empirical study of capital structure on agency costs in：實(shí)證研究資本結(jié)構(gòu)對(duì)代理成本

NatureandScience,1(1),2003,HongxiaLiandLimingCui,EmpiricalStudyofCapitalStructure

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EmpiricalStudyofCapitalStructureonAgencyCostsinChineseListedFirms

HongxiaLi*,LimingCui**

*SchoolofManagement,HarbinUniversityofScienceandTechnology,Harbin,Heilongjiang150080,China;**AstonBusinessSchool,AstonUniversity,Birmingham,B47ET,UK.

lhx_2002@

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Liming_cui@

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Abstract:Thisstudyexaminestheimpactofcapitalstructureonagencycostsin211non-financialChineselistedfirmsfortheperiod1999-2001.Therearetwomainfindings.(1)Firmswithhighdebttoassetratiohavehighratioofannualsalestototalassetsandhighratioofreturn-on-equity.Ifafirmhasahighdebttoassetratio,creditorsaremuchmoreconcernedaboutthepaymentofinterestandrepaymentofprincipalandwillhaveincentivestomonitorthefirm.Thus,acapitalstructurewithhighdebtdecreasesagencycosts.(2)Positiveandsignificantcorrelationisidentifiedbetweenownershipconcentrationandthereturn-on-equityratio.Thisisbecausethelargestshareholdershaveastronginterestinfirmperformanceandthereforeahighabilitytoreduceagencycosts.Ourempiricalresultsfurtherillustratethatfirmshaveinclinationofrefinancingthroughstockmarketandharmsmallshareholders’interest.[NatureandScience2003;1(1):12-20].

Keywords:capitalstructure;agencycosts;corporategovernance

1.Introduction

TheChinesestockmarketwasestablishedintheearly1990s.Bylistingonthestockexchange,state-ownedenterprises(SOEs)haveimprovedtheirdebttoassetratio,andpromotedtheirdevelopmentbydirectlyfinancingfromthestockmarket.After10years’development,therearemorethan1200listedfirmsonthetwostockexchangesnow.ThetotalmarketcapitalisationattheendofMarch2001wasRMB(Chinesedollar)5trillion,54%ofthelastyear’sGDP.Thisshowsthatlistedfirmsplayasignificantroleinthenationaleconomy.Ontheotherhand,ChinastillhasmuchtodoonreformincorporategovernanceThefinancialsupportprovidedbytheHeilongjiangProvinceNaturalScienceFundG01-10.

1Initsnarrowestsense,corporategovernanceisabouttherelationshipoftheownersorshareholdersofafirmwithitsmanager(IskanderandChamlou,2000),whichisoftencharacterizedbyeconomistsasthe“agencyproblem”.

.Forhistoricalreasons,themajorityofChina’slistedfirmswererestructuredandtransformedfrompreviousstate-ownedenterprisesorothergovernmentcontrolledentities2About75%oflistedfirmsareformerlystate-owned.Another10%arefirmsthatmostlyhadsignificantsharesheldbySOEs.Onlylessthan10%oflistedfirmsareformerlyprivate-ownedfirmsorforeign-investedfirms,whichinmostcaseshadSOEsastheirjointventurepartners.SeethewebsiteofChinaSecuritiesRegulatoryCommission:

andtherearemanyproblemsleftwiththegovernancestructure.Thecentralproblemwiththegovernancestructureistheambiguousdefinitionofthecontrollingpowerofthestateshares.Thisledtothefalseplacementofstateproperty.“Insidecontrol”problemisseriousThe“insidecontrol”viewpointwasairedin1995byJapanesescholarMasahikoAoki.

.Secondly,statesharesareuniquelybigandthereisseriousimpingementupontheinterestsofsmallshareholders.Thirdly,theboardofdirectorsisformedmainlybyexecutivedirectorsandcontrollingshareholders,directorslackintegrityobligations,failingtoperformtheirdutiesindustriouslyWuJinglian,June8,2001.Thebehaviourofcontrolshareholdersandcorporategovernance.Shanghaisecuritynews.

