The downside of absence of controlling shareholders: evidence from management trading abnormal return

Abstract

More and more Chinese-listed companies report the loss of controlling shareholders in recent years. This seems to be a boon to the Chinese capital market, which is plagued by tunnelling from controlling shareholders. Employing the absence of controlling shareholders as a novel event, this study analyzes its influence on management rent-seeking behaviour, as measured by management trading abnormal return. The results show that absence of controlling shareholders will lead to higher abnormal returns for management on share transactions. A channel analysis shows that information asymmetry and equity incentives are two moderators in the association between absence of controlling shareholders and management trading abnormal return. The results also show that the effect is less pronounced for companies with a high equity concentration and a high level of analysts following, and for companies facing a highly developed financial environment. Thus, although the type-II agency problem disappears when companies lose controlling shareholders, the type-I agency problem could be worse.