5080

0.1982**
5.2278

Number of Observations
Adjusted R 2

2,098
0.0142

2,098
0.0121

2,098
0.0539

EXV

EXV

EXV

0.9921**
19.2888
0.6843**
3.9660

1.3216**
18.1718

0.8097**
9.1595

-0.4236*
2.0733

-0.6007**
3.0425
0.7004**
9.3876
0.1673**
3.2077

Panel B
Explanatory Variable
Intercept
CASH
VOTES
CASH/VOTES

CES

0.0859
1.6399

0.1578**
2.9303

Number of Observations
Adjusted R 2

1,465
0.0117

1,465
0.0042

and ** represent significance at the 5 and 1 percent level respectively.

41

1,465
0.0474

42

38

Table 6: Cash-Flow and Voting Rights, and Expropriation

(By Ownership Types)
This table presents the regression results of the relationship between excess valuation (EXV) and the concentration of cash-flow and control rights. The
independent variables include the share of cash-flow rights held by the largest block-holder (CASH), the share of voting rights held by the largest block-holder
(VOTES), and the ratio of cash flow to voting rights (CASH/VOTES). Total capital expenditures over sales (CES) is included as a control variable. The
regressions are performed on the sample using the ordinary least-square method. All data are for 1996. Companies which do not have a block-holder with at least
10% of the vote or which do not report capital expenditures are excluded. Absolute values of t-statistics are reported under the coefficients.
Explanatory Variable
EXV
Intercept

Family Ownership
EXV
EXV

0.9888**
9.0954
0.3316
1.6119

CASH
VOTES

1.4892**
13.1812

0.8424**
5.9037

-0.9362**
4.7493

-0.8222**
4.2656
0.6627**
6.8068
0.0024*
2.4114

CASH/VOTES
CES

Observations
Adjusted R 2

0.0024*
2.4465
1,138
0.0032

0.0024*
2.4352
1,138
0.0158

1,138
0.0505

Financial Institutions
EXV
EXV
EXV
0.7537
1.8722
0.0161**
3.9909

1.2465**
3.3633

0.7222*
1.9717

-0.2375
0.5534

0.0016**
3.1889

0.0015**
2.8996

-0.6564
1.5382
0.6358**
7.0984
0.0015**
3.0089

521
0.0629

521
0.0411

521
0.1127

* and ** represent significance at the 5 and 1 percent level respectively.

43

EXV
1.3319**
5.1208
0.0462
0.0951

0.0004
0.2782
262
0.0067

Corporations
EXV

EXV

1.4582**
5.4718

0.8414*
2.3561

-0.3066
0.6006

-0.4239
0.8184
0.6588*
2.4444
-0.0002
0.0058

0.0004
0.3426
262
0.0051

262
0.0029

The State or Municipality

EXV
EXV
EXV
1.2976**
2.8699
0.8062
1.5089

0.0007
0.4216
169
0.0352

1.3412**
2.9468

1.3933*
2.2942

0.7017
1.2889

0.6988
1.2857
-0.0509
0.1215
0.0008
0.4433

0.0007
0.4401
169
0.0328

169
0.0267

Table 7: Cash-Flow and Voting Rights, and Expropriation in Japan

(By Ownership Types)
This table presents the regression results of the relationship between excess valuation (EXV) and the concentration of cash-flow and control rights. The
independent variables include the share of cash-flow rights held by the largest block-holder (CASH), the share of voting rights held by the largest block-holder
(VOTES), and the ratio of cash flow to voting rights (CASH/VOTES). Total capital expenditures over sales (CES) is used as a control variable. The regressions
are performed on the sample using the ordinary least-square method. All data are for 1996. Companies which do not have a block-holder with at least 10% of the
vote or which do not report capital expenditures or stock returns are excluded. State ownership is also excluded as a category as only 14 firms are controlled by
the state and none of them has a separation of cash-flow and control rights. Absolute values of t-statistics are reported under the coefficients.
Explanatory Variable
EXV
Intercept