.Additionally,thereisnotmuchpressureofdividendfromshareholders,sore-financingoflistedfirmsusuallyplacetheorderofdebtafteradditionalorrightshares.Bypeckingorderpatternoffinancingobservedinadvancedcountrycorporations,firmsobtaincapitalbymakinggreateruseofinternalfinancefollowedbydebtandturningtostockmarketfinanceonlyasalastresort.Jensen’s(1986)freecashflowtheoryconsidersdebtcanmitigatetheagencyproblemsbetweenshareholdersandmanagersoffirmsandmotivatemanagementtoactintheinterestsoftheshareholders.Howwouldtheirfinancingpatternsdifferfromthoseofadvancedcountryfirms?Howtodecidethebeststrategyofrefinancing?

Therehasbeenmuchresearchconductedconcerningtheagencyproblemindevelopedmarkets.Therearethreegeneralwaysinwhichtoreducetheconflictsofinterestbetweenmanagersandtheshareholders:1)Increasingmanagementownershipbecausehighmanagementownershipalignstheinterestsofmanagementandshareholders(Jensen,1993;Ang,1999).2)Monitoringmanagementbylargeshareholders(Shleifer,1986).3)Usingdebtfinancingtodisciplinemanagers(Jensen,1986;Stulz,1990).Thefirstoptionisnotthefocusofthisstudy.ThisisbecausethevastmajorityofChina’slistedfirmsareformerlystate-ownedorstate-controlledfirms.Themanagementholdingofsharesisextremelylow,about0.03%ofthetotalshareholdingThestatisticsgetfrom:

.

,anditissubordinatetocontrollingshareholders.Thissituationwillnotchangeinthenearfuture.Similarly,thesecondoptionisalsoexcluded.Thestateholdssharesofmostlistedfirmsingreatconcentration,listedfirms,isnotreallyseparatedfromcontrollingshareholdersinpersonnel,financialaffairsandassets.DuetothecomplicatedmarketandadministrativeprocessassociatedwiththereformofChinesepropertysystem,manyconstraintswerepresentonreducingagencycoststhroughthefirsttwooptions.Thusourresearchconcentratedonthethirdoptionmentioned:theimpactofcapitalstructureonagencycosts.

Thecontributionofthisstudyistwo-dimensional.Firstly,itcontributestotheliteratureoftheimpactofcapitalstructureonagencycostsinChineselistedfirms.PlentyofresearchaboutChinesecorporategovernancehasfocusedmainlyonownershipstructure,Xu(2000),Zheng(2002),Shi(2000),Zhang(1996),etc.Thefocusofthisresearchistostudytheinterrelationshipbetweenthecapitalstructureoflistedfirmsandagencycostsofequity.Secondly,amongthelimitedresearch,Yangetal(2001)analysestheinterrelationshipbetweenthecapitalstructureoflistedfirmsandagencycosts.Noempiricalanalysishasbeenconductedsofar.Thispaperwillfillthegapinthisarea.Itprovidesevidenceonfirmcapitalstructureandagencycostsmeasuredintermsofratioofsalestototalassetsandratioofreturnonequity.Wewishtoprovideevidencethroughempiricalstudyastohowwouldcapitalstructureinfluenceagencycosts.

Thispaperisstructuredasfollows.Section2givespreviousrelevantliteraturereview.Section3describesthecurrentstatusofChinesecorporategovernance,section4presentsthemethodologyincludingempiricalmodelandsample.Section5givestheempiricalresults,andsection6concludes.

2.LiteratureReview

Agencyproblemsarecausedbytheseparationofownershipfromcontrolinlargefirms(Berle,1932).JensenandMeckling(1976)applyagencytheorytothemoderncorporationandformallymodeltheagencycostsofexternalequityJensenandMecklingmodeltheagencycostsofdebtinthispaper.However,forourpurposesinthispaper,itistheagencycostsofequitythatarerelevant.

