Are future capital gain opportunities important in the ... · Objective of this paper: p It is difficult to examine the relation between liquidity and blockholder governance due to

Are future capital gain opportunities important in the market for corporate

control? Evidence from China

1

Liping Dong, Beijing Wuzi University Konari Uchida, Kyushu University

Xiaohong Hou, CUMT

May 25, 2017

1 INCAS Annual Conference 2017

1 Introduction (1) Research question

2

May 25, 2017


Control Rights

Improve management

Stock Liquidity

New Blockholder

Affect??

Control rights Transactions

1 Introduction (2) Active Monitoring View

3

May 25, 2017


Control Rights

Stock Liquidity

New Blockholder

Active Monitoring

Opportunity to realize capital gains

Affect (+)

1 Introduction (3) Exit Threat View

4

May 25, 2017


Control Rights

Stock Liquidity

New Blockholder

Opportunity to exit

Affect (+)

Downward stock price pressure

Informed Investor

Effort for shareholder value maximization

Objective of this paper: p  It is difficult to examine the relation between liquidity and

blockholder governance due to endogeneity problems (Bharath et al., 2013).

1 Introduction (4)

5

May 25, 2017


p  By using novel data from China, this paper tests whether stock liquidity improves function of corporate control market.

Value effect of Monitoring

Blockholder Target

Stock liquidity

Other factors (e.g.) prospects for the target

1 Introduction (5) Characteristics of Chinese data

6

May 25, 2017


Split-share structure and block trades Non-controlling shareholder

Publicly Tradable shares (PTS)

Controlling shareholder

Non-publicly Tradable shares (NPTS)

Sell and Buy

Privately Sell Control Rights =Negotiated Transactions Hold less liquid NPTS

1 Introduction (6) Characteristics of Chinese data

7

May 25, 2017


Publicly Tradable shares (PTS)

Non-publicly Tradable shares (NPTS) Sell and Buy

Privately Sell Control Rights =Negotiated transactions

n  The split share structure reform from 2005 p  Convert NPTSs to PTSs p  Negotiated transactions began to transfer PTS.

Hold liquid PTS. He can sell the stocks

Reform since 2005

Main results

1 Introduction (7)

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May 25, 2017


Short-term stock price reaction Positive. PTS > NPTS

Long-term stock price performance Positive. PTS > NPTS

Governance change Pr. (New CEO or chief director from the bidder) > 50%

Asset growth PTS > NPTS

Stock price effect of PTS High Q firms > Low Q firms

n  Yes. Liquidity matters. n  Active monitoring view is supported. n  Capital gain opportunities incentivize bidders to expand the

firm.

Previous studies n  Traditional view:

p  Liquidity is bad for blockholders’ voice because it allows them to sell their

stake in a troubled firm (Coffee, 1991; Bhide, 1993).

n  Active monitoring view: p  Maug (1998): Liquidity allows the blockholder to buy additional shares at a

price that does not reflect the benefits of intervention.

p  Faure-Grimaud and Gromb (2004): Liquidity motivates the blockholder to

actively monitor the firm since it makes stock prices more accurately reflect

the value of monitoring activities.

2 Background information, previous studies and hypothesis (1)

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May 25, 2017


Previous studies n  Exit threat view:

p  Since liquidity encourages blockholders to gather much information when

they purchase blocks, blockholders’ exit is likely to drive down stock prices

substantially.

p  Bharath et al. (2013): block ownership is positively associated with the firm

value reduction during the foreign currency crises (Russian default crisis and

the Asian financial crisis).

p  Edmans et al. (2013): hedge funds tend to choose 13G filing rather than 13D

when they purchase a block of liquid stocks, and their 13G filing is

accompanied by a positive market reaction, a positive holding period return,

and an improvement in operating performance.


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May 25, 2017


We examine: p  Do control rights transactions serve as an effective governance

mechanism in China?

p  Do PTS transactions generate different performance effects from NPTS transactions? n  The illiquidity of NPTS is likely to prevents block trade bidders from

effectively improving management.

Hypothesis:

PTS transactions experience better stock price performance than NPTS transactions do.


