On the Canonical Correlation between Stock Right Structure and

On the Canonical Correlation between Stock Right Structure and
Corporate performance,Agency Costs
ZHANG Xin 1, SONG Li 2
1 School of Management, Shenyang University of Technology, P.R.China, 110023
2 Schools of Management, Shenyang University of Technology, P.R.China, 110023
、
Abstract: This paper researches the correlation of stock-right structure and corporate performance
agency costs by means of canonical correlation analysis, based on the principle of major constituent
analysis. We choose listed corporations in China as the sample of positive analysis. The result shows
that Degree of Stock-right Concentration and Degree of Stock-right Restriction are the main factors to
affect corporate performance and agency costs from the side of stock-right structure.
Key words: agency costs, canonical correlation, corporate performance, stock-right structure
1 Introduction
Currently, the weak corporate performance and high agency costs are influencing the development
of Chinese corporations greatly. Hence, researching the influencing factor of corporate performance and
agency costs is an important issues cared by learners and experts. In this paper, the stock-right structure
influencing corporate performance and agency costs is analyzed simply, by means of canonical
correlation analysis.
2 Document reviewed
As to the correlation research of stock-right structure and corporate performance, the unitary
conclusion can’t be gained presently. The researchers at home SUN Yong-xiang and HUANG Zu-hui
(1999) considered that the corporate stock-right structure owning appropriate and the shareholders who
control stock-right relatively and other large shareholders benefit business incentive purchase and
merger competition of agency power and strategy of control, after examing the relation between the
proportion of the first shareholder in the total stock and Tobin’s Q, and they found that the performance
of corporation owning this stock-right structure is best[1]. DU Ya-jun and ZHOU Ya-ping(2004) drew
the conclusion that there is a weak negative correlation between the proportion of stock owned by state
Degree of Stock-right Concentration and corporate performance[2]. Miguel C(1985) found that Degree of
Stock-right Concentration and corporate performanc have no correlation[3]. S.Prowse(1995) found that
the banker ,as the large shareholder of listed corporation in Japan and German, didn’t functionate
significantly in corporate governance[4].
Researchers of the correlation of stock-right structure and agency costs, both at home and abroad,
have gained a large number of achievements: Sung (1994) pointed it out that the inside stock-right
proportion in corporations affected agency costs[5]. Ang (2000) and others considered that the amount of
stocks owned by managers was in connection with the motive of reducing agency costs, so the
proportion of stocks owned by managers had influence on agency costs[6]. GONG Jing (2004)
researched by means of multiple regression analysis and found that raising the proportion of stocks
owned by the first several shareholders drove these shareholders to restrict each other so that the agency
costs between the holding shareholder and others are reduced. She also found that raising the proportion
of stocks owned by managers especially that by presidents or introducing the excellent foreign
shareholders could reduce agency costs between managers and shareholders [7].
Known from the above documents, there are two conclusions, correlation and independence, on
stock-right structure affecting corporate performance. And more, each conclusion is supported by many
learners. And on stock-right structure affecting agency costs, the researchers at home mainly attach
emphasis to inefficient supervision and asymmetry of information as a result of the absolutely high
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proportion of stocks owned by state and juridical person, while the researchers abroad put emphasis on
the influence of the inside stock-right in corporation or the proportion of stocks owned by managers on
agency costs. At the same time, the above documents show that the general correlative analyzes or
regression analysis is adopted mainly in positive research. These two methods emphasise a single index
variable affecting the other and a group of index variables affecting a single index varible. However,
there are so many index variables reflecting the essential of stock-right structure and corporate
performance agency costs, that single index variables are not enough to draw an all-sided conclusion.
So canonical correlation ---an analytic method involving two groups of index variables---is adopted to
research correlation of stock-right structure and corporate performance agency costs in this paper. And
we expect to obtain a more reasonable and exhaustive explanation.
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3 Fundamental principle of canonical correlation analysis
Canonical Correlation Analysis is a method that researches correlation between two groups of
index variables. In detail, it turns the correlations between two groups of variables to two new variables,
at the same time the primitive information is not discarded. This method is brought forward by Hotelling
originally, and its basic principle is to reduce dimensions. That is to say, in terms of correlation of
variables, we search after one or a few synthetical variable couples to take place of the primitive
variables, so that correlation between two group of variables is concentrated on correlation of a few
couple of synthetical variables. The condition of extracting those variable couples is that the correlation
of the first synthetical variable couple is the most conspicuous, the second is weaker than the first, and
other couples in turn. These synthetical variables are called canonical variables, and the correlation
coefficients of the first couple of canonical variables are called the first canonical correlation coefficient.
Generally, 1~2 couples of canonical variables are adequate to summarize the information of samples.
The correlation between many index variables and others exists in a lot of ecomonic phenomenon,
and canonical correlation analysis is just fit to explain this kind of case, so it has a spacious prospect to
be adopted extensively in the positive analysis. Then, we choose this method to research the
correlation between stock-right structure and corporate performance agency costs by the statistical
analysis software——SPSS11.5 in this paper.