.Managerswhoownanythinglessthan100%oftheresidualcashflowrightsofthefirmhavepotentialconflictsofinterestwiththeoutsideshareholders,sincetheychoosetoreinvestthefreecashratherthanreturnittoinvestors(Jensen,1976,1986).Theconflictariseswhenthereismoralhazardinsidethefirm,whichiscalledtheagencycostsofequity.Thisagencyproblemcanbesolvedbyincreasingmanagementownershipbecausehighmanagementownershipalignstheinterestsofmanagementandshareholders(Jensen,1976).Otherpossibilitiesincludemonitoringofmanagementbylargeshareholders(Shleifer,1986),andtheuseofdebtfinancingtodisciplinemanagers(Jensen,1986;Stulz,1990).

2.1ManagerialOwnershipandAgencyCosts

Managerialownershiphasconsiderednon-linearforms(Morck,1988;McConnell,1995;Kole,1995).Jensen(1993)“convergenceofinterest”hypothesissuggeststhatmanagerialshareholdingshelpaligntheinterestsofshareholdersandmangers,andastheproportionofmanagerialequityownershipincreases,sodoescorporateperformance.Incontrast,Morcketal(1988)arguedthathighlevelofmanagerialownershipcouldleadto‘entrenchment’,asexternalshareholdersfindtheactionsofsuchmanagersdifficult.Kole’s(1995)argumentsuggeststhatmanagerialownershipmayimpactlargeandsmallfirmsdifferentlywithrespecttovalue.Angexaminedtherelationshipbetweenagencycostsandmanagerialownershipforsmallfirms,andSinghetaltestedsameworkontherelationshipforlargefirms.

2.2ConcentratedOwnershipandAgencyCosts

Animportantlineofagencycostsliteraturerelatestoconcentratedownership.Stiglitz(1985)hasarguedthatoneofthemostimportantwaysofvaluemaximizationbyfirmsisthroughconcentratedownershipofthefirm’sshares.ShomeandSingh(1995)replicatethisresultandprovideevidencethatthelargeshareholder’spresenceimprovesaccountingperformance.Largeshareholdersthusaddresstheagencyproblemasthattheybothhaveageneralinterestinprofitmaximisation,andenoughcontrolovertheassetsofthefirmtohavetheirinterestsrespected.Manyscholarsarguedthatoutsidelargeshareholdersreducemanagerialentrenchment(Shleifer,1986;Kang,1995;Yosha,1996;Porta,1998,1999;Park,1995;Denis,1996).

However,thisdoesnotexcludethepossibilityofrisingconcentrationofshareownershiptodepreciatethemarketvalueofthefirm(Huddat,1993;Admati,1994).Thecontrolshareholdersoftenhavebetteraccesstoinformation,holdmorepowerinselectingmanagementandinvolveinkeydecision-makings.EspeciallywhenthemanagerholdsfewersharesMorck,Shleifer,Vishny(1988)showedintheirempiricalstudythattheproportionofequityheldbymanagersandthevaluationofthefirmandproportionisininvertedU-shape.

andissubordinatetocontrollingshareholders,controlshareholdersimpingeupontheinterestsofsmallshareholdersbywayofnon-divisionofdividendsanddiversionofprofits.Theexploitationofsmallshareholdersbycontrollingshareholdersconstitutesexanteanexpropriationthreatthatreducesmanagerialinitiativeandnon-contractibleinvestmentsandmaycomeintoconflictwithperformance-basedincentiveschemes(Burkart,1997).