1.0182**
8.3614
0.7005**
2.5193

CASH
VOTES

Full Sample
EXV
1.1402**
10.2407

0.9876**
9.5640

0.4523
0.1358

0.1722**
3.4910

0.1577**
3.1855

-0.8465*
2.3789
0.5023**
7.0194
0.1636**
3.4325

654
0.0254

654
0.0124

654
0.0765

CASH/VOTES
CES

Observations
Adjusted R 2

EXV

Family Ownership
EXV
EXV
EXV
1.4368**
8.7506
-0.7250
1.0484

0.2163
1.5391
136
0.0161

1.4754**
8.8163

0.9563**
3.4344

-0.9086
1.3295

-0.9123
1.3386
0.5368
1.8671
0.2138
1.5189

0.2102
1.4959
136
0.0202

136
0.0204

* and ** represent significance at the 5 and 1 percent level respectively.

44

Financial Institutions
EXV
EXV
EXV
0.9615**
11.8883
0.0287**
5.6234

1.1365**
8.0502

0.9418**
12.1106

-0.1882
0.3438

0.1924**
3.7007

0.1777**
3.3106

-0.7547
1.4666
0.6344**
7.1409
0.1720**
3.3886

456
0.0722

456
0.0193

456
0.1091

EXV
1.1472**
6.1025
-0.1791
0.2716

0.2076
0.0548
40
-0.0517

Corporations
EXV

EXV

1.2074**
6.0641

0.8425
1.6641

-0.3909
0.5472

-0.4874
0.6572
0.3949
0.8096
-0.0512
0.2454

0.2012
0.0256
40
0.0092

40
-0.0564

Table 8: Cash-Flow and Voting Rights, and Expropriation (By Country)

The dependent variable is excess valuation (EXV), the independent variables include the share of cash-flow rights (CASH), the share of voting rights (VOTES), the ratio of
cash flow to voting rights (CASH/VOTES), a control variable for total capital expenditures over sales (CES). The regressions are performed using the ordinary least-square
method. All data are for 1996 and companies where the largest block-holder has less than 10% of voting rights are excluded. Absolute values of t-statistics are reported.
Explanatory Variable
Hong Kong
Indonesia
Korea
Malaysia
EXV
EXV
EXV
EXV
EXV
EXV
EXV
EXV
EXV
EXV
EXV
EXV
Intercept
1.3416** 1.7123** 1.2994** 0.6361** 1.2465** 0.6577
1.0353** 1.3204** 0.8185** 0.8713** 0.9439** 0.6007*
9.0044
10.3016
4.8295
5.8002
7.3475
0.3573
7.6689
8.5675
3.3018
6.1277
5.1183
2.2774
CASH
-0.6362
1.7111**
0.0102
0.6386
1.3598
4.2532
1.8072
1.1938
VOTES
-0.0171** -0.0162**
-0.4629
-0.3015
-0.3015
-0.0014
0.2969
0.3112
3.6980
3.5099
1.0573
0.7336
0.5792
0.0235
0.5089
0.5384
CASH/VOTES
0.4332*
1.5305**
0.5133**
0.4050
2.1506
8.3786
2.5851
1.7051
CES
0.4249*
0.7338*
0.7903*
0.4353
0.6319
0.3997
0.1876
0.2218
0.2002
0.6750** 0.6810** 0.6745**
2.0568
2.1414
2.2568
1.4691
1.9583
1.3608
1.6896
1.9617
1.7994
3.5833
3.6802
3.5404
Observations
Adjusted R 2
Explanatory Variable

