Abstract
CHINA JOURNAL OF ACCOUNTING STUDIES 2018, VOL. 6, NO. 1, 45–62 https://doi.org/10.1080/21697213.2018.1481629 a b Baoyin Qiu and Bo Cheng Postdoctoral Station of Business Administration, Shanghai University of Finance and Economics, China; Jiyang College,Zhejiang Agriculture and Forestry University, China ABSTRACT KEYWORDS credit financing; debt Social trust, as an informal mechanism, has an important influence on financing cost; equity economic activities. With the Chinese A-share listed companies from structure; legal environment; 2007 to 2013 as samples, this paper make an examination of the multi-layered enterprise; influence of stoical trust on a multi-layeredenterpriseequitystructure social trust and its functioning mechanism. This study shows that the higher the social trust in a region where the enterprise is located, the fewer the layers of enterprise equity structure. Further examination of the func- tioning mechanism shows that on the one hand, there may be a more obvious phenomenon in a region with a relatively weak legal environ- ment where the layers of enterprise equity structure decrease with the increase of social trust in the region. On the other hand, social trust influences a multi-layered enterprise equity structure by two paths, namely, debt financing cost and credit financing. 1. Introduction The term ‘multi-layered enterprise equity structure’ refers to the allocation of voting rights and cash flow rights within a company. It determines the distribution of rights and interests between the owner and the company, and enables the controller at the top of the enterprise’s hierarchy to use a dominant position from property rights to obtain extra residual rights (Fan, Wong, & Zhang, 2013; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2002). Therefore, the top priority for understanding the influence of a multi-layered equity structure on corporate governance, enterprise behaviour and the resulting consequences is to have an in-depth understanding of the institutional environment for the enterprise. As a market economy country with incremental reform, China has in the past few decades achieved rapid economic growth in an environment without perfect various systems. However, it will need to clarify said various mechanisms’ roles in economic development in the future in order to ensure a continuous, healthy and sustainable development in its economy. According to the institutional analysis framework put forward by Stulz and Williamson (2003), the corporate governance structure and its resulting economic consequences should be analysed under an informal mechanism such as norms, customs, traditions and religions at level 1 (the top level of the framework, “Embeddedness”), as well as formal mechanisms such as regulations, laws and property rights at level 2 (“Environment”). The advantages and disadvantages of corporate governance are influenced by informal mechanisms such as CONTACT Bo Cheng bondcheng@sina.com *Paper accepted by Donghua Chen. © 2018 Accounting Society of China 46 QIU AND CHENG ethics, cultures and relationships, as well as formal mechanisms such as laws, politics and the media. The informal mechanisms may have a more important position in China because it is a transitional and emerging market country without perfect legal provisions and perfect law enforcement (Chen, Hu, Liang, & Xin, 2013). As an important informal mechanism, social trust is not only an endogenous resource, as a component of a country’s soft power, but also an important factor in furthering soft power. Studies have shown that social trust can advance economic growth and social efficiency (Ao, &Li, 2012;Karl,Lins,&Tamayo, 2017; Knack, & Keefer, 1997;LaPorta,Lopez-de-Silanes, Shleifer, & Vishny, 1997; Li, Huang, He, & Zhou, 2008; Zou, Li, Shi, & Liu, 2015), financial market development (Guiso, Sapienza, & Zingales, 2008), corporate mergers & acquisitions (Chen, 2015; Chen, Liu, & Wang, 2016; Duarte, Siegel, & Young, 2012;He&Fan, 2015; Zhang & Li, 2012), international trade and investment (Ang, Cheng, & Wu, 2015;Cui, 2013;Guiso,Sapienza, &Zingales, 2009;Lei,Qiu,& Wang, 2014;Liu, Li, &Mo, 2011; Pan, Dai, Wu, & Liu, 2009; Zhao, & Chi, 2014) as well as family businesses’ governance and growth (Chu & Li, 2003;Li, 2002)in addition to improving an enterprise’s information quality and market response (Mikhail, Xie, & Xin, 2015;Pan,& Wu, 2010). Therefore, social trust as an informal mechanism can promote cooperation, reduce information asymmetry and transaction costs, realise the optimisation of corporate governance, and boost the enterprise’s healthy development. The influence of the institutional environment on the behaviour of an enterprise depends on the differences between the informal and the formal mechanism in terms of the mode and speed of change as well as the interaction mechanism between the informal and formal mechanisms (Pejovich, 2006). On this basis we study the influence of social trust (informal mechanism) on multi-layered equity structure and its mechanism of action. Studies show that an enterprise in a region with high social trust is more likely to be structured with fewer equity layers and that there is a more obvious phenomenon that such layers decrease with the increase of social trust in the region. Further studies indicate that a multi-layered enterprise equity structure is influenced by social trust through two intermediary mechanisms: debt financing costs and credit financing. The contributions of this paper are as follows. The first is an examination of how social trust as an informal mechanism influences