2.3DebtandAgencyCosts

Anotherstrandoftheagencyliteraturehasfocusedontheroleofdebtasameansofdiscipliningmanagers.GrossemanandHart(1982)werethefirsttoarguethatmanagerscouldpre-committoworkhardbyusingdebtratherthanequity.Similarly,Jensen’s(1986)freecashflowtheoryconsidersadditionaldebtbeneficialsincethefirmattemptstoimprovetheproductivityofitsassetsasaresultofadditionaldebtacquired.Debtnotonlyreducesthefreecashflowbutalsoprovidesdisciplinetomanagementthroughthedebtmarket.DebtmonitoringhypothesisisformalisedbyHarrisandRaviv(1990)andStulz(1990)andempiricallydemonstratedbyMaloneyetal.(1993).ShleiferandVishny(1997)providedextensivesurveyabouttherolefordebtinreducingtheconflictofinterestsbetweenmanagersandshareholdersSeveralarticlesmodelthebenefitsandcostsofdebt,thebenefitisusuallythereductionintheagencycost,suchaspreventingthemanagerfrominvestinginnegativenetpresentvalueprojects,orforcinghimtosellassetsthatareworthmoreinalternativeuse.Themaincostsofdebtisfirmsmaybepreventedfromundertakinggoodprojectsbecausedebtcovenantskeepthemfromraisingadditionalfunds,orelsetheymaybeforcedbycreditorstoliquidatewhenitisnotefficienttodoso.

.Ontheotherhand,increasedleveragealsohascosts.Asleverageincreases,theusualagencycostsofdebtrise,includingbankruptcycost(Jenson1986).Myers(1977)pointedtothedebtoverhangproblemwherefirmsmayforegogoodprojectsiftheyhavesignificantdebtoutstanding.Thereasonisthatforafirmfacingfinancialdistress,alargepartofthereturnstoagoodprojectgotobondholders.Therefore,inchoosingtheirdebt-equitylevel,firmsshouldtradeoffbetweentheagencycostsofdebtandtheagencycostsofequity.Byappropriatelyallocatingrefinancebetweenequityanddebt,capitalstructurecanbalancetheconflictsbetweeninvestorsandmanagementaswellasthatbetweenmanagementandcreditors.

Finally,twopreviousstudiesmostcloselyrelatedtothisstudyareAngetal(1999)andSingh(2002).Inthefirstcase,Angetalprovidedevidenceoncorporateownershipstructureandagencycostsmeasuredintermsofassetutilizationandoperatingexpenses.AnguseddataonsmallbusinessinAmericatoexaminehowagencycostsvarywithafirm’sownershipstructure.Theyfindagencycosts1)arehigherwhenanoutsiderratherthananinsidermanagesthefirm;2)areinverselyrelatedtothemanager’sownershipshare;3)increasewiththenumberofnon-managershareholders,and4)toalesserextent,arelowerwithgreatermonitoringbybanks.Inthesecondstudy,SinghandDavidsonextendtheworkofAng’sanalysisofrelationshipbetweencorporateownershipstructureandagencycoststolargepubliclytradedcorporations.UsingslightlydifferentmeasuresofagencycostsUsetheSG&anexpenserationinsteadofoperatingexpensestomeasureagencycosts.

,theyanalysedmulti-perioddatafortheyear1992and1994,andstudiednotonlyinsideownershipstructureasadeterminantofagencycosts,butalsotheroleofoutsidelargeequityholdersindiscipliningthemanagement.Theyfoundoutsidelargeshareholders’ownershipmayonlyhavealimitedeffectonreducingagencycostsandboardsizewasnegativelyrelatedtoassetturnover,andunrelatedtodiscretionaryexpenditures.

Inthispaper,followingtheirexampleweuseratioofsalestoassetsasoneofthemeasuresofagencycostsSinghfoundtheSG&Aexpenserationotsignificantlyinfluencedbyownership.Thisisbecausegovernancevariablesarenotasvisiblyrelatedtocashflowsgeneratedbyfirmsthataresalesrevenues.Weconductedasimilaranalysisanddidn’tfindanysignificancerelationshipeither.

.Additionally,weuseROEasanalternativemeasureofagencycoststoanalysethepossibleimpactofvariablesonagencycostsinChineselistedfirms.AlthoughROEisamoremanipulabilitymeasureineconomicsense,theregulatingauthoritiesinChinausethisparticularratioasastandardtodecidewhetherafirmisqualifiedforrightsharesoradditionalshares.ItisoneofthemoststrictlyregulatedratiosinChinaandiswidelyusedforcomparativepurpose.