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p  Sample selection §  234 block trades formally announced in 2003-2009 §  Sample companies listed on Shanghai and Shenzhen Stock

exchanges experienced block trades.

p  Data source §  CCER database

§  Hand collection •  Type of transferred shares

•  Management turnover

•  Bidders’ shareholdings in the post-block trade period

12

3 Sample selection and data (1) May 25, 2017

INCAS Annual Conference 2017

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Table 1Panel A : Distribution by announcement year

Initial announcement Formal announcement

PTS NPTS Total PTS NPTS Total

1999 0 (0.0%) 1 (0.6%) 1 (0.4%) 2000 0 (0.0%) 2 (1.2%) 2 (0.9%) 2001 0 (0.0%) 10 (6.0%) 10 (4.3%) 2002 2 (2.9%) 29 (17.5%) 31 (13.2%) 2003 1 (1.5%) 53 (31.9%) 54 (23.1%) 0 (0.0%) 73 (44.0%) 73 (31.2%)2004 1 (1.5%) 41 (24.7%) 42 (17.9%) 0 (0.0%) 47 (28.3%) 47 (20.1%)2005 14 (20.6%) 21 (12.7%) 35 (15.0%) 3 (4.4%) 25 (15.1%) 28 (12.0%)2006 23 (33.8%) 4 (2.4%) 27 (11.5%) 29 (42.6%) 15 (9.0%) 44 (18.8%)2007 7 (10.3%) 3 (1.8%) 10 (4.3%) 15 (22.1%) 2 (1.2%) 17 (7.3%)2008 10 (14.7%) 1 (0.6%) 11 (4.7%) 4 (5.9%) 3 (1.8%) 7 (3.0%)2009 10 (14.7%) 1 (0.6%) 11 (4.7%) 17 (25.0%) 1 (0.6%) 18 (7.7%)Total 68 (100.0%) 166 (100.0%) 234 (100.0%) 68 (100.0%) 166 (100.0%) 234 (100.0%)

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Panel D: Premium

PTS NPTS Difference test

Mean Median N Mean Median N t-stat. Z-stat.

PREMIUM -0.482 -0.553 58 -0.663 -0.718 158 -4.93*** -4.12***

Table 1

p Dong et al. (2014): p Bidders of Chinese block trades pay negative premium after

the split-share structure reform.

p PREMIUM: (block trade price – market price at the day before the initial announcement) / market price at the day before the initial announcement day.

p Chinese bidders enjoy discounts.

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Panel A: Types of bidder, seller, and target

PTS NPTS Total

Bidder type

Individuals 1 (1.5%) 0 (0.0%) 1 (0.4%)

Institutional investor 5 (7.4%) 23 (13.9%) 28 (12.0%)

Non-financial corporation 61 (89.7%) 142 (86.1%) 203 (87.1%)

Government agency 1 (1.5%) 0 (0.0%) 1 (0.4%)

Total 68 (100.0%) 165 (100.0%) 233 (100.0%)

Seller type

Individuals 1 (1.5%) 0 (0.0%) 1 (0.4%)

Institutional investor 5 (7.4%) 13 (7.8%) 18 (7.7%)

Non-financial corporation 59 (86.8%) 135 (81.3%) 194 (82.9%)

Government agency 3 (4.4%) 18 (10.8%) 21 (9.0%)

Total 68 (100.0%) 166 (100.0%) 234 (100.0%)

Target type

SOE 34 (50.0%) 106 (63.9%) 140 (59.8%)

Non-SOE 34 (50.0%) 60 (36.1%) 94 (40.2%)

Total 68 (100.0%) 166 (100.0%) 234 (100.0%)

Table 3

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Table 3Panel B: Target’s performance and the ratio of PTS prior to the block trade

PTS NPTS Difference test Mean Median N Mean Median N t-stat. Z-stat.

CER_1yr -11.6% -10.8% 66 -19.2% -17.4% 162 -1.70* -1.46

CER_3yr -69.4% -77.5% 65 -46.1% -45.1% 145 3.09*** 3.39***

ROA (Year -1) -2.5% -0.3% 66 -0.9% 1.4% 163 1.21 2.26***

Industry-adjusted ROA (Year -1) -5.3% -3.0% 66 -4.0% -1.5% 163 1.03 1.89*

PTSR (Year -1) 0.460 0.435 67 0.391 0.378 163 -4.14*** -3.37***

p  Target firms experience deteriorating performance before the block trade.

p  Corporate controlling shareholder sells control rights to another non-

financial corporation.

p  PTS targets have more outstanding PTS.