a multi-layered enterprise equity structure and its functioning mechanism based on China’s unique soft institutional environment and with the challenges faced by China from micro-governance in its economic transformation at present as a practical background. This is, to a certain extent, not only is it conducive to a better understanding of the influence of social trust as an informal mechanism on an enterprise’s micro-behaviour, but it is also mean- ingful in extending the literature regarding how a soft institutional environment influ- ences a micro-subject’s decision-making and to studying how an enterprise adapts to different soft institutional environments. The second contribution is an attempt to open the black box behind corporate governance by examining the endogenous decision- making mechanism under a company’s equity layers, expanding on prior corporate governance research. This paper finds that social trust helps reduce the layers of enterprise equity, and influence such layers through debt financing cost and credit financing mechanisms. Finally, an embedding of formal and informal mechanisms in a multi-layered enterprise equity structure provides a framework of analysis for studying the influence of the interaction between the formal mechanism (legal environment) and the informal mechanism (social trust) on such a structure. CHINA JOURNAL OF ACCOUNTING STUDIES 47 The remaining sections of this paper include theoretical analysis and research hypoth- eses (Section 2), research design (Section 3), empirical tests and analysis of results (Section 4) and conclusions (Section 5). 2. Theoretical analysis and hypotheses development 2.1. Social trust and multi-layered enterprise equity structure The multi-layered enterprise equity structure arrangement makes it possible for the con- troller at the top of equity control chain to control more interests by fewer assets. Grossman and Hart (1986)aswell asHart (1995) pointed out that two kinds of contractual rights (specified rights and residual rights) will emerge in the case of incomplete contracts. Although a series of contracts are concluded by and between the controller of an enterprise with a multi-layered equity structure and its small and medium shareholders due to property rights, it is impossible to include all possible issues in the contracts. This makes it possible for the controller, through an advantageous position in property rights, to appro- priate the residual rights enjoyed by small and medium shareholders. Levine (2005)believed that the protection of property rights was not a naturally occurring phenomenon but the result of a series of policy choices and social mechanisms. In addition to explicit codes and formal administrative agencies, some informal norms restricting human interactions as ‘morality and ethics’ also influence the formation and protection of property rights. Social trust is a specific form of informal social norms. Small and medium shareholders tend to have an inherently high confidence in enterprises in the region with high social trust, which is based on socio-cultural and traditional judgements and leads them to conclude that the controller will not be fraudulent. However, business operation is a dynamic process with significant uncertainty. It is impossible for small and medium shareholders and controllers to reach all-inclusive agreements in advance on all possible events in contracts. Therefore, tacit understand- ing is often contained in an implicit contract that has no way to include explicit provisions. There is often shareholders’ tacit understanding about gains, losses and implicit punishments. The tacit understanding contained in an implicit contract consti- tutes the mutual trust between the contractors (Lei, Qiu, & Wang, 2014). Social trust means the common social norms resulting from the repetitive human transactions or activities in a region, which requires the common participation and maintenance of all people in that region (Fukuyama, 1995). As a shared value, trust can reduce the expected uncertainty in the same social network. A controller in a region with high social trust is more likely to consider how to achieve a better operation of the enterprise other than obtaining short-term interests by encroaching on the interests of small and medium shareholders. Consequently, the controller in such a region naturally has no incentive to make a complicated arrangement of multi-layered enterprise equity struc- ture. Williamson (1985) believed that agency cost can be regarded as the friction between transaction activities. Trust, just like a lubricant, helps the two parties of a transaction to reduce such friction and ensures the transaction proceeds smoothly. The higher the social trust environment, the more attention will be paid by the enterprise controller to the long-term sustainability of transactions as well as the consideration of 48 QIU AND CHENG the overall transaction costs of the enterprise. In consequence, fewer layers of equity structure are set. The above analyses show that the establishment of an enterprise equity structure depends on the motives of the controller at the top of such a structure for encroaching on small and medium shareholders, suppliers and clients by the use of property rights. Social trust helps to strengthen property rights protection for the weaker party, which may restrain the controller’s motive for profit, and simplify supervision and information transmission. Based on the foregoing analyses, the following hypothesis is proposed. H1: With other conditions unchanged, the higher the social trust in the region where the enterprise is located, the fewer the layers of enterprise equity structure. 