Question

Corporate Finance: "Supporting hands" or "Tunneling hands" of major shareholders have been hot topics in recent years.

Question: Are there this type of agency problem in Thailand? (with example if possible)

Answer 1

Definition: Tunneling is an unethical business practice in which majority shareholders transfer a company’s assets to privately-owned firms or utilise profits in such activities that benefit them at the expense of minority shareholders.
Such actions may include sale of assets at lower valuations to a firm owned by majority shareholders, dilutive share measures, excessive executive compensation and personal loan guarantees. The key feature of tunneling is that the stakeholders who engage in the activity, usually comply with all of the relevant legal procedures for personal gains.

The work of Wiwattanakantang indicates that the controlling shareholders in Thailand do not act in expropriation (abused by the majority of shareholders) on the company's assets. In fact, the existence of controlling shareholders is presumably associated with higher firm performance. (Performance is specifically measured by ROA and the ratio of sales to assets.) This happens because virtually all companies in Thailand do not implement the controlling mechanisms in separating voting rights with the right of cash flows. As consequence, controlling shareholders are being constrained by themselves and do not acquire private benefits.

Additionally, Claessens, Djankov and Lang (1999) report that family firms have dominated the concentration of the market capitalisation of public companies in East Asia. They show that the number of public shares held by 10 large family enterprises in Indonesia has reached 57.7%. Other evidence describes similar results; the results of a cross-country study reveal that the portion of family owned companies in the Philippines and Thailand has reached 52.5% and 46.2%, respectively. Similar results are found in Malaysia and Korea; both of these countries are controlled by 15 family firms, and the concentration of majority ownership in these two countries is approximately 28.3 and 38.4%, respectively

References:

Wiwattanakantang, Y. (2001). Controlling shareholders and corporate value: Evidence from Thailand. Pacific-Basin Finance Journal, 9, 323–362

Claessens, S., Djankov, S., Fan, J. P. H., Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57, 2741–2771

Claessens, S., Djankov, S., & Lang, L. (1999). Who controls East Asian Corporations? Working Paper, World Bank.

Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, 81-112