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4 canonical correlation analysis on stock-right structure and corporate
performance agency costs
At present, the main feature of Chinese listed corporate stock-right structure is: the Proportion of
stocks owned by state and juridical people is high, and control stock-right absolutely. The first
shareholder is state in most situations and the Degree of Stock-right Concentration is high, while the
other shareholders own less stock, that makes they difficult to control and constraint the first shareholder.
So stock-right distribution the Degree of Stock-right Concentration and Degree of Stock-right
Restriction can be the analysis base of stock-right structure. Corporate performance means the value and
business performance and efficiency of corporation, and it reflects the business effictiveness and is
reflected by means of a single or a group of financial index variables generally. In recent years, the
research at home or abroad adopt the rate of net capital earning, the rate of Tobin’s Q and the rate of
Main operation proceeds earning as the evaluation criteria of corporate performance. The rate of net
capital earning most reflects corporate value in current circumstance, and is fit to crosswise comparison
in corporations. And it can be showed as formula: the rate of net capital earning = (net
eaning÷shareholder’s interest at the end of the year) ×100%. In this paper, Tobin’s Q equals to specific
value between the sum of corporate market value and debt and the total capital, in which the corporate
market value is the sum of the value of corporate stock and bond. In the side of corporate agency costs,
Ang and others considered to use Management Fee Ratio Operation Expenses Ratio, Financial Expense
Ratio and Total Capital Velocity to measure agency costs, but LV Chang-jiang, a professor of accounting
in Jilin University, argued that Financial Expense Ratio includes net expenditure of interest, exchange
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loss , correlative handling fee and so on, which are not related to agency costs essentially, so it should be
deleted. Hence , Management Fee Ratio Operation Expenses Ratio and Total Capital Velocity are chose
as the index variables in this article. From above, three groups of indexes are showed as Tab.1.
，
Tab.1 Index varibles
CODE
X1
NAME
TR: Proportion of stocks
owned by state and
juridical people
CR5: Degree of
X2
Stock-right Concentration
FORMULA
INTERPRET
SS + CS
TR =
TS
5
∑S
i=1,2,3,4,5
CR 5 =
X3
Y1
Rate of net capital
earning
Y2
The rate of Tobin’s Q
Y3
Rate of main operation
proceeds earning
Si
i
∑S
DR 5 =
S1
i
i=2
Si
S1
i=2,3,4,5
：
：Proportion of stocks owned by the ith
shareholder
i =1
5
DR5: Degree of
Stock-right Restriction
：
：
SS Proportion of stocks owned by state
CS Proportion of stocks owned by juridical
TS Total proportion of stock
：Proportion of stocks owned by the first
shareholder
： Proportion of stocks owned by the ith
shareholder
Net profit/net capital
Net capital: the sum of the stock owned by
shareholders in corporation
The market value of
The market value of corporation: the sum of
corporation + the total debt / the market value of the corporate stock and
the total capital
band
Pprofit of main operatio
proceeds/ the total capital
The management fee / the main
operation proceeds
The operation expenses / the
Z2 Operation Expenses Ratio
main operation proceeds
Z1
Z3
Management Fee Ratio
Total Capital Velocity
I ×2
TCV =
TC P + TC F
（
The agency costs
The agency costs
：
TCV Total Capital Velocity
I Main operation proceeds
TCP Total capital at the beginning of year
TCF Total capital at the end of year
：
：
：
）
In this paper, 50 listed state-owned corporations except for those by ST and PT are chose as
backup samples. In order to guarantee the validity of data, and to eliminate the poor influence on the
conclusion induced by abnormal samples, we delete some backup samples in light of the criterion as
followed:
1. The corporations that Degree of Stock-right Concentration and Degree of Stock-right Restriction
are ± 3 times of standard deviation more than mean of corresponding sample data respectively.
2. The corporations that Total Capital Velocity, Operation Expenses Ratio and Management Fee
Ratio are ± 3 times of standard deviation more than mean of corresponding sample data respectively.
Ultimately, 35 corporations are left as the essential samples in this paper. The corresponding data is
obtained by looking up Data Base of GuoTaiAn and Annual Report of Listed Corporations in 2003.
In this paper, x1 x2 x3
y1 y2 y3
z1 z2 z3 are made as three groups of corresponding
index variables. After inputing the data to SPSS, we tidy it up and run the corresponding program .The
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main results are : the analysis of the stock-right structure and corporate performance is exhibited in
Tab.2 Tab.3 Tab.4 Tab.5; and the analysis of the stock-right structure and the agency costs is exhibited
inTab.2’
Tab.3’
Tab.4’
Tab.5’.