3.ChineseCorporateGovernance

3.1OwnershipStructureandCorporateGovernance

ThemaincharacteristicoftheChinesecorporategovernanceistheoverconcentrationofequitystructure.MostofthelistedfirmsinChinaaretransformedfromstate-ownedenterprises.Ownershipstructuredisplaysthephenomenonoftheco-existenceofcontrolshareholders,whoarenormallyrelatedtothestateandmanyothersmallandcomparativelyweakshareholders.Statesharesareuniquelylarge.Statisticsshowthatthestateholdssharesofmostlistedfirmsingreatconcentration.Ofthelistedcompanies,54%oftheequitiesbelongtothestateorstate-ownedcorporatepersonsStatesharesareheldbygovernmentbodiessuchasstateassetmanagementagencies,orinstitutionsauthorisedtoholdsharesonbehalfofthestatesuchasawhollystate-ownedinvestmentfirm.Legalpersonsharesaresharesheldbyanyentityorinstitutionwithalegalpersonstatus,includinganSOEorafirmcontrolledbyanSOE.

.Amongthe1104listedfirmsonShenzhenandShanghaistockmarkets,theproportionofsharesofthenumberoneshareholderhadreached45%andthesecondlargestshareholdermadeup8%.

Themanagementlevellackslong-termincentiveandrestrainingmechanism.Theboardofdirectorsismainlyformedbycontrolshareholders.Thelackofindependentdirectorsmakesitdifficulttodisplaytheirregulatingandbalancingroles.Amongallthedirectorsofthelistedfirms,73.3%havethebackgroundofstateshares(27.9%)orsharesofstate-ownedcorporatepersons(45.4%).Sincethemanagerholdsfewershares,andissubordinatetocontrollingshareholders,theagencyproblembetweenshareholdersofafirmanditsmanagerhasturnedintotheseconddimensionoftheagencyprobleminafirm,theconflictbetweenthecontrollingshareholdersandsmallshareholders.

3.2LeverageandCorporateGovernance

Thecentralgoalofcorporation,includingpubliclisting,istoestablish“amodernenterprisesystem”inChina,featuringthecorporategovernancestructurethatseparatesthegovernmentfromenterprises.AnotherobjectiveistoraisecapitalforSOE’sandreducetheirhighlevelofdebttoassetratiobyincreasingdirectfinancethroughsellingequitytothepublic.ThevastmajorityofChina’slistedfirmsareformerlystateownedorstatecontrolledfirms,mostlylargeandbetterperformingfirms.Beforeinitialpublicoffering,theydotheirbesttodisposeofthedebt.So,thedebttoassetratiooflistedfirmsislowerduringthefirstcoupleofyearsafterinitialpublicoffering.

Accordingtocapitalstructuretheory,thewaytorefinanceisdeterminedbythecostofcapital.Indevelopedcapitalmarket,thetopmanagersarerestrainedbyshareholdersandcreditors,facingthepressureofpayingdividendanddebt.Theempiricalresultsshowthatlistedfirmsobtaincapitalfirstfrominternalsources,thenfromdebt,andlastfromequity.Capitalcostinfluencesthestyleoffinancing.InChina,duetothespecialownershipstructureoflistedfirms,stateshareisabsolutelythelargestamongtotalsharesandtherepresentativesofstatesharesareusuallyabsent.Thisreducestherestrictiontomanagement,andthemanagerswouldoverpursuethecontrolrightofcashflow.Theconsequenceisthatre-financingoflistedfirmswouldhavepartialityforequityratherthandebt.Additionally,thereisnotmuchpressureofdividendfromshareholders,sorefinancingoflistedfirmsinChinausuallyplacetheorderofdebtafteradditionalorrightshares.