Intercept
CASH

327
0.0163

327
327
0.0542
0.0623
The Philippines
EXV
EXV
EXV

1.1573**
6.9429
0.4070
0.7735

VOTES

1.4540**
8.1103

0.2950
1.6107

-0.7125
1.4833

-0.9240
1.9320
1.4215**
6.8753
-0.0199
0.8204

CASH/VOTES
CES

Observations
Adjusted R 2

-0.0033
1.2942
97
0.0063

-0.0033
1.3083
97
0.0072

97
0.1444

177
0.1008
EXV
1.0034**
7.9234
0.5042
1.0935

0.1190
0.6933
206
-0.0048

177
0.0199
Singapore
EXV

177
0.2551

178
0.0292

EXV

EXV

1.1758**
7.4615

0.8606**
3.6534

-0.1794
0.3870

-0.3675
0.7749
0.4988
1.7781
0.1895
0.8542

0.1838
1.1259
206
-0.0087

206
0.0013

45

0.9178**
5.4871
1.4181*
1.9946

178
0.01309
Taiwan
EXV

178
0.0391

237
0.0430

EXV

EXV

0.8992**
3.5157

0.5525
1.9359

1.2390
1.3688

0.9530
1.2351
0.5142
1.1168
0.7712*
2.3725

0.7384**
2.4639

0.7132**
2.6045

89
0.0821

89
0.0738

89
0.0781

0.8429**
4.8175
0.7648
1.7370

0.4197
1.5236
133
0.0326

237
0.0359
Thailand
EXV

237
0.0432
EXV

1.2895**
6.5923

-0.2279
1.0153

-0.4419
0.9744

-0.2438
0.5784
1.5562**
9.0209
0.4022
1.3705

0.4573
1.5435
133
0.0219

133
0.1192

and ** represent significance at the 5 and 1 percent level, respectively.

Table A1: Sources of Ownership and Control Data for East Asian Firms

Country
Hong Kong

Immediate Ownership Data

Worldscope

Dual-Class Shares
Datastream

Business Groups: Pyramids and Cross-Holdings

Chu, Yin-Wah and Gary Hamilton, 1993, Business Networks in Hong
Kong, University of California, Davis, mimeo.

Asian Company Handbook

Hong Kong
1997

Company

Far Eastern Economic Review, 1992, Have Cash, Will Travel, March
5, Special Section on the Li ka-Shing Conglomerate

Handbook

Hong Kong Company Handbook, 1998

Indonesia

Worldscope

Datastream

Fisman, Ray, 1998, Announcement Effects of Suhartos Illnesses on

Related Companies, Working paper, Harvard Business School.

Asian Company Handbook

Handbook of Indonesian Companies

1996

Handbook of Indonesian Companies

1996

W.I.Carr Banque Indosuez Group,

Connections, Jakarta, Indonesia

1997,

Indobusiness, 1998, 1995 Ranking of

Conglomerates,
available
http://indobiz.com/company/warta/conglo/htm
Japan

Worldscope

Datastream

Indonesian
Indonesian

Group
Largest
at

Dodwell Marketing Consultants, 1997, Industrial Groupings in Japan:

the Anatomy of the Keiretsu, 12th Edition, 1996/1997, Tokyo,
Japan.

Japan Company Handbook

Sato, Kazuo, 1984, The Anatomy of Japanese Businesses,

M.E.Sharpe, Chapter 4.
Korea (South)

Worldscope

Datastream

Korean Fair Trade Commission, 1997, 1996 List of Largest 30

Chaebol, Seoul, Korea.

Asian Company Handbook

Lim, Ungki, 1998, Ownership Structure and Family Control in
Korean Conglomerates: with Cases of the 30 Largest Chaebol, Seoul
University, Korea.

46

Table A1 (continued)

Country
Philippines

Singapore

Taiwan

Immediate Ownership Data

Worldscope

Dual-Class Shares
Datastream

Business Groups: Pyramids and Cross-Holdings

Philippine Stock Exchange, 1997, Investment Guide 1996, Manila.

Asian Company Handbook

Philippine Stock Exchange

Investments Guide 1997

Philippine Stock Exchange

Investments Guide 1997
Worldscope

Tan, Edita, 1993, Interlocking Directorates, Commercial Banks, Other

Financial Institutions, and Non-Bank Corporations, Philippine
Review of Economics and Business, 30, 1-50.

Datastream

Singapore Stock Exchange, 1997, Singapore Company Handbook.

Asian Company Handbook

Singapore Investment Guide 1997

Hiscock, Geoff, 1998, Asias Wealth Club, Nicholas Brealey.

Worldscope

Datastream

China Credit Information Service, 1997, Business Groups in Taiwan,

1996-1997, Taipei, Republic of China.