2.2. Social trust and multi-layered enterprise equity structure: regulation from legal environment Social trust as an informal mechanism and the legal environment as a formal mechanism constitute the external institutional environment factors that influence a multi-layered enterprise equity structure. The interaction mechanism between formal and informal mechanisms, as well as differences in their patterns and speed of change, determines the effectiveness and stability of an institutional environment (Pejovich, 2006). As mentioned earlier, social trust as an informal mechanism protects the weaker party’s property rights, which is expressed by the phenomenon that the higher the social trust in a region where the enterprise is located, the fewer will be the layers of enterprise equity structure. Then, the legal environment will, as an important formal mechanism, inevitably influence the relation- ship between social trust and multi-layered enterprise equity structure. On the one hand, there may be a more obvious phenomenon in a region with a better legal environment, that the number of enterprise equity structure layers will decrease with an increase of social trust. According to North (1990), the reason is that an institution is a kind of rule that can restrain an organisation’s behaviour and their mutual relations. The informal mechanism will play a great restraining role in the absence of a formal mechanism in order to reduce uncertainty and provide a stable institutional environment for organisa- tions. Social trust and legal environment represent, respectively, informal and formal mechanisms. A formal mechanism’seffectiveness depends on social members’ trust in the formal mechanism, whereas social fairness and justice need more to be supported by the general trust of society. Therefore, members in a society with a better formal mechan- ism such as democracy, rule of law and justice have more tendencies to trust each other. They have confidence in fairness and justice of rules, laws and political mechanisms, in the authenticity and reliability of information, and in the harmony and stability of social relations (Yang, Meng, & Fang, 2011). An environment with high trust is conducive to restraining the controller’s personal gains and simplifying the supervision and information transmission mechanism, due to which the enterprise’s controller has no incentive to establish complex layered structures. In a region with a better legal environment, a participant in contract will pay a relatively high cost for untrustworthy behaviours. The trust of small and medium shareholders in the controlling shareholders may be strength- ened because they believe that if the enterprise’s controller proves to be untrustworthy, CHINA JOURNAL OF ACCOUNTING STUDIES 49 they can force the controller by law to make up their losses from such untrustworthiness. Therefore, it is expected in this paper that there will be a more obvious phenomenon in a region with a better legal environment that the layers of enterprise equity structure will decrease with the increase of social trust in the locality. On the other hand, the aforementioned phenomenon may be more obvious in a region with a weak legal environment. The reason is that a good legal environment can provide unrelated and unfamiliar participants with a foundation and bottom line for judgement of their mutual cooperation and dispute resolution, thereby expanding the radius and scope for social trust to function well. At the same time, social trust also implies common ideology and values. It ensures that a corporation is formed between and among strangers or people who do not often meet each other (Guiso et al., 2008), helps increase people’s recognition of and maintenance for the legal mechanism in their localities and, in the end, forms a kind of common social norm. It is expected that people in a society, whose operation is based on rules and legal norms, will have expectations that others will take responsible actions in order to make prior contracts entered into by and between them more credible. In a region with a weak legal environment, an enterprise’s controller is able to separate cash flow rights from controlling rights by establishment of multi-layered and multi-chain complex structures, and may then use methods such as ‘hollowing’ or ‘defence’ to obtain more private interests in terms of controlling rights. At this time, social trust as an informal mechanism can compensate for the impact of a weak legal environment on property rights protection, thereby not only suppressing the private gains, such as wealth plundering, which are possibly obtained by the controller, but also alleviating the costs, such as right dispersion, agency cost and information cost, resulting from complex layered equity structures. Therefore, it is expected in this paper that there will be a more obvious phenomenon in a region with a weak legal environment that the layers of enterprise equity structure will decrease with the increase of social trust in the locality. Based on the above analyses, two hypotheses are proposed as follows: H2a: With the other conditions unchanged, there will be a more obvious phenomenon in a region with a better legal environment that the layers of enterprise equity structure decrease with the increase of social trust in the locality. H2b: With the other conditions unchanged, there will be a more obvious phenomenon in a region with a weak legal environment that the layers of enterprise equity structure decrease with the increase of social trust in the locality. 