CHINA FINANCIAL RESEARCH NETWORK
2010-06-08 第3卷 第3期
Fudan UniversitySchool of Management
China Europe International Business SchoolDepartment of Accounting
City University of Hong KongDepartment of Accountancy
Texas Christian UniversityM.J. Neeley School of Business
Chao Chen Fudan UniversitySchool of Management
Until recently, Chinese companies publicly listed in domestic stock exchanges had two classes of stock: tradable and non-tradable shares. These two classes of stock had the same voting, cash flow, and all other legal rights except that non-tradable shares cannot be transferred at the open markets. From 2005 to mid-2007, Chinese government completed the ownership reform, so-called the Split Share Structure Reform (SSSR), to convert all non-tradable shares into tradable shares. Under this reform process, the holders of non-tradable shares had to negotiate with those of tradable shares to determine how much liquidity premium, or the compensation ratio, non-tradable shareholders have to pay to tradable shareholders in order to obtain the liquidity right. This paper starts with a theoretical model to identify the fundamental factors, including price discount before and after the SSSR reform, the percentage of non-tradable shares in total shares, the volatility of tradable share price, and the lockup period, that should determine the compensation ratio. We show that those factors except price discount before the reform are statistically significant in determining the compensation ratio proposed by non-tradable shareholders. We further show that the agency problems also reveal themselves in the compensation ratios. Specifically, when a firm is controlled by a governmental agency, the compensation is higher. However, the compensation is lower when more concentrated in the top ten holders, especially when shares are held by mutual funds. Thus, the evidence is consistent with the notion that the agency problem exists in China’s fund managers. Finally, we show that the existence of agency problems also reduce the importance of fundamental factors in determining the compensation ratios.
Shimin Chen China Europe International Business SchoolDepartment of Accounting
This study examines the relation between political connections and investment efficiency in China. For listed state-owned enterprises (SOEs), we find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for those with than without political connections. Politically connected SOEs over-invest significantly more than non-connected SOEs. This negative impact of political connections is primarily observed in SOEs controlled by local governments and/or in SOEs without sufficient investment opportunities. However, for private enterprises, investment expenditure is significantly more sensitive to investment opportunities and over-investment is significantly less in politically connected firms than in those without such connections. We further show that over-investment reduces firm value across the board for both SOEs and private enterprises. Taken together, our findings suggest that political connections distort investment behavior, reduce investment efficiency, and damage firm value in listed SOEs in China, but for listed private enterprises, political connections improve investment efficiency, reduce over-investment, and consequently enhance firm value.
Zhihong Chen City University of Hong KongDepartment of Accountancy
Using a 2004 Chinese securities regulation that required equity offering proposals and other major corporate decisions to seek the separate approval of minority shareholders, we empirically test the effect of a regulatory increase in minority shareholders’ control over corporate decisions on shareholder value. While the overall stock market reaction to the announcement of the regulation is insignificant, the stock market reaction is more positive for firms with higher institutional (especially mutual fund) block ownership and more negative for firms with higher individual block ownership. The regulation helps deter management from submitting value decreasing equity offering proposals, especially for firms with higher mutual fund block ownership. In addition, value reducing equity offering proposals submitted in the post-regulation period are more likely to be vetoed in firms with higher block ownership of institutional and individual minority shareholders. Overall, our results suggest that the 2004 regulation increases shareholder value, especially in firms with higher mutual fund block ownership.
In-Mu Haw Texas Christian UniversityM.J. Neeley School of Business
This paper investigates whether Chinese equity investors price major earnings components correctly. Total earnings are decomposed into core and non-core earnings according to a classification framework of Chinese accounting principles. The results show that, as expected, core earnings are more persistent than non-core earnings. Most importantly, the market underestimates (overestimates) the value implications of changes in current core (non-core) earnings for future earnings changes. Therefore, future stock returns can be predicted based on the information that is contained in the components of current earnings. Both portfolio tests and regression analysis generate economically significant abnormal returns that are robust to sensitivity checks.
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