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4 Empirical results (1) May 25, 2017


Information leakage?

Panel A: Entire sample (N = 228)

　 Mean t-statistics Median Z-statistics

Abnormal returns (AR)AR (-5) 0.16% 0.236 -0.11% 0.096AR (-4) 0.40% 0.582 -0.03% 1.248AR (-3) 0.48% 0.699 0.07%** 2.016AR (-2) 0.78% 1.145 0.34%*** 3.951AR (-1) 1.13% 1.654 0.37%*** 4.940AR (0) 0.98% 1.429 0.36%*** 2.909AR (1) -0.18% -0.270 -0.55%*** -3.155AR (2) 0.01% 0.014 -0.33% -0.807AR (3) -0.12% -0.169 -0.25% -1.520AR (4) -0.16% -0.234 -0.22% -1.581AR (5) -0.09% -0.138 -0.19% -1.609Cumulative abnormal returns (CARs)CAR (-1, 0) 2.18%** 2.255 1.12%*** 5.764CAR (-1, 1) 2.22%* 1.875 0.97%*** 3.958CAR (-2, 2) 3.16%** 2.067 1.43%*** 4.745CAR (-3, 1) 3.72%** 2.435 2.01%*** 5.743CAR (-20, 20) 4.55% 1.0397 0.85%* 1.727

Short-term event study resultsTable 4

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Table 4Panel B: PTS versus NPTS transactions

　 Sample Mean Mean difference Median Median difference N

　2-day CAR

(-1, 0)　

PTS 3.80%**(2.070) 2.24%

(1.040)

2.31%***(3.717) 1.51%*

(1.923)

63

NPTS 1.56%(1.372)

0.80%***(4.513) 165

　3-day CAR

(-1, 1)　

PTS 5.01%**(2.225) 3. 85%*

(1.784)

1.36%***(2.889) 0.58%

(1.600)

63

NPTS 1.15%(0.829)

0.78%***(2.864) 165

　5-day CAR

(-2, 2)　

PTS 7.07%**(2.455) 5.45%**

(2.536)

4.82%***(3.457) 3.57%**

(2.027)

64

NPTS 1. 63%(0.904)

1. 25%***(3.684) 164

CAR (-3, 1)PTS 7.78%***

(2.701) 5.65%***(2.630)

4.53%***(3.906) 2.80%**

(2.228)

64

NPTS 2.13%(1.184)

1.73%***(4.434) 164

p  Positive stock price reaction. p  Significantly higher CARs for PTS transactions than for

NPTS transactions. Support Hypothesis.

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4 Empirical results (3)

p Regression analyses of CARs. § Dependent variable

•  CAR § Key independent variable

• D_PTS: Dummy variable that takes a value of one for PTS transactions, and zero otherwise.

§  Control variables •  FCF; LEVERAGE (ROA); Q (SIZE); FIRST;

D_SOETARGET; P_PTST; Annual index return. •  In the main empirical part, our regression does not

include year dummies due to their inherent high correlations with D_PTS.

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Sample Entire Entire PTS transactions and matched ones

PTS transactions and matched ones

Dependent variable 5-day CAR (-2,2) CAR (-3, 1) 5-day CAR (-2,2) CAR (-3, 1)　 (1) (2) (3) (4)

D_PTS 0.070***(3.57)

0.068***(3.56)

0.072***(3.69)

0.069***(3.59)

FCF 0.002(0.02)

0.057(0.96)

0.037(0.38)

0.142*(1.76)

SIZE -0.007(-0.82)

0.000(-0.05)

-0.016(-1.28)

-0.006(-0.37)

LEVERAGE 0.009(0.30)

0.006(0.24)

0.025(0.49)

0.013(0.29)

ROA -0.074(-0.86)

-0.107(-1.22)

-0.041(-0.33)

-0.041(-0.31)

Q 0.004(1.06)

0.005(1.34)

0.004(0.31)

