Do capital structure and cash holding expropriate minority shareholders? A case of non-financial concentrated firms in Pakistan
| Pages | 1289-1305 |
| DOI | https://doi.org/10.1108/JFC-03-2020-0033 |
| Date | 10 June 2020 |
| Published date | 10 June 2020 |
| Author | Wajid Alim,Muhammad Kaleem,Sammar Abbas,Dilawar Khan |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Do capital structure and cash
holding expropriate minority
shareholders? A case of
non-financial concentrated
firms in Pakistan
Wajid Alim
Lahore School of Accountancy and Finance,
University of Lahore, Lahore, Pakistan
Muhammad Kaleem and Sammar Abbas
Institute of Business Studies, Kohat University of Science and Technology,
Kohat, Pakistan, and
Dilawar Khan
Department of Economics, Kohat University of Science and Technology,
Kohat, Pakistan
Abstract
Purpose –One aspect of agency theory suggeststhat dominant shareholders use the firm’s assets for their
personal benefits and 1thus expropriate minority shareholders (tunneling). Accordingly, this paper aims to
examine the effectof capital structure and cash holding decisions on minorityshareholders’expropriation for
short and long periods.
Design/methodology/approach –Data of 16 years (2000-2015) has been obtained from 200 non-
financial firms registeredat Pakistan Stock Exchange (PSX). The study used fixed effect and autoregressive
distributedlagged to obtain the results.
Findings –The results suggest that the presenceof more debts in capital structure is positively associated
with minority shareholders’expropriation, whereas a negativeassociation has been found between the level
of cash holding and minority shareholders expropriation. These results have been observed as significant
both for the shortand long run.
Research limitations/implications –This study also suggests some important measures to control
minorityshareholders’expropriation by the dominantshareholders and thus to protect their rights.
Originality/value –There is a lack ofliterature for this severe issue in the developingcountries especially
Pakistan, so this study narrates the potential measures to the regulatory authority of the market to curb
tunnelingand to protect minority shareholders.
Keywords Capital structure, Cash holding, Auto regressive distributed lagged, Tunneling
Paper type Research paper
Introduction
Non-financial concentrated firm are usually featured with an inherent conflict between
minority and majority shareholders (Porta et al., 1999). These firms have a distinctive
corporate governance mechanism (ownership pattern, agency conflict, monitoring) which
benefit the majority (dominant) shareholders and proponents such financial practiceswhich
Capital
structure and
cash holding
1289
Journalof Financial Crime
Vol.27 No. 4, 2020
pp. 1289-1305
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-03-2020-0033
The current issue and full text archive of this journal is available on Emerald Insight at:
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negatively influence minorityshareholders (Wei and Zhang, 2008). It has been found that in
these firms dominant shareholders secure their personal benefits through tunneling and
thus expropriate minority shareholders(Lin et al., 2012). Tunneling refers to illegal financial
practices where dominant shareholders use firm’s resources for their own benefits and
deprive minority shareholders of theirdue benefits. Dominant shareholders in concentrated
firms do not favor more debtsrather support internal capital by holding morecash and thus
avoid external credit monitoring (Jensen, 1986;Jensen and Meckling, 1976). It has been
observed that in concentrated firms, operating in countries with weaker legal systems,
dominant shareholders usually retain control of firm’s assets by holding surplus cash and
lesser amount of debts. Weaker legal system provide space to dominant shareholder in
securing their benefits as there as fewer chances of being caught(Chiou et al., 2010;Faccio
et al.,2010)(Becker,1968).
It has been found that debts and cash holding policies can benefit as well harm a firm.
For example, more debts can provide tax shield but on the other hand increase chances of
bankruptcy. Similarly,holding more cash can ensure internal capital availability,but it also
send negative signals to market thatfirm is afraid of taking risk (Grossman and Hart, 1982).
Debt financing provides firm with more cash availability and thus management does not
need to issue more equity. This helps dominant shareholders to avoid ownership and
dividend dilution. Thus, debt financing is used as a tool by dominant shareholders to use
firm’s assets for their personalbenefits. Similarly, holding more cash reduces firmreliability
on external debts, help to secure benefiting opportunities, avoid bankruptcy but canalso be
used by dominant shareholders for their personal use through inter-corporate loans and
more dividends (Chiou et al., 2010). This usually happens where firms have weak corporate
governance structure.
Weak corporate governance structure helps dominant shareholders enjoy more powers
to secure their personal benefit at the cost of the minority shareholders’benefits. (Johnson
et al.,2000)(Bertrand et al.,2002;La Porta et al.,2003) This is known as tunneling.
Tunneling does not always harm but can provide firm with tunneled funds, which can be
used for investment and dividend purposes. It can also save firms from expropriation by
injecting funds from one firm to another (Cheung et al., 2006). However, there are fewer
evidences that tunneling positively influence firm. Majority evidences suggest that
tunneling always lead to expropriation of minority shareholders in the form of salaries to
dominant shareholders, transfer pricing, subsidize personal loan, non-arm’s length asset
transaction, outright theft, pricing, use of assets of the member firms as collateral for
another and inflated payment for intangible asset like patent, insurance and brand name
(Bertrand et al.,2002;Johnsonet al.,2000).
In past, due to weak corporate governance system prominent Pakistani firms (e.g. Taj
Company, Crescent Bank,Engro, PTCL, Mehran Bank, etc.) met with financial scandals and
failure (Amad, 2002). There are evidences of tunneling in Pakistani concentrated firms,
where dominant shareholders use firm’sassets for personal benefits (Ullah and Shah, 2015),
and they hold extra non-tradable shares (Anjum and Sadiq, 2012). Accordingly, this study
aims to examine the effects of leverage policy (debt policy) and cash holdings within the
firms on minority shareholders expropriation (tunneling) both in long run and short run,
which has been overlookedby previous studies.
Literature review/theory and hypothesis development: capital structure
Capital structure decision is one of the major financial decisions and many other financial
decisions depends on this. A firm’s main objectiveof owners’wealth maximization is can be
achieved when it makes an efficientcapital structure decision that bears minimum financing
JFC
27,4
1290
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