2.3. Social trust and multi-layered enterprise equity structure: identification paths based on financing cost As an informal institutional arrangement, social trust can be used to promote effec- tive cooperation and reduce information asymmetry between banks and enterprises in addition to lowering the transaction costs resulting from enterprise’s external financing (Mayer, 2008). Trust is the basis for cooperation, which implies that people are more willing to cooperate with those with high trustworthiness other than those with low trustworthiness (Gambetta, 1988). Enterprises with multi-layered equity 50 QIU AND CHENG structure often use cross-layered guarantees to obtain more loans from banks and financial institutions with fewer resources when they have difficulties in financing. Under such a kind of pyramid structure, the internal capital market has the alter- native effect in terms of financing (Han, Li & Xu, 2008), the leverage effect from a pyramid structure can expand the scale of debt financing for large enterprise groups so that they can better adapt to the financial market environment with financing constraints (Li, Xin, & Yu, 2008), and family businesses can obtain a higher proportion of bank-secured loans through a pyramid structure (Chen, Xiao, & Wang 2013). Therefore, the controller in a region with weak social trust cannot easily obtain funds from the market, due to which the controller has to establish a complex layered structure as an alternative. On the contrary, the controller in a region with high social trust does not need to establish such a relatively complex layered structure to alleviate the constraints on financing. Therefore, where an enterprise’s financing is adversely influenced by social trust in a region, the enterprise’s layered equity structure is naturally influenced by social trust in the form of financing difficulties. It is undeniable that different commercial credit models in enterprise’s activities are just the embodiment of various contractual structures, and different commercial credit models are the reflection of the differences in transaction costs and risks (Liu, Li, & Xue, 2009). Specifically, and based on the supplier’s view, the higher the social trust in a region where the enterprise is located, the faster the accounts payable are paid by the enterprise to the supplier after receiving the latter’s goods or services, thereby reducing the corresponding transaction costs. On the contrary, an enter- prise in a region with low trust has to pay for goods or services in advance (prepayments) to the supplier; this is a kind of credit model with the highest cost, due to which the right to use the fund has been transferred to the other party in advance, resulting in a higher transaction cost. It can be concluded from the client’s perspective that an enterprise in a region with high social trust tends to inherently believe that no bad debt will emerge from its clients for the goods or services provided by it, due to which it is not eager to collect the corresponding accounts receivable. On the contrary, the less there is mutual trust, the more a guarantee is needed for a transaction. The relatively safe credit way for an enterprise is to receive the payments from clients in advance. Therefore, when an enterprise’s commercial credit is influenced by social trust in a region, an enterprise’s layered equity structure will also naturally be influenced by such trust through a commercial credit model. Based on the foregoing analyses, our hypothesis is proposed as follows: H3: With the other conditions unchanged, a multi-layered enterprise equity structure is influenced by social trust through the financing cost mechanism. CHINA JOURNAL OF ACCOUNTING STUDIES 51 3. Research design 3.1. Sample and data source The Chinese A-share listed companies from 2007 to 2013 selected as initial samples in this paper have been screened according to the following principles: (a) excluding any financial company; (b) excluding any company under special treatment (ST companies) or a company in the first year of listing; (c) excluding any company without relevant index data; and (d) winsorising at 1% the main continuous variables. Finally, 11,188 observed values were obtained. The main research data for this paper are from the CSMAR database. 3.2. Definitions of variables (1) Social trust (Trust 1). Social trust not only represents traditional values and beliefs, but it also, as a product of a country’s cultural tradition, becomes an informal mechanism through its being inherited and passed down by social groups, ethnic groups and religions from generation to generation (Guiso et al., 2008). In this paper, social trust is measured by the indexes put forward by Zhang and Ke (2002) on the investigation of enterprise leaders’ understanding of social trust, and with reference to the studies conducted by Ang et al. (2015), Liu et al. (2009) and Zhang and Li (2012). (2) Social trust (Trust 2). This is related to the total number of blood donations and blood donors in every province in 2000. At present, there is no legal provision and economic incentive in respect of voluntary blood donation in China. The purpose of blood donation is only for social values, cooperation, altruism and reciprocity, which further reflects a kind of social trust. The same indexes have also been used by Ang et al. (2015) for such studies. (3) Multi-layered equity structure. The multi-layered equity structure is measured according to the number of layers from the controlled listed company on the