Both financial economists and regulators have paid significant attention on initiatives
to improve corporate governance practices and protect minority shareholder rights around the
world. Recent studies such as La Porta, Lopez de Silanes, Shleifer and Vishny (1997, 1998)
recognize that there is variation in quality of legal systems and its impact on corporate financing
decision and shareholder protections across countries.1
The majority of extant studies have characterized deviations of control rights from cash
flow rights as the potential sources of expropriation of minority shareholders.2 Through cross
shareholdings, ultimate owners of publicly traded firms gain effective control with minority
cash flow rights, which leads to incentives for owners to pay less attention to share value
maximization than to their private gains. 3 Mitton (2002) suggests that the greater the
divergence of cash flow/voting rights, the greater is the incentive for ultimate owners to
expropriate corporate resources.
