INSTITUTE OF DEVELOPING ECONOMIES Discussion Papers are preliminary materials circulated to stimulate discussions and critical comments Keywords: corporate governance, concentrated owner, expropriation, state owned enterprises, China JEL classification: G32, G34 ,K22、P31, P34 * Comments welcome. Research fellow, Area Studies Centre, IDE (marikot@ide.go.jp) DISCUSSION PAPER No. 224 Separation of Control and Cash-Flow Rights of State Owned Listed Enterprises: Channels of Expropriation after the Discriminated Share Reform in China Mariko WATANABE* June, 2010 Abstract Literature on agency problems between controlling and minority owners claim that separation of cash flow and control rights allows controllers to expropriate listed firms, and further that separation emerges when dual class shares or pyramiding corporate structures exist. Dual class share and pyramiding coexisted in listed companies of China until discriminated share reform was implemented in 2005. This paper presents a model of controller’s expropriating behavior as well as empirical tests of expropriation via particular accounting items and pyramiding generated expropriation. Results show that expropriation is apparent for state controlled listed companies. While reforms have weakened the power to expropriate, separation remains and still generates expropriation. Size of expropriation is estimated 7 to 8 per cent of total asset. If the “one share, one vote” principle were to be realized, asset inflation could be reduced by 13 percent.