lowest layer to the topmost controller with reference to the studies conducted by La Porta et al. (2002) and Fan et al. (2013). Shenzhen Tagen Group Co., Ltd. (Figure 1) and Sunvim Group Co., Ltd. (Figure 2) are two examples in this regard. In Figure 1, the State-owned Assets Supervision and Administration Commission of the Shenzhen Municipality can directly control the Shenzhen Tagen Group Co., Ltd. with one layer for such control, 36.35% of controlling rights and 36.35% of cash flow rights, Shenzhen state-owned assets management committee Holding 36.5% Shenzhen Tagen (group) co. LTD. Figure 1. Equity level of Shenzhen Tagen (Group) Co., Ltd. 52 QIU AND CHENG Sun Rigui 29.36% 10.57% Shandong Sunvim holding co. LTD. 21.42% Fu Ri group co. LTD. Figure 2. Equity level of Sunvim Group Co., Ltd. which means that the wedge between the two rights is equivalent to the difference between them, namely, zero. In Figure 2, Sun Rigui controls Shandong Sunvim Holdings Co., Ltd., which controls Sunvim Group Co., Ltd., which means that, as the topmost controller, Sun Rigui realises his control of Sunvim Group Co., Ltd. by his control of Shandong Sunvim Holdings Co., Ltd., with two layers for such control, 31.99% of control rights, which is equal to the sum of 21.42% and 10.57%, 16.86% of cash flow rights, which is equal to the product of 29.36% and 21.42% plus 10.57%. The wedge is 15.13%, which is equivalent to the difference between these two kinds of rights. In the robustness test, the difference between control rights and cash flow rights is used to measure the wedge. The measurement of control rights is the sum of the minimum ownership ratio of every control chain from the topmost controller to the controlled listed company at the lowest level. The cash flow rights are the sum of the product of ownership right in every control chain from the topmost controller to the bottom-most controlled listed company. With the growth and increase of control chains, cash flow rights will be gradually decreased in comparison with control rights, and there will be a separation between control rights and cash flow rights, thereby establishing the topmost controller’s excess control over the company. The variables are defined in Table 1. 3.3. Model To test H1 and H2, this paper sets the following model: Layer ¼ α þ α Trust þ α Law þ α Trust Law þ α Control þ ε (1) 0 1 2 3 i i i In order to identify the transmission mechanism of social trust and the multi-layered enterprise equity structure, this paper has borrowed the mediation factor test method of Sobel (1986). Set path model Path a, Path b, and Path c as follows: Path a : Layer ¼ α þ α Trust þ α Control þ ε (2) 0 1 i i i 2 CHINA JOURNAL OF ACCOUNTING STUDIES 53 Table 1. Definition of variables. Variable Definition Layer The number of layers from the controlled listed company on the lowest layer to the topmost controller Wedge Difference between the controlling shareholders’ voting rights and cash flow rights Trust1 Degree of enterprises’ trustworthiness in a given province, calculated as the weighted average score of trustworthiness ranking given by managers in their responses to a survey conducted by Zhang and Ke (2002) in year 2000 through the Chinese Enterprise Survey System Trust1 The millilitres of blood donated on a purely voluntary basis in a province divided by the population in the province. The data are from year 2000 Law The legal environment index Loan The ratio of interest expense to the sum of short-term borrowing and long-term borrowing ZYF (accounts payable + notes payable + receivables – receivables – notes receivable – prepayment)/total assets of the firm Size Natural logarithm of total assets of the firm Soe Equals one if the company is state-owned, and zero otherwise MB The ratio of market value to book value Top1 The shareholding proportion of the largest shareholder. Sizeros The ratio of operating income to total assets. of the firm Outdir The ratio of the number of independent directors to the total number of directors. Growth The growth rate of operating income. ROA Net profit to total assets MP Monetary policy refer to the method of Chen et al.(2005), Rao and Jiang (2013) PRO Regulated industry refer to the method of Chen et al.(2005), Rao and Jiang (2013) Year Industry dummy variable Industry Year dummy variable Path b : Loan=ZYF ¼ α þ α Trust þ α Control þ ε (3) 0 1 i i i Path c : Layer ¼ α þ α Trust þ α Loan=ZYF þ α Control þ ε (4) 0 1 2 i i i Layer is a variable that represents the multi-layered equity structure, Trust represents the social trust index, Loan enterprise’s debt financing cost, and ZYF enterprise’s credit financing index. According to the mediating effect test method, if the regression coefficient α satisfying Path a and Path b is significant, the regression coefficients α 1 1 and α of Path c are simultaneously significant, but if α is significantly lower than 2 1 regression coefficient α of Path a, and the Sobel test is statistically significant, then some mediating effects are thus established. If the regression coefficient α satisfying Path a and Path b is significant, the regression coefficient α of Path c is significant whereas if the coefficient α of Path c is insignificant, and the Sobel test is statistically significant, then the complete mediating effects are thus established. The formula for calculating the value of Sobel Z is as follows: qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 2 2 2 2 2 2 Z ¼ ab= a s þ b s þ s s (5) value b a a b In formula (5), a and s are, respectively, the estimated coefficient and standard deviation of α in Path b, whereas