Ultimate ownership structure and corporate disclosure quality: evidence from China

The purpose of this paper is to examine whether the type of ultimate controllers (i.e. private vs state) affects corporate disclosure quality and whether the relationship between the type of ultimate controllers and corporate disclosure quality is moderated by the separation of ownership and control. This study employs the data of 405 Chinese listed firms in 2005. Annual reports were reviewed to collect the data including the type of ultimate owners, cash-flow rights, and control rights; and the ratings of corporate disclosure quality were obtained from the Shenzhen Stock Exchange website. Ordered logistic regression tested the hypotheses. It was found that corporate disclosure quality is lower for firms ultimately controlled by individuals than for firms ultimately controlled by the state. Also, the negative effect of private ultimate ownership on corporate disclosure quality is stronger for firms with high deviation of cash-flow rights and control rights. These findings suggest that privatizing state-owned companies may increase the expropriation of minority shareholders by controlling shareholders if the privatization does not reduce the separation of cash-flow rights from control rights. Thus, it may be necessary to strengthen the governance role of minority shareholders and constrain the divergence between cash-flow rights and control rights of the ultimate owners when state-owned companies are privatized. This study contributes to the literature on the expropriation of minority shareholders by examining the main effect of the type of ultimate controllers and the interactive effect of ultimate ownership type and the divergence of ownership and control on corporate disclosure quality