Helping Hand or Grabbing Hand? Central vs. Local Government Shareholders in Chinese Listed Firms
Yan-Leung Cheung, P. Raghavendra Rau, Aris Stouraitis
Review of Finance, Volume 14, Issue 4, October 2010, Pages 669–694, https://doi.org/10.1093/rof/rfp024
Minority shareholders appear to be expropriated in state-owned (SOE) firms controlled by local governments but not in SOEs controlled by the Central government, according to an analysis of related party transactions (RPTs) between Chinese publicly listed firms and their state-owned shareholders by Yan-Leung Cheung, Raghavendra Rau, and Aris Stouraitis. In Helping Hand or Grabbing Hand? Central vs. Local Government Shareholders in Chinese Listed Firms (Review of Finance; Oxford Vol. 14, Iss. 4, Oct 2010: 669-694), they analyze 181 hand-collected filings to China’s stock exchanges of RPTs between publicly listed SOEs and their wholly state-owned controlling shareholders during 2001-2002. RPTs are transfers of resources or liabilities between a listed company and the legal entities or individuals who control it, and can provide direct opportunities for controlling shareholders to extract resources from listed companies under their control.
Value transfer from the listed firm is measured as the ratio of excess shareholder value (abnormal stock returns at the announcement of the transaction times the firm’s market capitalization) over the announced size of the deal. The documented value transfer is substantial – minority shareholders lose 43% of the value of the median RPT – akin to a “tax” imposed on listed SOEs by their controlling government shareholders. This number is driven by firms controlled by local governments (or a large proportion of local government directors on their board). Local government controlled firms with better performance experience a larger value transfer to their controlling shareholders. In contrast, RPTs by firms with central government connections appear to benefit minority shareholders. The proportion of state ownership is not significant in explaining the value transfer. What is significant is the type of government shareholder (local or central) and the political affiliation of the firm’s directors.
In contrast, 427 arm’s length (non-related) acquisitions of assets and equity, asset sales, and sales of equity stakes undertaken by Chinese SOEs during the same period, do not reduce shareholder value. The same firms that destroy value when they undertake RPTs with their government parents, create value when they undertake arms’ length transactions with third parties.
In many provinces, non-tax revenue (including revenue from state-owned assets) is substantial. Most of the expropriation is concentrated in China’s richest provinces (measured by Gross Regional Product, unemployment, budget deficit), and in provinces where government bureaucrats are less likely to be prosecuted for misappropriation of state funds (based on 801 hand-collected corruption cases during 2001–2002 prosecuted by Chinese judicial authorities). Higher provincial anti-corruption effectiveness is associated with smaller wealth transfers away from firms undertaking RPTs.
Overall, the effects of local government ownership may differ from those of central government ownership. China may be representative of other large countries which are characterized by strong local governments with autonomy in influencing economic policy. Consequently, focusing only on the level of state ownership, rather than on the type, may miss part of the picture.