b and s are, respectively, the estimated coefficient 1 b and standard deviation of α in Path c. 2 54 QIU AND CHENG 4. Empirical results and analysis 4.1. Descriptive statistics Table 2 reports the descriptive statistics over the years of the characteristic variables of a multi-layered enterprise equity structure of the sample companies. The mean value for the sample companies’ structural layers is 2.27, with a wedge of 5.90%. The period from 2007 to 2013 has witnessed a decrease of corporate structure layers and wedge. It shows that there has, to some extent, been an alleviation of agency conflicts arising from enterprises’ wedge with the acceleration of China’s economic reform and marketisation process. Table 3 reports the descriptive statistics of the main variables. Among the descriptive statistical results of independent variables, the mean value of social trust index (Trust 1) is 3.83, and the standard deviation is 1.14, indicating significant differences in social trust index across regions. The mean value of the social trust index (Trust 2) is 1.35 and the standard deviation 0.95. The mean value of the legal environment (Law) is 7.26 and the standard deviation 3.06, indicating relatively large differences across regions. 4.2. Regression results 4.2.1. The direct effect of social trust and multi-layer equity level Table 4 reports the test results of the relationship between social trust and multi-layered enterprise equity structure. It shows that social trust is negatively correlated with structure, significant at the level of 1%. Hypothesis H1 was thus tested and verified, which shows that a controller in a region with high social trust pays more attention to Table 2. The annual mean characteristics of the corporate equity hierarchy variable. Year 2007 2008 2009 2010 2011 2012 2013 Total Obs 1116 1246 1324 1399 1762 2084 2257 11,188 Layer 2.38 2.38 2.38 2.33 2.21 2.13 2.13 2.27 Wedge 6.39 6.38 6.34 5.83 5.64 5.42 5.29 5.90 Table 3. Descriptive statistics of main variables. Variables Obs. Mean STD Min Median Max Layer 11,188 2.25 0.96 1.00 2.00 13.00 Wedge 11,188 5.79 8.18 0.00 0.00 29.83 Trust1 11,188 3.83 1.14 0.99 4.35 5.39 Trust2 11,023 1.35 0.95 0.02 1.26 3.43 Law 11,188 7.26 3.06 2.28 6.00 12.90 Size 11,188 21.84 1.22 19.56 21.67 25.65 Soe 11,188 0.52 0.50 0.00 1.00 1.00 MB 11,188 2.28 1.46 0.81 1.83 8.88 Top1 11,188 0.37 0.15 0.09 0.35 0.76 Outdir 11,188 0.37 0.05 0.09 0.33 0.80 Sizeros 11,188 0.73 0.50 0.08 0.61 2.78 Growth 11,188 0.20 0.45 –0.57 0.14 2.97 ROA 11,188 0.04 0.05 –0.15 0.04 0.20 MP 11,188 0.58 0.49 0.00 1.00 1.00 PRO 11,188 0.10 0.30 0.00 0.00 1.00 Loan 11,188 0.05 0.04 0.00 0.05 0.16 ZYF 11,188 0.01 0.14 –0.33 –0.00 0.42 CHINA JOURNAL OF ACCOUNTING STUDIES 55 Table 4. The test results of social trust on multi-layer equity level. (1) (2) (3) Total sample Soe Non-Soe Trust1 –0.042*** 0.008 –0.053*** (–12.33) (0.95) (–9.39) Size 0.060*** –0.009 0.095*** (15.32) (–0.96) (13.65) MB 0.002 –0.000 0.015*** (0.56) (–0.01) (3.21) Top1 0.227*** –0.036 0.375*** (8.71) (–0.59) (9.26) Outdir –0.604*** –0.507*** –0.321*** (–8.63) (–3.80) (–2.92) Sizeros 0.101*** 0.056*** 0.091*** (11.84) (2.79) (6.47) Growth –0.034*** 0.008 –0.049*** (–3.90) (0.85) (–3.74) MP 0.018 –0.031** 0.093*** (1.12) (–2.29) (3.29) PRO –0.072*** 0.027 –0.087*** (–3.76) (0.57) (–2.60) ROA –0.562*** –0.215** –0.508*** (–9.46) (–2.09) (–5.37) Industry/Year YES YES YES _cons –0.513*** 1.040*** –1.432*** (–5.45) (5.13) (–8.67) N 11188 5767 5421 Adj-R 0.126 0.044 0.209 F 47.13 8.60 41.93 Note: ***, **, * denote significance at 1%, 5%, and 10%, respectively, the t-value is in parentheses, the interpreted variable is the Layer. considering how to achieve a better operation of enterprises than obtaining short-term benefits by encroaching on small and medium shareholders, and need not worry about obtaining bargaining power in this way. Therefore, an enterprise’s controller has natu- rally had no motivations to establish multi-layered complex enterprise equity structure. Meanwhile, such a structure leads to a decentralisation of enterprise rights and a higher cost in agency and information, and makes supervision more difficult. It is unnecessary for a controller in an environment with high trust to do so to balance the costs. A further grouping test of enterprise ownership shows the negative correlation between social trust and multi-layered enterprise equity structure is more significant at non-state- owned enterprises than that at their counterparts. 4.2.2. Social trust and multi-layer shareholding structure: the regulation effect of legal environments Table 5 reports the results of testing the relationship between social trust, legal envir- onment, and a multi-layered enterprise equity structure. The regression results in column (1) show that there is negative correlation between legal environment and structures, which is significant at the level of 1%. This indicates that the way for an enterprise’s controller in a weak legal environment to obtain more private interests in terms of control rights is: (a) to establish such structures to separate control rights from cash flow rights and (b) based on this, to ‘hollow’ or raise discourse rights to take more private interests from control rights. However, such a practice incurs high cost in a better 56 QIU AND CHENG Table 5. The test results of the relationship between social trust, legal environment on multi-layer equity level. (1) (2) Trust1 –0.017*** –0.030*** (–3.24) (–4.45) Trust1× Law 0.035*** (3.10) Law –0.046*** –0.055*** (–3.77) (–4.37) Size 0.037*** 0.036*** (9.30) (9.20) Soe 0.201*** 