What price connection Expropriation of minority shareholders in the HK stock market

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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

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• ...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.

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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

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Introduction

• A connected transaction is
• 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
• 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

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Objectives

• What are the valuation effects of different types
  of connected transactions?
• What are the characteristics of firms more likely
  to expropriate?
• Does the market anticipate the expropriation by
  firms?

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Types of connected transactions

• Asset acquisition
• Asset sales
• Equity sales
• Trading relationships
• Cash payments
• Cash receipts
• Subsidiary relationships
• Takeover joint-ventures
• J V stake acquisition
• Jo V stake sales

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Observations

• 2 times more assets acquisition than asset sales
  cash from listed companies to its controlling
  owners
• 3.5 times more in providing cash assistance to
  third parties as opposed to receiving assistance
• Terms are unfavorable (acquiring at a premium or
  selling at a discount) for most deals when
  information are available

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Results

• Short-term,
• Average of -3.4 during a period of 10 days after
  announcement

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• Long term,
• Average of -12.6 during a period of 12 months
  after announcements

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• Blue Size MB adjusted CARs
• Red Size adjusted CARs

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• 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

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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

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• Variable of Corporate governance do not have any
  impact
• audit committee
• number of independent non-executive
  directors
• CEO duality

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Discussion

• The quality of independent non-executive
  directors
• Information disclosure
• Regulatory framework

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END