Download Expropriation of minority shareholders in the HK stock market

What price connection?
Expropriation of minority
shareholders in the HK stock
market *
by
Stephen Yan-leung Cheung
Department of Economics and Finance
City University of Hong Kong
*The paper is co-authored by Cheung, Ran and Stouraitis
“...China Logistics Group (00217) to confess
that millions of dollars has gone missing
from its coffers.... The bulk of the cash is
suspected to have vanished across the
border.... A HK$ 200 million deposit paid out
for the acquisition of Shanghai Pudong
CNCC Logistics Development was missing...
while the money left China logistics, it was
allegedly never received by the vendor.”
South China Morning Post, 18 September 2002.
Stephen Cheung
City University of Hong Kong
2
Introduction
Companies with concentrated ownership:
 extract case by selling assets, goods, or
services
 obtain loans on preferential terms
 assets transfer
 dilute the minority shareholders’ interests
Stephen Cheung
City University of Hong Kong
3
Introduction
A connected transaction is
a) any transaction between a listed issuer or any of
its subsidiaries and a connected person, whether
or not it also falls within any of the other
categories in 14.02; and
b) an acquisition or realisation by a listed issuer or
any of its subsidiaries of an interest in a
company, a substantial shareholder of the listed
acquiring or realising issuer or any of its
subsidiaries of the listed issuer or any of its
subsidiaries
Stephen Cheung
City University of Hong Kong
4
Objectives
1) What are the valuation effects of different
types of connected transactions?
2) What are the characteristics of firms more
likely to expropriate?
3) Does the market anticipate the
expropriation by firms?
Stephen Cheung
City University of Hong Kong
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Types of connected transactions
1) Asset acquisition
2) Asset sales
3) Equity sales
4) Trading relationships
5) Cash payments
6) Cash receipts
7) Subsidiary relationships
8) Takeover & joint-ventures
9) J V stake acquisition
10) Jo V stake sales
Stephen Cheung
City University of Hong Kong
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Observations
1) 2 times more assets acquisition than asset
sales; cash from listed companies to its
controlling owners
2) 3.5 times more in providing cash
assistance to third parties as opposed to
receiving assistance
3) Terms are unfavorable (acquiring at a
premium or selling at a discount) for most
deals when information are available
Stephen Cheung
City University of Hong Kong
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Results
Short-term,
 Average of -3.4% during a period of 10
days after announcement
Sales of equity stake
Sales of assets
Acquiring of assets
Trading relationships
Selling JV
Cash payment
Stephen Cheung
City University of Hong Kong
-11.8%
-6.4%
-7.5%
-7.5%
-6.1%
-2.5%
8
Long term,
 Average of -12.6% during a period of 12
months after announcements
Sales of assets
-21.9%
Trading relationships
-21.8%
Cash payment
-18.7%
Takeover & JV
-29.8%
Selling JV
-17.2%
Stephen Cheung
City University of Hong Kong
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All connected
CARs
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-12 -9
-6
-3
0
3
Month
6
9
12
Blue: Size & MB adjusted CARs
Red: Size adjusted CARs
Stephen Cheung
City University of Hong Kong
10
Returns are
 negatively related to percentage
ownerships by the main shareholders
 negatively related to proxies for
information disclosure
* value of transaction
* independent financial advisor
* Big 5 as auditing firm
Stephen Cheung
City University of Hong Kong
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 likelihood of undertaking connected
transactions is higher
* ultimate owners can be traced to
mainland China
 likelihood of not disclosing the value of the
deal and likelihood of violating the listing
rules are higher for
* Mainland China ownership
* Concentrated ownership
Stephen Cheung
City University of Hong Kong
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 Variable of Corporate governance do not
have any impact
* audit committee
* number of independent non-executive
directors
* CEO duality
Stephen Cheung
City University of Hong Kong
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Discussion
 The quality of independent non-executive
directors
 Information disclosure
 Regulatory framework
Stephen Cheung
City University of Hong Kong
14
~END~
Stephen Cheung
City University of Hong Kong
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