0.198*** (23.81) (23.43) MB 0.007** 0.006* (2.02) (1.83) Top1 0.165*** 0.164*** (6.47) (6.43) Outdir –0.513*** –0.515*** (–7.51) (–7.55) Sizeros 0.084*** 0.085*** (10.04) (10.14) Growth –0.021** –0.021** (–2.49) (–2.50) MP –0.001 –0.001 (–0.07) (–0.08) PRO –0.074*** –0.076*** (–3.94) (–4.02) ROA –0.422*** –0.417*** (–7.25) (–7.17) Industry/Year YES YES _cons –0.116 –0.112 (–1.25) (–1.20) N 11187 0.171 0.171 Adj-R F 63.23 61.87 Note: ***, **, * denote significance at 1%, 5%, and 10%, respectively, the t-value is in parentheses, the interpreted variable is the Layer. legal environment. The controller will make trade-offs between its misappropriation of small and medium shareholders and the forceful consequences from the legal environ- mental. The regression results in Column (2) show that the interaction between social trust and legal environment is positively correlated with multi-layered enterprise equity structure at the level of 1%. This means a more obvious phenomenon in a region with a weak legal environment is that the layers of enterprise equity structure decrease with the increase of social trust, validating hypothesis H2b. 4.2.3. Social trust and multi-layer shareholding structure: path identification of a financing cost perspective Table 6 shows the mediating effect results of testing debt financing costs and credit financing. Columns (1) and (2) are the test results of the debt financing cost path. As for Column (1) in the model Path b, the regression coefficient between debt financing cost (Loan), the intermediary factor, and social trust (Trust 1) is –0.001, which is significant at the level of 1%. This shows that social trust is negatively correlated with enterprise’s debt financing cost, and that the higher is social trust in a region, the lower is the debt financing cost for an enterprise. As for Column (2) in the model CHINA JOURNAL OF ACCOUNTING STUDIES 57 Table 6. Social trust and multi-layer ownership structure: path identifica- tion of financing cost perspective. (1) (2) (3) (4) Loan Layer ZYF Layer Trust1 –0.001*** –0.033*** –0.003*** –0.032*** (–3.57) (–9.68) (–3.23) (–9.58) Loan 0.398*** (4.60) ZYF 0.284*** (9.16) Size 0.004*** 0.036*** 0.025*** 0.030*** (9.01) (9.03) (20.53) (7.56) Soe 0.003*** 0.202*** 0.022*** 0.197*** (3.69) (24.06) (8.78) (23.46) MB –0.002*** 0.008*** –0.004*** 0.008*** (–5.90) (2.33) (–4.14) (2.44) Top1 –0.027*** 0.174*** 0.016** 0.157*** (–9.55) (6.78) (2.05) (6.23) Outdir –0.003 –0.516*** –0.088*** –0.492*** (–0.41) (–7.56) (–4.25) (–7.22) Sizeros 0.010*** 0.079*** 0.028*** 0.075*** (11.37) (9.34) (10.96) (8.92) Growth –0.003*** –0.020** –0.001 –0.021** (–2.76) (–2.36) (–0.20) (–2.47) MP 0.01657*** –0.007 –0.012** 0.003 (9.59) (–0.46) (–2.45) (0.17) PRO –0.007*** –0.071*** 0.009 –0.076*** (–3.24) (–3.75) (1.61) (–4.05) ROA –0.065*** –0.399*** –0.162*** –0.379*** (–10.28) (–6.83) (–9.13) (–6.51) Industry/Year YES YES YES YES _cons –0.041*** –0.130 –0.492*** –0.006 (–4.03) (–1.40) (–17.40) (–0.07) N 11188 11188 11188 11188 Adj-R 0.103 0.171 0.279 0.176 F 36.83 63.46 121.19 65.51 Note: ***, **, * denote significance at 1%, 5%, and 10%, respectively, the t-value is in parentheses, the interpreted variable is the Layer. Path c, regression coefficients α and α are all significant after the debt financing 1 2 cost, the mediating factor, was added to the basic model, but α is lower than regression coefficient α of Path a in Table 4, and the Z value from Sobel test is – 2.78, which is statistically significant at the level of 1%. This shows that social trust has some mediating effects on a multi-layered equity structure in terms of the debt financing cost path. Columns (3) and (4) are the results of testing the credit financing path. As for Column (3) in the model Path b, the regression coefficient between credit financing (ZYF), the intermediary factor, and social trust (Trust 1) is –0.003, which is significant at the level of 1%. This shows that social trust is negatively correlated with an enterprise’s credit financing, that the higher is the social trust in a region, the faster are the accounts payable paid by the enterprise to the supplier, and that, in the meantime, enterprises are not eager to urge their clients to pay accounts receivable. As for Column (4) in the model Path c, regression coefficients α and α are all significant after enterprise credit 1 2 financing, the intermediary factor, was added to the basic model, but α is lower than regression coefficient α of Path a in Table 4, and the Z value from the Sobel test is –3.03, 1 58 QIU AND CHENG which is statistically significant at the level of 1%. This shows that social trust has some mediating effects on equity layers in terms of the credit financing path. 4.3. Robustness checks In order to ensure a stable and reliable result, the indexes used for measuring social trust and layered equity structure in this paper were changed to test anew the results mentioned earlier. 