Nancy Huyghebaert

Expropriation of Minority Investors in Chinese Listed Firms: The Role of Internal and External Corporate Governance Mechanisms

Manuscript Type: Empirical. Research Question/Issue: We investigate how ownership structure, board characteristics, and regional differences in law enforcement and stock market development affect the conflict of interest between majority and minority investors in Chinese listed firms. For this purpose, we study related‐party transactions as well as labor redundancy, and classify firms as either state‐ or private‐controlled. Research Findings/Insights: We find that related‐party transactions grow more extensive as the wedge between the controlling shareholders control rights and cash flow rights increases. Related‐party transactions also rise with voting rights held by the government in state‐controlled firms. Next, the state as controlling shareholder exacerbates labor redundancy. The control rights of the second to tenth largest investors can offset expropriation. Regarding board characteristics, we find that a larger fraction of directors affiliated with the dominant owner enlarges related‐party transactions, while large boards also increase labor redundancy in state‐controlled firms. We find only weak evidence that higher‐quality institutions help to restrain expropriation of minority investors. Theoretical/Academic Implications: In Chinese listed firms, a major conflict of interest arises between majority and minority investors. Also, the state may exercise its control rights to achieve imperative social and political objectives, to the detriment of external investors. Yet, as the stock market valuation and financial performance of state‐controlled firms rise with the fraction of shares held by the state, future research should better delineate the conditions under which state ownership is either detrimental or beneficial to firms. Next, the results indicate that governance mechanisms suggested by conventional agency theory are deficient in Chinese listed firms. Future research could therefore establish more clearly when internal and external governance mechanisms are likely to work, thereby also taking into account the identity of the controlling shareholder. Practitioner/Policy Implications: Investors should be aware that expropriation in Chinese listed firms has specific implications when the state is the controlling owner. Also, at this stage of development, independent directors and external governance mechanisms can hardly protect the best interests of minority investors. Rather, expropriation is counterbalanced when voting rights are concentrated in the hands of other large block holders. Policy makers should work on ownership restructuring, board independence, and institutional quality to better protect minority rights in Chinese listed firms.

Can Stock Markets Predict M&A Failure? A Study of European Transactions in the Fifth Takeover Wave

In this paper we develop various measures of M&A failure for an intra-European sample during the fifth takeover wave: inferior long-term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short-term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately-held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long-term losses. In contrast, when targets are privately held, we find no evidence of such an association.

Ownership Dynamics after Partial Privatization: Evidence from China

This paper studies ownership dynamics in 221 Chinese state-owned enterprises that were partially privatized via the Shanghai Stock Exchange. We build probit models to investigate the further decline in government ownership after listing. We differentiate between share issuance, where state ownership is diluted as a result of rights issues and seasoned equity offerings, and government divestment. We find evidence that share issuance results in the dilution of state ownership in the highly profitable and leveraged firms that rely more on subsidies, while assets growth has a negative effect. The issuance decision is timed to occur when stock market conditions are favorable. Chinese authorities tend to sell part of their shares in the smaller and unprofitable firms reporting higher sales growth. Variables capturing the size of managerial incentive problems do not play an incremental role after controlling for firm performance. Finally, the divestment decision is not affected by windows of opportunity.

Share Issuing Privatizations in China: Determinants of Public Share Allocation and Underpricing

Using data on 451 Chinese privatizations over the period 1994-2002, this paper empirically investigates the firm and stock market characteristics that determine the size of the portion of new shares sold to the general public and underpricing at SIP-time. We find that poor performance and financing constraints, reflected by a low profitability and high leverage, mainly drive public share allocation. Also, the government widens ownership to a larger extent in firms that receive substantial subsidies. By contrast, stock market returns pre-SIP and variables capturing the firms growth opportunities do not positively affect public share allocation. Yet, in firms with a low market-to-book ratio, the government is more likely to relinquish its majority stake at SIP-time. The determinants of underpricing further illustrate the uniqueness of SIPs compared to private-firm IPOs. Overall, there is little evidence that information asymmetries regarding firm value influence first-day returns whereas stock market conditions have an impact. After accounting for the endogeneity of the public share allocation decision, we find that the fraction of ownership divested is significantly positively related to underpricing.

Large Shareholders and Value Creation Through Corporate Acquisitions in Europe. The Identity of the Controlling Shareholder Matters.

