Cumulative Voting: Investor Protection or Antitakeover? Evidence from Family Firms in China

• DOI: http://doi.org/10.1111/corg.12096
• Author: Wenjing Li,Karen Jingrong Lin,Yugang Chen
• Published date: 01 May 2015
• Date: 01 May 2015

Cumulative Voting: Investor Protection or

Antitakeover? Evidence from Family Firms

in China

Yugang Chen, Wenjing Li, and Karen Jingrong Lin*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The Chinese government regulates on the adoption of cumulative voting (CV) in order to protect

minority shareholders by allowing them to elect a dissident director. However, adopting CV may deter potential acquirers,

reducing the effectiveness of corporate takeover as a governance mechanism. Even worse, lacking enforcement of CV

adoption allows f‌irms to adopt CV when they need to deter potential acquirers.

Research Findings/Insights: First, we f‌ind CV adopters have better governance overall, but also have tightened control such

as higher ownership concentration. This evidence hints that when a f‌irm adopts better governance to signal the market, it

may tighten control in other ways such as increasing shareholder power and adopting CV. Second, we distinguish the role

of CV in investor protection by examining its competing effects on tunneling and antitakeover. We f‌ind that CV does not

reduce tunneling but lowers the probability of CEO turnover and of the f‌irm becoming a takeover target. These results

indicate that CV is used as an antitakeover measure in family-controlled listed companies. Finally, we f‌ind that adopting CV

has no impact on company performance.

Theoretical/Academic Implications: Our evidence sheds light on the incentives embedded in the ownership structure that

can determine the governance mechanism in family f‌irms.

Practitioner/Policy Implications: Since 2002, the Chinese Securities Regulatory Commission requires f‌irms with a control-

ling shareholder holding more than 30 percent of shares to adopt CV. Our study shows that this policy has unintended

consequences and does not always protect minority shareholders.

Keywords: Corporate Governance, Family Firms, Cumulative Voting, Investor Protection, China

INTRODUCTION

Family f‌irms are important to China’s economy: they

make up about 85 percent of China’s private sector (Xi,

2011). Around the world, family ownership is prevalent, and

can enhance or destroy f‌irm value (Anderson & Reeb, 2003;

La Porta, Lopez-de-Silanes, & Shleifer, 1999). That is, on the

one hand, the founding family’s involvement in manage-

ment can increase monitoring of professional managers and

reduce agency costs (Anderson & Reeb, 2003; Burkart,

Panunzi, & Shleifer, 2003; Jensen & Meckling, 1976). On the

other hand, family ownership can be used by the controlling

shareholder (i.e., the family) to expropriate minority share-

holders, which is more severe when legal protection of

minority shareholders is weak (Barclay & Holderness, 1989;

Ehrhardt & Nowak, 2001; Young, Peng, Ahlstrom, Bruton, &

Jiang, 2008).

Good corporate governance facilitates good family f‌irm

performance and ensures that investors obtain returns on

their investments (Shleifer & Vishny, 1997). In emerging

economies, where supporting institutions are weak, govern-

ment regulation, legal enforcement, and other external gov-

ernance mechanisms are crucial to the corporate governance

of family f‌irms (La Porta, Lopez-de-Silanes, Shleifer, &

Vishny, 2000; Luo & Chung, 2013). Although each element

has been studied separately, the interactions between these

forces in shaping family f‌irms’ corporate governance in

emerging markets are largely unexplored. Our study exam-

ines such interaction effects on family f‌irm governance by

evaluating the effectiveness of the mandatory adoption of

cumulative voting (CV) as a minority shareholder protec-

tion mechanism in China.

*Address for correspondence: Karen Jingrong Lin, Manning School of Business, Uni-

versity of Massachusetts-Lowell, 1 University Avenue,Lowell, MA 01854, USA. Tel:

978-934-2406; E-mail: Jingrong_lin@uml.edu

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12096

Corporate Governance: An International Review, 2015, 23(3): 234–248

234