4.3.1. Test for the change of multi-layered enterprise equity structure In Table 7, equity layers are substituted by a wedge in order to test anew all results with reference to the studies conducted by La Porta et al. (2002) and Fan et al. (2013), and wedge is used to measure enterprise equity layers. The test results show that: first, social trust is significantly and negatively correlated with an enterprise’s wedge in Column (1) regression, and such significance is 1%, which further validated hypothesis H1; second, Table 7. The test results of changing the interpreted variable of multi-level ownership structure. (1) (2) (3) (4) Trust1 –0.437*** –0.325*** –0.431*** –0.425*** (–6.42) (–2.43) (–6.34) (–6.25) Trust1× Law 0.805*** (3.51) Loan 3.946** (2.26) ZYF 3.561*** (5.68) Law –1.352*** (–5.30) Size 0.513*** 0.490*** 0.497*** 0.425*** (6.46) (6.17) (6.25) (5.27) Soe –4.704*** –4.828*** –4.717*** –4.784*** (–27.77) (–28.31) (–27.84) (–28.19) MB –0.197*** –0.215*** –0.188*** –0.182*** (–2.98) (–3.26) (–2.85) (–2.76) Top1 8.646*** 8.673*** 8.751*** 8.589*** (16.77) (16.84) (16.91) (16.68) Outdir –14.980** –14.935** –14.968** –14.665** (–10.86) (–10.85) (–10.86) (–10.64) Sizeros 1.174*** 1.227*** 1.133*** 1.075*** (6.95) (7.26) (6.67) (6.34) Growth –0.366** –0.369** –0.356** –0.364** (–2.14) (–2.16) (–2.08) (–2.13) MP 0.482 0.469 0.417 0.524* (1.52) (1.48) (1.31) (1.65) PRO –0.214 –0.270 –0.188 –0.247 (–0.57) (–0.71) (–0.50) (–0.65) ROA –2.343** –2.158* –2.084* –1.767 (–1.99) (–1.84) (–1.77) (–1.50) Industry/Year YES YES YES YES _cons –0.982 –0.144 –0.820 0.771 (–0.52) (–0.08) (–0.44) (0.41) N 11188 11188 11188 11188 Adj-R 0.106 0.108 0.106 0.108 F 37.73 36.74 36.86 37.69 Note: ***, **, * denote significance at 1%, 5%, and 10%, respectively, the t-value is in parentheses, the interpreted variable is the Wedge. CHINA JOURNAL OF ACCOUNTING STUDIES 59 social trust’s test of a wedge in different legal environments was further verified in Column (2) and so was hypothesis H2b; third, the results of the two intermediary financing channels were further verified in Columns (3) and (4), in which both of them satisfied the three conditions of some mediating variables, both the Z value from the Sobel test (debt financing cost – wedge) is –1.86 and the Z value (credit financing – wedge) is –2.77, and both of them are statistically significant at the level of 10% and 1%, respectively, which is basically consistent with the results mentioned earlier. 4.3.2. Test with the blood donation rate in 2000 as substitution of social trust indexes In Table 8, social trust (Trust 2) was substituted by (Trust 1) to test a new multi-layered enterprise equity structure. The test results show that: first, social trust (Trust 2) is significantly and negatively correlated with the multi-layered enterprise equity structure in Column (1) regression, and such significance is 1% which further validated hypothesis H1; second, social trust’s test of the wedge in different legal environments was further Table 8. The test results of using the donation rate of 2000 to replace the Social Trust Index. (1) (2) (3) (4) (5) (6) Layer Layer Loan Layer ZYF Layer Trust2 –0.027*** –0.052*** –0.001*** –0.027*** –0.007*** –0.025*** (–6.72) (–4.35) (–2.88) (–6.60) (–6.10) (–6.22) Trust2 × Law 0.053*** (4.05) Loan 0.414*** (4.73) ZYF 0.277*** (8.81) Law –0.048*** (–4.47) Size 0.039*** 0.038*** 0.004*** 0.037*** 0.025*** 0.032*** (9.69) (9.58) (9.02) (9.26) (20.99) (7.81) Soe 0.212*** 0.197*** 0.003*** 0.210*** 0.024*** 0.205*** (25.05) (22.88) (3.64) (24.89) (9.42) (24.24) MB 0.009*** 0.007** –0.002*** 0.010*** –0.004*** 0.010*** (2.58) (2.08) (–6.09) (2.85) (–3.63) (2.89) Top1 0.158*** 0.169*** –0.027*** 0.169*** 0.020** 0.153*** (6.12) (6.53) (–9.48) (6.53) (2.51) (5.93) Outdir –0.499*** –0.510*** –0.002 –0.499*** –0.082*** –0.477*** (–7.22) (–7.38) (–0.30) (–7.21) (–3.92) (–6.91) Sizeros 0.078*** 0.083*** 0.011*** 0.073*** 0.026*** 0.070*** (9.17) (9.74) (11.36) (8.62) (10.14) (8.31) Growth –0.018** –0.020** –0.002** –0.017* –0.001 –0.017** (–2.04) (–2.39) (–2.52) (–1.93) (–0.20) (–2.03) MP –0.008 –0.006 –0.004** –0.007 –0.002 –0.008 (–0.48) (–0.36) (–2.16) (–0.38) (–0.30) (–0.46) PRO –0.068*** –0.077*** –0.007*** –0.065*** 0.009 –0.070*** (–3.54) (–3.99) (–3.14) (–3.40) (1.54) (–3.68) ROA –0.439*** –0.418*** –0.066*** –0.412*** –0.166*** –0.393*** (–7.43) (–7.09) (–10.30) (–6.94) (–9.29) (–6.65) Industry/Year YES YES YES YES YES YES _cons –0.173* –0.159* –0.021** –0.164* –0.525*** –0.028 (–1.88) (–1.72) (–2.12) (–1.78) (–18.83) (–0.30) N 11023 11023 11023 11023 11023 11023 Adj-R 0.167 0.172 0.104 0.168 0.280 0.172 F 62.22 61.10 36.33 61.26 120.27 63.06 Note: ***, **, * denote significance at 1%, 5% and 10%, respectively, the t-value is in parentheses. 60 QIU AND CHENG verified in Column (2) and so was hypothesis H2b; third, the results of the two inter- mediary financing channels were further verified in Columns (3), (4), (5) and (6), in which both of them satisfied the three conditions of some mediating variables, both the Z value from the Sobel test (debt financing cost – wedge) is –2.42 and the Z value (credit financing – wedge) is –5.00, and both of them are statistically significant at the level of 1%, which is basically consistent with the results mentioned earlier. A new test of social trust was conducted by measurement of the ratio of the total number of blood donations and blood donors in every province in 2001, and shows no change has occurred. In order to take into account the macroeconomic environment’s influence on this paper’s conclusions, indexes such as per capita GDP and marketisation were added to the main effect model, and the test results show that no substantive change has occurred. 5. Conclusion Since its reform and opening up, China’s rapid economic development has been influenced not only by formal institutional arrangements such as laws, politics, govern- ment and the media, but also by informal institutional arrangements such as cultures, ethics and relationship networks. 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Journal
China Journal of Accounting Studies
– Taylor & Francis
Published: Jan 2, 2018
Keywords: credit financing; debt financing cost; equity structure; legal environment; multi-layered enterprise; social trust