Theoptimaldebt-to-equityratioisthepointatwhichfirmvalueismaximised,thepointwherethemarginalcostsofdebtjustoffsetthemarginalbenefits.TheoverlowlevelofdebttoassetratioreflectedthepoormanagementofcorporatefinancialgearofChineselistedcompanies.Refinancingthroughequityisnottheoptimalstrategytoreducetheircapitalcost.It’snotacommonphenomenonforamoderncorporatetorelyalmosttotallyonit’sowncapital,usingnoneormerelylittledebt.OneofthemostimportantreasonsthatChineselistedcompaniesdon’tbothertousedebtisthefactthattheygenerallycanobtain“freecapital”easilyfromtheequitymarket.Inordertolimitthe“equityfinancingthirst”,ChinaSecurityRegulatoryCommissionrequiresInTable1,thedebttoassetratioistheindustryaverageleveloflistedfirms.TheindustryclassificationconformstothefirstgradeindustryclassificationofChineseStockExchange.ThispolicywasannouncedonMarch18th2001.

thatthedebttoassetratiooflistedfirmswhowanttoaddsharesonstockmarketmusthavehigherdebttoassetratiothantheaveragelevelofthesameindustry(Table1).Listedfirmshavepaidmoreattentiontotheircapitalstructuresincethen,andithelpstoimprovethecapitalstructureoflistedfirms.

4.DataandMethodology

4.1TheData

ThesamplewasapoolofseveraldataoffirmslistedontheChina(ShanghaiandShenzhen)StockExchangesfrom1999to2001.211listedfirmsTherewere1160listedfirmsonstockmarketintheendof2001.Sample=1160-(43STfirms+8PTfirms)*20%-11firmsIPOafter1999=211firms.

wererandomlychosenexcludingfinanceandinsuranceindustry,ST(specialtreatment)ShanghaiStockExchangeandShenzhenstockexchangedeclaredemergingabnormalphenomenonfromsomelistedfirms’financialstatements.Suchlistedfirms’stockwasspeciallytreated.ThestockiscalledSTstock.Thereare43STfirmsinChina’stwostockexchangesattheendof2001.

andPT(particulartransfer)Listedfirmsthathavecontinuous3-yearlossarecalledPTfirms.Thereare8PTfirmsattheendof2001.

firmswerenotincludedinthesampleeither.Theaccountingdatawasobtainedfromlistedfirms’annualreportsfrom

1999to2001,whichwerepublishedonthewebsite(http://

HYPERLINK

)ofChina’sSecuritiesRegulatoryCommission(CSRC).Theinsideandoutsideownershipinformationandboardsize

Table1.ListedFirmsIndustryAverageDebttoAssetRatio(%)

Industry

Classification

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(12)

(11)

(13)

AverageDebttoassetratio

39.2

30.60

47.74

39.93

54.71

36.97

49.21

61.94

91.74

73.65

38.70

42.51

63.38

(1)Agriculture,Forestry,AnimalHusbandryandFishing.(2)Mining.(3)Manufacture.(4)ReductionandDistributionofElectricity,Gasandwater.(5)Construction.(6)Transport,StorageandPost.(7)Informationtransmission,Computerservicesandsoftware.(8)WholesaleandRetailsale.(9)FinanceandInsurance.(10)Realestate.(11)Residentserviceandotherservice.(12)DisseminateandCulture.(13)Synthesis.Materialsource:

/data/agora/20020730/125466.hml.

informationwereobtainedfromthewebsite:http://

HYPERLINK

andhttp://

HYPERLINK

.

ThesamplewasapoolofsevenratiosoffirmslistedontheChina(ShanghaiandShenzhen)StockExchangesfrom1999to2001(Table2).Thedebttoassetratioincludesdataoffirms’assetsturnover,returnonequity,debttoassetratio,outsideblockownership(thepercentageofshareholdingofthelargestandfivelargestshareholders),firmtotalsales,boardsizeandmanagerialownership.

4.2Methodology

Themethodologyweuseisasystemofsimultaneousequations.