0.006(0.45)

FIRST 0.027(0.62)

0.008(0.20)

0.004(0.31)

-0.002(-0.04)

D_SOETARGET -0.030*(-1.67)

-0.019(-1.20)

-0.048*(-1.82)

-0.033(-1.44)

Annual index return -0.007(-0.62)

-0.007(-0.69)

-0.012(-0.82)

-0.010(-0.83)

CER-1yr -0.072***(-3.92)

-0.064***(-3.22)

-0.090(-4.02)

-0.081***(-3.38)

Constant 0.134 (0.75)

0.009(0.05)

0.341(1.23)

0.127(0.37)

Industry dummy Yes Yes Yes YesYear dummy No No No NoR2 0.219 0.202 0.309 0.264N 207 207 117 116

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Table 7 (Short-term stock price reaction):

p  Models (1) and (2): positive and significant coefficient on D_PTS

p  PTS transactions receive more favorable stock price reactions than NPTS transactions do.

p  Models (3) to (4) use PTS targets and their matched NPTS targets, which are closest in the probability of being a PTS target.

p  The result rules out the possibility that the stock market favorably reacts to PTS transactions since PTS bidders target firms with high probability of performance improvement.

May 25, 2017


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Alternative stories:

n  Do differences in firm characteristics between PTS and NPTS targets affect results? p  No. Results are same for PTS targets and their matched

NPTS targets which are similar in the probability of being a block trade target.

n  Do PTS bidders pick up undervalued stocks? p  No. D_PTS is significant after controlling for CER_1yr. p  When we replace Q by PBR, we find a positive coefficient

on PBR.

n  Affected by the difference in PTSR? p  No. PTSR is not significantly associated with CAR.

May 25, 2017


23


n  Long-term stock price performance: n  12-, 24-, 36-month BHR from the month before initial

announcement.

n  BHR from the month before initial announcement to 12 month after the formal announcement

n  ABHR = Target firm’s BHR – Matched firm’s BHR

n  Matched firm: p  The non-block trade firm from same industry whose market value of

equity ranges between 50 percent and 200 percent of the event firm's

market value.

p  Closest to the event firm in the book-to-market ratio at the year before

the initial announcement.

May 25, 2017


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Panel A: Entire sample (N = 220) Investment horizon Mean t-statistics Median Z-statistics

12 month from tinitial – 1 10.86%** 2.47 3.57%* 1.82 24 month from tinitial – 1 18.58%** 2.54 3.66%* 1.95 36 month from tinitial – 1 27.08%*** 2.86 1.61% 1.64

(tinitial – 1 , tformal + 12) (annualized) 12.36%*** 2.66 1.55% 1.55 Panel B: PTS versus NPTS transactions

Investment horizon Transaction type Mean Difference Median Difference N

12 month from tinitial - 1 PTS

35.78%**

34.48%*** (3.61)

9.33%** 61 (2.57) (2.09) 8.08%*

NPTS 1.30% 1.26% (1.77)

159 (0.50) (0.78)

24 month from tinitial - 1 PTS 48.38%** 16.58%* 62

(2.22) 41.49%** (1.92) 15.40%

NPTS 6.89% (2.58) 1.18% (1.61)

158 (1.29) (1.01)

36 month from tinitial – 1 PTS 29.01% -2.42% 63

(1.27) 2.70% (0.45) -7.93%

NPTS 26.31%*** (0.13) 5.51%** (-0.78)

157 (2.72) (1.96)

(tinitial – 1 , tformal + 12) (annualized)

PTS 43.49%*** 15.61%**

62 (3.04) 43.35%*** (2.39) 15.76%**

NPTS 0.14% (4.36) -0.15% (2.39)

158 (0.05) (0.16)

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Table 8 (Long-term stock price performance): Panel A:

p  Target companies significantly outperform matched companies in the long-run.

p  The positive short-term stock price response is not arising from investors’ overreaction.

Panel B: p  PTS transactions record significantly higher ABHRs than

NPTS transactions do except for the 36-month investment horizon, which is consistent with hypothesis.

p  Why not significant for 36-month return? p  Increased PTS may generate downward price pressure.

