State Policy, Ownership, and Firm Value: The Evidence of the Statecontrolled Privatized Firms in Chi

1
State Policy, Ownership, and Firm Value The
Evidence of the State-controlled Privatized Firms
in China

• Jeng-Ren Chiou, Li Cheng ,
• Yenn-Ru Chen, Cheng-Few Lee
• Cheng Kung University, Taiwan.
• Rutgers University, New Jersey, USA

2
The Overview

• Motivation and the main purpose
• The Development of Security Markets in China
• The relation of ownership and performance in
  Chinese listed firms
• Sample and data collection
• Empirical Design and Results
• Conclusion

3
Motivation

• Since 1978, China has reformed to a socialist
  market-planned economy.
• Due to increasing demand for capital,
  privatization of SOEs by issuing shares on the
  primary market encouraged to establish Shanghai
  and Shenzhen stock markets in 1990s.
• However, the Chinese government still does not
  want to lose control of newly listed firms. The
  ownership of privatized firms is concentrated
  held by the state or state agencies.

4
Motivation (Cont.)

• Being effectively controlled by the state, the
  firms may not be able to improve their value
  after privatization since state interference may
  not allow them to pursue the objective of firm
  value maximization.
• While previous studies have examined the
  relationship between ownership and value of
  privatized firms in China, the results are not
  conclusive.
• Moreover, previous studies do not
• consider political influence on firm value.

5
Main Purposes

• We argue that the inconsistent empirical evidence
  is due to lack of consideration of state
  influence that simultaneously impacts firm value
  and ownership.
• This study examines the relation between
  ownership concentration and firm value, taking
  into account the implications of state influence
  and firm-specific economic factors.

6
Main Purposes (Cont.)

• We first perform the Hausman test to ensure that
  ownership and firm value are simultaneously
  determined.
• If an endogenous effect exists, then we use the
  2SLS and 3SLS estimated methods to investigate
  the relation between ownership concentration and
  firm value.

7
The Development of Security Markets in China

• Starting from 1978, China has implemented
  economic reforms in order to make the transition
  from a planned economy to a socialist
  market-planned economy.
• To meet their increasing demand for capital, it
  is essential to devise policies regarding the
  privatization of SOEs by issuing shares on the
  primary market, thus encouraging the
  establishment of security markets in Shanghai and
  Shenzhen in 1990 and 1991 (Lee and Rui, 2000).

8
The Development of Security Markets in China
(Cont.)

• In its bid to privatize SOEs in order to generate
  the capital needed, the Chinese government still
  does not want to lose control of the newly
  privatized firms.
• To this end, the state not only retains a certain
  level of ownership but also restricts the trading
  of most of the listed firms shares.

9
The Development of Security Markets in China
(Cont.)

• The ownership structure in China is complex
  (before share reform)
• Non-tradable shares they are mostly held by the
  state, institutions, employees and others.
• Tradable shares they are mostly held by domestic
  individual investors (referred to as A-shares)
  and foreign investors (referred to as B-shares
  and H-shares).

10
The Development of Security Markets in China
(Cont.)

• The ownership of privatized firms is concentrated
  held by the state or state agencies.
• However, the ultimate owners of the state shares
  of privatized firmsthe Chinese citizensare
  unable to manage and monitor company operations.
• The SASAC is given the responsibility for
  managing all state assets.

11
The Development of Security Markets in China
(Cont.)

• Since the SASAC do not closely monitor the
  privatized SOEs, managers are often able to
  expropriate shareholder wealth via perk
  consumption and tunneling of assets to other
  entities.
• Accordingly, privatized firms are believed to
  perform poorly when the level of state share is
  high.

12
The Development of Security Markets in China
(Cont.)

• Realizing that state control is the main reason
  affecting firm value, the Chinese government has
  declared its intention to reduce the proportion
  of state shares in competitive industries and to
  withdrawal capital from poorly performing SOEs.