、
Tab.2 Canonical Correlations
0.760
0.172
0.013
Tab.2’ Canonical Correlations
1
0.613
2
0.442
3
0.125
Tab.3 Test that remaining correlations are zero
Wilk's
Chi-SQ
DF
0.409
18.309
9.000
0.970
0.619
4.000
1.000
0.004
1.000
Tab.3’ Test that remaining correlations are zero
Wilk's
Chi-SQ
DF
0.495
21.478
9.000
0.792
7.110
4.000
0.984
0.480
1.000
Tab. 4 Standardized Canonical Coefficients for Set-1
1
2
3
0.229
0.243
-1.892
-1.204
-0.812
1.084
-1.101
0.520
-0.546
Tab. 4’ Standardized Canonical Coefficients for Set-1
1
2
3
0.475
-1.067
0.793
-1.574
0.571
-0.392
-1.032
1.186
0.384
Tab.5 Standardized Canonical Coefficients for Set-2
1
2
3
-0.240
-0.739
0.778
-0.338
-1.051
-0.540
-1.058
-0.026
-0.491
Tab. 5’ Standardized Canonical Coefficients for Set-2
1
2
3
0.482
-0.246
-0.886
0.257
1.006
0.093
-0.778
-0.005
-0.708
1
2
3
1
2
3
1
2
3
X1
X2
X3
X1
X2
X3
Y1
Y2
Y3
Y1
Y2
Y3
、
、
Sig.
0.032
0.961
0.952
Sig.
0.011
0.130
0.488
、
The result of the test of significance is exhibited in Tab.2 Tab.3 Tab.2’ Tab.3’. From Tab.3 and
Tab.3’, we find the canonical correlation of the first variable couple is more notable (Sig.=0.032<0.05
and Sig.=0.011<0.05 ) than other two couples, which tell that the first canonical variable couple is
significant in statistics. Hence, the first variables couple is chose as the analytical reference in this paper.
From this point, we can know that the canonical correlation analysis is an adequate analytic method to
research the correlation between stock-right structure corporate performance and agency costs. At the
same time, the corresponding canonical correlation coefficients between two groups are exhibited in
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Tab.2 and Tab.2’, and the first canonical correlation coefficients is 0.760 and 0.613 respectively.
The standardized canonical coefficients are adopted in the results, and the canonical correlation
models of corporate performance and agency costs are exhibited in Tab.4 Tab.5 Tab.4’ Tab.5’. From
these tables, we can know the first canonical variable of stock-right structure, respectively, is:
P1= 0.475X1-1.574X2-1.032X3
Q1= 0.229X1-1.204X2-1.101X3
From the two formulas, we can know that the main influencing factors are X2 (Degree of
Stock-right Concentration) and (Degree of Stock-right Restriction) , while X1(Proportion of stocks
owned by state and juridical people) is less influential than those two.
The first canonical variable of corporate performance is:
U1= -0.24Y1 -0.338Y2 -1.058Y3
The formula indicates that the most main influencing factor of corporate performance is Y3 (Rate
of main operation proceeds earning), and the second one is Y2(Tobin’s Q), and the last one is Y1(Rate
of net capital earning ).
The first canonical variable of agency costs is:
V1= 0.482Z1 +0.257Z2 -0.778Z3
The formula indicates that the most main influencing factor of agency costs is Z3 (Total Capital
Velocity), and the second one is Z1 (Management Fee Ratio), and the last one is Z2 (Operation
Expenses Ratio).
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5 Conclusion and analysis
This paper chooses 35 listed corporations as samples, and adopts canonical correlation analysis to
researches the correlation of stock-right structure and corporate performance agency costs. The result
shows that Degree of Stock-right Concentration and Degree of Stock-right Restriction are the main
influencing factors to affect corporate performance and agency costs from the side of stock-right
structure. As known to everyone, the very high proportion of stocks owned by state is one of the most
important questions in stock-right structure in our country currently. Therefore, to adjust Degree of
Stock-right Concentration and Degree of Stock-right Restriction efficiently and optimize the stock-right
structure is the available approach to heighten corporate performance and to reduce agency costs in our
country.
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Main reference
[1] SUN Yong-xiang, HUANG Zu-hui. The Stock-right Struture and Corporate Performance in
Listed Corporations. Economy Research, 1999(12). (in Chinese)
[2] DU Ya-jun, ZHOU Ya-ping. The Correlation of The Stock-right Struture and Corporate
Performance——The Positive Research of a Part of Chinese Listed Corporations. Management
Science, 2004(2). (in Chinese)
[3] Miguel C. Manjón Antolín, 1985: Un estudio empírico de la separación de la propiedad y el
control en las sociedades bursátiles españolas (1989-1995)*, Facultad de Ciencias Económicas.
[4] Stephen D. Prowse, 1995: Corporate Control in Central Europe and Russia: Should Banks Own
Shares?, World Bank Policy Research Working Paper No. 1481.
[5] Bae,Sung C.,Klein,Daniel P..Event Rish Bond Convenants,Agency Cost of Debt and Equity,and
Stockholder Wealth.Financial Management,1994,23 4 28-40.
[6] J.S.Ang,R.A.Cole,J.W.Lin.Agency Cost and Ownership Structure. Journal of Finance, 2000, 55
1
81-106.
[7] GONG Jing, LIU Hong-yan. Research of Agency Costs of Our National Listed Corporations by
Demonstration. Statistic and Decision-making, 2004 5 . (in Chinese)
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