May 25, 2017


26


Positive value effects. Which is true? n  Active monitoring view n  Exit threat view


PTS NPTS

Panel A: Bidder’s shareholdings

Hold target shares 1 year after the formal announcement 65 (95.6%) N=68 153 (93.3%) N=164



Panel B: Management turnover

Turnover of CEO or Chief director at the year of formal announcement

44 (62.9%) N=68 95 (58.6%) N=162

Turnover of CEO or Chief director at the year of or after the formal announcement

49 (72.1%) N=68 127 (77.4%) N=164

New CEO appointment from bidder at the year of formal announcement

34 (50.0%) N=68 70 (42.9%) N=163

New CEO appointment from bidder at the year of or after the formal announcement

38 (55.9%) N=68 83 (50.6%) N=164

Stock picking up story is not supported.

Table 9

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Operating performance and financial behaviors: n  Trace changes before and after the formal announcement year. n  Adjusted variable = Target firm’s variable – Matched firm’s

variable n  Matched firm:

p  Same industry form whose asset size ranges between 50 percent and 200 percent of the event firm’s asset size.

p  Closest in the variable under consideration. n  Operating performance:

p  We do not find evidence that PTS targets improve ROA significantly better than NPTS targets do.

May 25, 2017


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What is the source of value creation? n  Potential story:

p  PTS incentivizes bidders to pursue upside potential of stocks by enhancing firms’.

p  In contrast, NPTS bidders have very limited opportunities to realize capital gains even when the stock price significantly increases.

May 25, 2017


F0

PTS bidder: Big capital gain

Expansion

Shareholder Cash flow

NPTS bidder: Uncertainty for capital gain

29



Year -1Year 0( F o r m a l announcement)

Year 1 Year 2 Year 3 From Year -1 to Year 1

From Year -1 to Year 2

From Year -1 to Year 3

PTS transactions

-0.001(-0.27)0.000(0.73)

N=62

0.032(0.71)-0.018(-0.59)

N=63

0.075(1.56)0.022(1.17)

N=62

0.187***(3.00)0.059**(2.23)

N=66

-0.028(-0.36)-0.007(0.34)

N=68

0.251*(1.90)-0.034(0.55)

N=62

0.811**(2.39)0.107*(1.88)

N=62

1.117**(2.29)0.070*(1.68)

N=63

NPTS transactions

-0.006(-1.08)0.000(-1.37)

N=157

0.016(0.62)0.002(-0.21)

N=156

0.003(0.09)-0.022(-0.98)

N=155

-0.011(-0.43)-0.036(-1.45)

N=146

-0.055*(-1.67)-0.008(-1.35)

N=142

0.011(0.23)-0.041(-0.50)

N=158

-0.001(-0.01)-0.130(-1.19)

N=154

-0.038(-0.26)-0.179**(-2.06)

N=152

Difference test (t-sta./Z-stat.)0.52/1.30 0.32/-0.22 1.30/1.28 3.44***/2.85** 0.36/0.59 2.12**/0.61 3.27***/2.43** 2.97***/1.97**

Table 10: Percentage asset growth

n  PTS targets significantly increase assets than their industry peers and matched companies, although Tobin’s Q is higher for NPTS targets.

n  PTS targets also increase fixed assets significantly more than NPTS targets do.

30

5 Additional analyses (1)

n  Alternative story on the small value creation in NPTS transfers. n  Low bidding prices on NPTSs transaction might cause poor

performance of NPTS trades.

n  Do premiums explain value creation effects?

n  Do gratuitous transfers (control rights transfer without any compensations) will weaken bidders’ incentives to improve target firms’ management?

n  No, our analyses do not support this alternative story.

