The subject of safeguarding the rights of minority shareholders has not
received much attention until now. After experiencing more and more cases
of wrongdoing throughout my business career, I have decided to explore
thoroughly the subject and devote several years to study the matter in a
theoretical and empirical research.
The philosopher Schopenhauer believed in the eventual triumph of truth,
despite the disappointments engendered by his indifferent contemporaries.
Two centuries later, we live in a time of accelerated changes, and we do not
have the long life to wait for the truth. Activist business ethics, business ethics
with a more activist militant approach, is needed in order to remedy the
wrongdoing committed to the stakeholders and minority shareholders.
Brazil’s equity market has grown rapidly in terms of both market capitalization and
transaction volumes. Total equity market capitalization was about 55 percent of GDP in 2011
with a diversified investor base including individuals, institutional investors, financial
institutions, and foreign investors. This growth has been fueled by a combination of strong
market performance and a steady increase in the total quantity of shares.
Moreover, due to the complicated pyramidal and cross-holding ownership structures
typical in East Asian companies, a significant number of controlling owners in the region
actually possess more control than their equity ownership indicates, which further
exacerbates the entrenchment effect.2 The entrenchment effect of the ownership structure
potentially affects firms’ financial reporting.
The high ownership concentration can also serve
as a credible commitment that the controlling owner is willing to build a reputation for
not expropriating minority shareholders (Gomes, 2000). The commitment is credible
because minority shareholders know that if the controlling owner unexpectedly extracts
high levels of private benefits when he/she still holds a substantial amount of shares, they
will discount the stock price accordingly, and the majority owner’s share value will be
While it is not the primary objective of this article to discuss differences
between national codes, a number of distinguishing characteristics nevertheless
bear mentioning. A first important variable is the scope of corporate governance
codes or recommendations. Naturally, most codes examined for this article (and
in most other member countries) address issues such as the equitable treatment
of shareholders, operation and accountability of boards and management,
transparency and disclosure, as well as minority shareholder protection.
When an investor controls an investee, consolidation is required. The parent investor must
prepare consolidated statements, to enable investors (and others) to see the assets, liabili-
ties, revenues, and expenses of the entire economic entity, consisting of the parent and all
of its subsidiaries.
When consolidated statements are prepared, the investment account relating to a con-
trolled subsidiary disappears entirely from the balance sheet. Instead, the subsidiary’s assets
and liabilities are added to those of the parent and reported together as a single economic
This paper focuses on the relations between corporate ownership structure and the
quality of accounting information in seven East Asian economies excluding Japan. More
specifically, we use the informativeness of accounting earnings to investors as a measure
of the quality of accounting information. We develop two complementary arguments
pertaining to the relations between ownership structure and earnings informativeness.
The first argument is related to the entrenchment effect of ownership concentration
(Morck, Shleifer, and Vishny, 1988).
Gaining effective control of a corporation enables the controlling owner to
determine how profits are shared among shareholders. Although the minority
shareholders are entitled to the cash flow rights corresponding to their share investments,
they face the uncertainty that the entrenched controlling owner may opportunistically
deprive them of their rights. The effects of entrenchment by the controlling shareholder
include outright expropriation, i.e., the controlling shareholder benefits from self-dealing
transactions in which profits are transferred to other companies he/she controls.