Thesystemoftwoequationstobeestimatedis:

Agencycosts=0+1capitalstructure+2Conc+3Size+4board+jDumjt(1)

Capitalstructure=5+6Conc+7ROE+8Val(2)

(Conc–concentration)

Weusetwoalternativemeasuresforagencycosts.Thefirstmeasureforagencycostsistheratioofannualsalestototalassets(assetutilization),followingtheresearchofAngetal(1999).Thisratiomeasuresmanagement’sabilitytoemployassetsefficiently.Ahighratioofannualsalestototalassetsshowsalargeamountofsalesandultimatelycashflowsthataregeneratedforagivenlevelofassets.Whileahighassetturnovermaybeidentifiedwithefficientassetmanagementpracticesandhenceshareholdersvaluecreation,alowassetutilisationreflectsassetdeploymentforunproductive

purposes.Therefore,higherassetturnoverhaslessagencyconflict.

Weuseanadditionalmeasureofagencycosts,theratioofreturnonequity(ROE),asameasureofprofitability.Thisindicatormeasuresprofitabilityfromadifferentangle.InChina,mostlistedfirmsweretransformedfromstateownedenterprises.Inordertoprotectthevalueofstateassets,fixedassetsdepreciationratesarecentrallydeterminedandoftenareartificiallylow,thusleadingtoanupwardbiasinfixedassetestimates.Currentassetsincludesomestockpiledgoodsthateithercannotbesoldattheirbookvalue,orcannotbesoldatall.ROEisclearlyamorepreferableindicatorofprofitability,matchingthecommonusageofthemarketeconomics.Profitisthereturntoequityholders;thereforehigherturnonequityhaslessagencyconflict.

Independentvariableswerechosenmainlybasedontheexistingagencyliterature.Thefirstvariableusediscapitalstructure,measuredbydebttoassetratio(totaldebtdividedbytotalbookassets).Thesecondvariableusedisownershipconcentrations.Ownershipconcentrationismeasuredbytheproportionofthesharesheldbythelargestshareholdertothetotalsharesandtheshareproportionofthetopfivelargestshareholders.Thethirdcategoriesofvariablesarecontrolvariables.Theyareincludedintheregressionstocontrolforotherpotentialinfluencesontheagencycostsoffirms.Thevariablesincludedarethesizeofboardofdirectors,firmsize,andindustryDummies.Thenumberofboardmembersmeasuresthesizeoftheboardofdirectors.Themeasureofafirm’ssizeisthelogarithmoftotalsales.TheindustrydummyvariableisChineselistedfirms’classified13industries,excludingfinancialfirms.Thisprovides11industrydummyvariablesinthemultipleregressionmodels.

Tosolvepotentialendogenousproblems,whethertheratioofreturnonequityorthedebttoassetratioissimultaneousistested.Ononehand,thedebttoassetratiocanaffectreturnonequity.Firstly,anincreaseinthedebttoassetratio,throughfinancialchargeswouldreduceprofit.Ahighdebt-assetratio,finally,shouldimplyahighdegreeofexternalcontrolascreditors,concernedaboutthepaymentofinterestandtherepaymentoftheprincipal.Creditorshaveincentivestomonitortheenterprise.Ahigherdegreeofsupervisioncouldleadtohigherprofitability.Secondly,byusingdebt,ROEwouldincreaseeventhoughtheprofitdoesn’tincrease,withaconstantequity.Onthecontrary,obtainingcapitalthroughequitywouldreduceROE.Ontheotherhand,ROEaffecttheleverage,withahighlevelofROE,listedfirmscangetfundsfromnewlyaccumulatedprofitsorfromstockmarketbyadditionalorrightshares.ThedebttoassetratiomaydependnotonlyonROEbutalsoontheownershipstructure.Ifthereishighownershipconcentration,thecontrolshareholdersmightwanttoreducethedividend,implyingalowdebttoassetratio.However,iftheequityvaluegrowthishigh,thefirmcanobtainplentyofcashflow,andimpactondebttoassetratio.WeuseValtomeasuretheequityvaluegrowth.Thisvaluation

Table3.MultivariateRegressionAnalysisdebttoAssetRatioandOwnershipConcentrationtoAgencyCosts

PanelA:Agencycostsasmeasuredbytheratioofannualsalestototalassets.

PanelB:agencycostsasmeasuredbyratioofreturnonequity.

Regress-ion