YanLeung Cheung P' Raghu Rao Aris Stouraitis

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The helping hand, the lazy hand, or the grabbing
hand? Government shareholders in publicly listed
firms in China
by Yan-Leung Cheung P. Raghu Rao Aris
Stouraitis
discussion by Sankar De Corporate Governance
in Emerging Markets Conference November, 2007
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Outline

• General observations
• Interpretation of main results
• Relation to the existing literature
• Some methodological comments
• Concluding remarks

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General observations

• Promising paper. The result that publicly listed
  companies with significant state ownership at the
  local level engages in value-destroying related
  party transactions with SOEs is interesting and
  convincing, though hardly surprising.
• Hand-collected data on listed company/SOE adds
  value
• Has an interesting implication for an
  increasingly important trajectory of research in
  law and finance area. Country studies such as
  the present paper can add significant insights to
  law and finance literature traditionally
  dominated by cross-country studies (as shown by
  Allen-Qian-Qian (AQQ,2005), Allen-Chakrabarti-De-Q
  ian-Qian (ACDQQ, 2007)

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General observations

• On the other hand, the data and the results on
  corruption are less convincing and not very
  well-tied to the first part of the paper.
• The claim that related party transactions are
  used by corrupt state officials as a specific
  channel to transfer resources away from public
  firms to SOEs, and then to their personal
  coffers, is at best conjectural.
• What does a larger number of misappropriation
  cases in the total number of corruption cases
  prosecuted signify?

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Interpretation of main results

• While the main result about related-party
  transactions with SOEs seems fairly robust, what
  does it tell us? How to interpret it?
  Specifically,
• As AQQ (2005) show, listed firms (along with
  SOEs) are only a very small part of the Chinese
  economy, so whatever the authors find regarding
  the role of local governments (grabbing hands)
  cannot be generalized very much.
• In fact, there is evidence that local government
  officials have played a helping hand in dealing
  with non-state, non-listed firms (the hybrid
  sector firms in AQQ), especially in the coastal
  areas where economic growth has been much faster.

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Interpretation of main results

• Combining (b) and the papers evidence, is it
  possible that local government officials may
  behave DIFFERENTLY with regard to different
  firms? For example,
• they generally lend a helping hand toward the
  hybrid sector firms (because these firms have
  considerable potential profits that could be
  shared, local government officials incentives
  can be aligned with those of the entrepreneurs),
• they behave much worse when dealing with listed
  firms with large state ownership, since these
  firms are at best average, and hence the best
  strategy for the officials may be to grab as much
  as possible while they can

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Relation to the existing literature

• The authors seem to be missing some very
  important and relevant papers. Necessary to
  consult them to position the paper better.
• Two types of papers
• Expropriation in the context of law and finance
  literature
• The Law and Economics of Self-Dealing , 2006, by
  Simon Djankov, Rafael La Porta, Florencio
  Lopez-de-Silanes, Andrei Shleifer (DDLS). The
  related transactions described in the paper are
  very much in line with the activity described in
  DLLS (and hence can be interpreted as case
  studies in China)

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Relation to the existing literature

• Perverse effects of state ownership in China
• Ownership, Institutions, and Capital Structure
  Evidence from China, 2007 by Kai Li, Heng Yue,
  and Longkai Zhao. SOEs have easier access to
  long-term loans, especially from banks, and have
  higher leverage than non-state firms
• Financial Distress without Bankruptcy The Case
  of China, 2007, by Joseph Fan, Jun Huang, and
  Ning Zhu. SOEs are more likely to
  face distress and receive soft lending during
  distress, and less likely to recover from
  distress.
• Das (Wasted) Kapital Firm Ownership and
  Investment Efficiency in China, 2007, by David
  Dollar and Shang-jin Wei. SOEs have much lower
  returns than privately-owned firms (both domestic
  and foreign. Reallocation of capital from state
  to private sector would improve efficiency and
  economic growth significantly.

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Some methodological comments

• Institutional background  the hand collected
  data on related transactions is a strong plus for
  the paper.  But the authors should provide more
  institutional background on the disclosure
  requirements. How can we be sure that the OTHER
  transactions (acquisitions and asset sales) are
  indeed NON-related?  
• They should also discuss what type of related
  transactions should be disclosed (they can
  consult DLLS (2006) on this issue) and when (the
  timing of the disclosure).  
• The institutional info would also help us
  understand whether we can use CAR as the main
  performance metric in statistical tests (see the
  next point).

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A few methodological comments

• Use of CAR as the primary test metric  The paper
  basically uses CAR (announcement returns of
  relates transactions) as the main vehicle to
  test the effect of government-controlled related
  transactions/ tunneling.  The procedure is valid
  if financial markets are semi-strong form
  efficient.  Chinas financial stock markets are
  by no means efficient, and hence the paper needs
  to address the appropriateness of this method.
  Specifically,
• Are the sample firms frequently traded and how do
  their P/E ratios compare to other similar listed
  firms during normal times? 
• As a robustness test, can we look at the
  non-market based performance of the firms
  (accounting, financial variables, whether going
  into distress, whether executives are arrested
  etc) following these transactions?

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A few methodological comments

• Low explanatory power of the regression tests
  very low R2 in all regressions (see tables 3b,
  4b, 5c, 5d) raises doubts about the results.
  Significantly, adding controls does not improve
  R2 (table 3b). Are they the right controls then?
• Concerns re anti-corruption effectiveness index
• Significance of the variables?
• High correlation between the variales

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Concluding remarks

• Interesting main result backed by hand-collected
  data offers promise of a good contribution.
• Law and economics angle should be explored
  further.

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• Thank You