May 25, 2017


31

5 Additional analyses (2) May 25, 2017


Dependent variable/ Sample

CAR (-3, 1)Entire

CAR (-3, 1)Entire and Gratuitous Transfer

CAR (-3,1)Low Q firms

CAR (-3,1)High Q firms

CAR (-3, 1)Year 2005 and

afterCAR (-3, 1)

Entire

　 (1) (2) (3) (4) (5) (6)D_PTS 0.075***

(3.20) 0.063***

(3.96) 0.015(0.84)

0.098***(3.63)

0.074***(2.57)

0.045**(2.52)

PREMIUM -0.029(-0.72)

D_GRAT -0.001(-0.06)

FCF 0.070(1.06)

0.050(0.93)

0.179*(1.99)

-0.024(-0.27)

0.099(0.82)

0.073(1.18)

SIZE 0.005(0.44)

0.003(0.29)

-0.018(-0.98)

0.007(0.41)

-0.004(-0.24)

0.001(0.17)

LEVERAGE 0.015(0.39)

-0.005(-0.18)

-0.072**(-2.12)

0.050(1.52)

0.004(0.07)

-0.006(-0.23)

ROA -0.059(-0.61)

-0.100(-1.29)

-0.128(-1.10)

-0.123(-1.00)

-0.144(-0.93)

-0.165*(-1.82)

Q 0.005(1.01)

0.005(1.31)

-0.066(-1.42)

0.005(1.00)

-0.004(-0.18)

-0.001(-0.28)

FIRST 0.013(0.30)

0.045(1.18)

-0.005(-0.09)

0.038(0.62)

-0.024(-0.34)

0.023(0.55)

D_SOETARGET -0.021(-1.19)

-0.023(-1.49)

-0.032(-1.45)

0.000(0.00)

-0.042(-1.50)

-0.028*(-1.68)

Annual index return

-0.004(-0.35)

0.000(0.04)

0.017(1.51)

-0.033*(-1.82)

-0.015(-1.08)

CER-1Yr -0.074***(-3.43)

-0.061***(-3.46)

-0.054**(-2.20)

-0.065**(-2.01)

-0.090***(-2.88)

-0.060***(-3.27)

Constant -0.134(-0.63)

-0.055(-0.29)

0.560(1.25)

-0.200(-0.55)

0.126(0.32)

-0.034(-0.19)

Industry dummy Yes Yes Yes Yes Yes YesYear dummy No No No No No YesR2 0.222 0.198 0.280 0.369 0.245 0.290N 192 244 104 103 80 207

32


n  We proposed:

p  PTS transactions create more value than do NPTS ones because PTS bidders have stronger incentives to expand the firm.

n  If this story is true, PTS transactions create high value especially when the target firm has rich growth opportunities.

n  This prediction is supported.

May 25, 2017


33


n  Are you skeptical due to lack of year dummies?

p  Run regression for block trades announced in 2005 and after: n  D_PTS is still positive and significant.

p  Use year dummies instead of Annual index return:

n  S_PTS is still positive and significant.

p  Replicate the regression by using 5-day CAR(-2, +2) as a dependent variable:

n  Results are qualitatively same except that the significance of D_PTS becomes 10% when we use year dummies.

May 25, 2017


34


n  Additional analyses

p  Include the interval between initial and formal announcements. p  Add SOE bidder dummy.

p  Replace the dummy for SOE target to the dummy for block trades transferring control rights of SOE to private party.

p  All analyses engender a positive and significant coefficient on D_PTS.

May 25, 2017


35

6 Conclusions (1)

Main results p  Target firms’ stock prices show significantly positive

responses to initial announcements of block trades; target firms’ shares also outperform their industry peers in the long-run.

p  PTS transactions experience significantly larger stock price reactions and better long-term performance than NPTS transactions do.

May 25, 2017


36

6 Conclusions (2)

Main results (Conti.) p  Bidders appoint a new CEO or chief director for more

than 50% of block trades. p  Targets of PTS transactions significantly increase their

assets during the post announcement period than NPTS targets.

p  The positive stock price reaction to announcements of PTS transactions arises mainly from block trades targeting firms with rich growth opportunities.

May 25, 2017


37

6 Conclusions (3)

Contributions n  Show evidence that stock liquidity affects the function of

corporate control market, by using the Chinese institutional setting. p  Support the active monitoring view:

l  Maug (1998); Faure-Grimaud and Gromb (2004) n  The market for corporate control serves as a corporate

governance device in emerging markets. n  Policy implications: the split-share structure reform enhances

value creation activities in the corporate control market.

May 25, 2017


38

Thank you so much for your attention!

Documents

Are future capital gain opportunities important in the ... · Objective of this paper: p It is difficult to examine the relation between liquidity and blockholder governance due to