13
The relation of ownership and firm value in
Chinese listed firms

• A few studies examine the relation between
  ownership and firm value for privatized firms in
  China. However,
• The results in previous studies are inconclusive.
• Previous studies do not consider political
  influence.

14
The relation of ownership and firm value in
Chinese listed firms

• First, inconsistent findings in previous studies
• Xu and Wang (1999), Chen (2001), and Sun and Tong
  (2003)
• a positive relation between ownership
  concentration and firm value
• firm value is negatively related to state shares
  but positively related to institutional shares.
• Wei et al. (2005)
• institutional shares are indirectly controlled by
  the state and thus have the same effect as state
  shares on firm value.
• Therefore, they find that state and institutional
  ownership are both negatively related to firm
  value.

15
The relation of ownership and firm value in
Chinese listed firms

• In circumstances under the state controls the
  majority of company shares and such control leads
  to poor performance, the relation between
  ownership concentration and firm value should not
  be positive.
• Nevertheless, Xu and Wang (1999) and Chen (2001)
  find a positive relation.
• Such a discrepancy among the empirical findings
  raises the possibility that the positive relation
  between ownership concentration and firm value
  suggested on the basis of an exogenous relation
• in prior studies may not always be true.

16
The relation of ownership and firm value in
Chinese listed firms

• Second, previous studies do not consider
  political influence
• The empirical findings conclude that a higher
  level of state ownership indicates stronger
  political influence that harms a firms value
  (Qi, Wu and Zhang, 2000)
• However, studies in the literature using Chinese
  data do not consider that ownership structure and
  firm value are affected by political influence.

17
The relation of ownership and firm value in
Chinese listed firms

• This study examines the relation between
  ownership concentration and firm value, taking
  into account the implications of the state
  influence and firm-specific economic factors.

18
Sample and Data Collections

• Observations 6,014 non-financial firms
• listed on Shanghai and Shenzhen Stock
• Exchanges
• Sample Period from 1996 to 2004
• Data source CCER database

19
Empirical Design

• The simultaneous equation model presents as
  follows

(1) (2)
20
Table 1Descriptive Statistics
21
Table 2Estimation of OLS Regression
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
22
Table 3 Estimation of Simultaneous Regression
Panel A The Result of 2SLS Estimations
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
23
Table 3 (Cont) Estimation of Simultaneous
Regression
Panel B The Result of 3SLS Estimations
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
24
Table 4 The Results for the Two Sub-samples
Covering the Periods before and after the Year
2001
Panel A The Result of 2SLS Estimations
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
25
Table 4 (Cont) The Results for the Two
Sub-samples Covering the Periods before and after
the Year 2001
Panel B The Result of 3SLS Estimations
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
26
Table 5Additional Test for the Nonlinear Impact
of Ownership Concentration on Firm Value
Panel A The Results of OLS estimates
The change from positive to negative suggests
that conclusions on the basis of OLS empirical
results may suffer the problem of model
specifications.
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
27
Table 5 (Cont.) Additional Test for the
Nonlinear Impact of Ownership Concentration on
Firm Value
Panel B The Results of 2SLS estimates
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
28
Table 5 (Cont.) Additional Test for the
Nonlinear Impact of Ownership Concentration on
Firm Value
Panel C The Results of 3SLS estimates
Asterisks (, and ) denote statistical
significance at the 1, 5, and 10 levels,
respectively.
29
Conclusion

• China has reformed since 1978, the state owns the
  majority shares of listed firms in order to keep
  control.
• We argue that state influence simultaneously
  affects both the ownership and value of
  privatized firms.
• However, prior studies all assume the existence
  of an exogenous relation while examining the
  influence of ownership on firm value, leading to
  mixed results.

30
Conclusion (Cont.)

• We apply Hausman test to confirm the endogenous
  relation between ownership concentration and firm
  value.
• By controlling for state policies as well as
  other economic factors and for the endogenous
  effect, we find a significantly negative relation
  between ownership concentration and firm value.
• This finding supports the argument that firms
  perform poorly under state control, and the mixed
  results of prior studies are due to
• model misspecification.

31
The End