Taking Away the Voting Powers from Controlling Shareholders: Evidence from the Chinese Securities Market


  • We thank the support from National Natural Science Foundation of China Projects (NSFC No.70872052 and No.70672031), We thank the support from Southern Illinois University at Carbondale. We thank Kevin Chen, Oliver Li, Jieping Chen, the participants at 2009 SIUC Research Seminar, the participants at 2009 SUFE International Symposium, the participants at the 8th EAR International Symposium, the participants at 2009 AAA MidWest Conference, and the participants at 2010 AAA Midyear International Section Conference.


The main agency problem in the Chinese economy comes from a conflict between strong controlling shareholders and weak minority shareholders. In such economy, seasonal equity offerings (SEOs) are used as a means to exploit minority shareholders. This paper examines the effects of a regulation (the classified voting system [CVS]) that attempts to protect the interests of minority shareholders by excluding controlling shareholders from the voting process of SEOs. This results show that the rejection rate significantly increases after the CVS comes into effect. SEOs proposals are more likely to be rejected when perceived private benefits are high and security benefits are low, and when minority shareholders have higher bargaining power. Further, investors receive significantly higher post-SEO stock returns for SEOs approved under the CVS than for those approved before the CVS.