Asian Company Handbook

Thailand

Far Eastern Economic Review, 1994, The Money Machine, August

11, for the corporate holdings of the Kuomintang.
Tara Siam Ltd., 1997, Thai Business Groups 1996/1997: A Unique
Guide to Who Owns What, Bangkok, Thailand.

Worldscope

Datastream

Asian Company Handbook

Securities Exchange of Thailand

Companies Handbook 1997
The Nation, 1998, Thai Tycoons: Winners and Losers in the
Economic Crisis, July, Special Issue.

Securities Exchange of Thailand

Companies Handbook 1997

Far Eastern Economic Review, 1997, From Chickens to Microchips:

the Story of Thai Conglomerates, January 23.

Figure 1: The Fuyo Group (Japan)

47

This figure shows the organizational structure of the Fuyo group, the fourth largest keiretsu in Japan. The principal shareholder is
shown in thick-bordered box. Cash-flow rights are denoted with C and voting rights are denoted with V. Pyramidal holdings are
denoted with solid lines. The numbers represent the percentage of cash-flow and voting rights. The difference between ownership and
control at any given node implies that shares with superior voting rights are used. No cross-holdings are reported on this figure.
Yasuda Life Insurance
A Widely-Held Financial
Institution

C&V 7.5

C&V 5.2

Oki Electric

Showa Denko

C&V 4.2

Nippon Seiko

Fuji Bank

C&V 5.1

Yasuda Fire and Marine

Insurance

C&V 4.4

C&V 4.4

C 4.8; V 5.6

Nihon Cement

Nippon Kokkan

C 4.7; V 6.5

C&V 8.6

Marubeni Corp.

Yasuda Trust Bank

48

Figure 2: Yasuda Trust Bank (Japan)

This figure shows the organizational structure of Yasuda Trust Bank, the second largest company in the Fuyo group in terms of
market capitalization. The principal shareholder chain is shown in the two thick-bordered boxes. Cash-flow rights are denoted with
C and voting rights are denoted with V. The numbers represent the percentage of cash-flow and voting rights. Pyramidal holdings

Yasuda Life Insurance

C&V 8.6
Yasuda Trust Bank

C&V 7.2
Nippon Seiko

Oki Electric

C&V 2.3
Showa Denko

C&V 4.9

C&V 2.8

C&V 4.9

Fuji Bank

C&V 2.9

Katakura Co.

49

Marubeni Corp.

Yasuda Fire and Marine

Insurance

C&V 5.2

Nihon Cement

C&V 5.1

C&V 5.0
Japan Carlit

are denoted with solid lines. There are no cross-holdings or shares with superior voting rights being used.
Figure 3: Fuji Bank (Japan)
This figure shows the organizational structure of Fuji Bank, the third largest company in the Fuyo group in terms of market
capitalization. The principal shareholder chain is shown in the two thick-bordered boxes. Cash-flow rights are denoted with C and
voting rights are denoted with V. The numbers represent the percentage of cash-flow and voting rights. Pyramidal holdings are
denoted with solid lines, cross-holdings are denoted with dotted lines.

Yasuda Life Insurance

C&V 4.4

C&V 4.9

C&V 5.0

Fuji Bank

C&V 4.1

C&V 4.8

C&V 4.9

Nippon Seiko

Oki Electric

C&V 16.8

C&V 3.1

C&V 7.2

Tabai Espec

C&V 32.4

Tsurumi
Mfg
.

C&V 13.7

Toyo Sugar

Toho Zinc

C&V 11.0

C&V 5.2

C&V 5.0

Marubeni Corp.

Yasuda F&M

C&V 7.9

C&V 6.3

Toa Corp.

C&V 11.2

Hoko Fishing

Showa Denko

Nihon Cement

C&V 4.7

Yasuda Trust Bank

C 4.1; V 5.3

C&V 13.1

Kanto Bank

C&V 14.3

Showa Lines

C&V 9.6

AmateiInc.

DaishowaPaper

C&V 14.3

Japan Carlit

Okano Valve

50

C&V 12.6

C&V 5.1

Tatamono Inc.

C&V 15.2

Daito BankLtd

C&V 15.7

KajiTechnol.

Katakura Co.

C&V 11.7

M.Construction

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