We investigate whether and how major shareholders influence M&A wealth effects for listed acquirers in Europe. To that end, we examine 342 intra-European takeovers of listed target firms announced between 1997 and 2007. We find that family-controlled acquiring firms on average engage in deals with substantially larger value creation, particularly in Continental Europe. However, this positive family effect disappears in industry-diversifying acquisitions, consistent with the idea that those family-controlled firms may also pursue corporate diversification through M&As in order to diversify the family wealth. Moreover, family owners across Europe cannot curb low-value acquisitions driven by managerial overconfidence. We relate this finding to the strong connections of family owners with management in family-controlled firms. Next, large institutional shareholders all over Europe are associated with the lowest-value deals, but they are able to limit the negative effects of managerial overconfidence. As to the division of M&A gains, we find that regardless of their identity, large acquirer shareholders tend to put their firm in a weaker negotiation position. Lastly, we find no robust support for the idea that major owners are less likely to pursue private benefits through M&As in countries with stronger investor protection.

Value creation and division of gains in horizontal acquisitions in Europe: the role of industry conditions

In this article, we empirically investigate the industry determinants of value creation through Mergers and Acquisitions (M&A) and the division of M&A gains for a sample of horizontal acquisitions in Europe during the period 1997–2008. We calculate the combined abnormal return around deal announcement to proxy for M&A value creation. Our results show that industry sales concentration and the ratio of the combined target and bidder size relative to the minimum efficient scale in the corresponding industry are significantly negatively associated with M&A value creation. The relation between industry sales growth and M&A gains is U-shaped. The extent of foreign competition within the industry, industry technological intensity and industry deregulation bear no significant association with M&A wealth effects, however. Finally, the data reveal that the division of M&A gains between target and bidder investors is determined by firm and deal characteristics rather than by industry conditions.

How Debt Creates Pressure to Perform When Information Asymmetries are Large: Empirical Evidence from Business Start-Ups

In this paper, we empirically examine how leverage affects firm performance when information asymmetries are large. We argue that entrepreneurs are strongly incentivized to maximize earnings when leverage is high in order to reduce the likelihood of adverse credit decisions and firm liquidation. Our empirical tests focus on the effects of leverage on firm profitability and growth in earnings during a 5-year window after start-up for a large and unique sample of newly established ventures in Belgium. Accounting for the endogeneity of leverage, the data reveal that more highly indebted business start-ups are not only more profitable but also realize larger earnings growth. Moreover, the positive effect of leverage on firm profitability intensifies as the venture matures.

Bookbuilding and share pre-allocation in IPOs

Publisher Summary Since the second half of the 1990s, initial public offerings (IPOs) in Continental Europe have increasingly used bookbuilding to market their shares. During this process, a special role is assigned to institutional investors, who frequently – but not always – are pre-allocated a fraction of the offering. This chapter empirically investigates the driving forces behind bookbuilding and share pre-allocation in IPOs. Using data on Belgian IPOs, it found that firms using the stock market as a financing vehicle are more likely to use bookbuilding and pre-allocate shares at the time of IPO. These decisions are not influenced by investor sentiment, as measured by the historical stock market return. However, information asymmetries are a major determinant of bookbuilding, whereas agency and monitoring considerations only influence the pre-allocation decision. Specifically, the firms where initial owners retain a large stake in the company post-IPO are less inclined to pre-assign a fraction of the offering to retail and institutional investors. Whereas, if post-IPO ownership by initial shareholders is smaller and the stock market is used as a financing vehicle, firms are more likely to pre-allocate shares at the time of IPO. Finally, the results demonstrates that underpricing is larger with bookbuilding whereas, preallocating shares reduces underpricing and enhance post-IPO stock liquidity.

Institutional development and financing decisions: evidence from a cross-regional study on Chinese listed firms

In this paper, we empirically investigate how differences in the development of legal and financial institutions across Chinese provinces and municipalities affect the financing decisions of Chinese listed firms. Our results indicate that a stronger regional enforcement of property rights reduces firms’ reliance on bank loans. Conversely, in regions with a larger government expropriation risk, firms raise more and shorter-term bank debt. Active regional bank lending positively impacts the debt ratio and the fraction of bank loans, but shortens loan maturities. The size of the local banking sector, the market capitalization as well as the liquidity of local stocks bear no relation with the capital structure. Overall, these relations do not depend upon the identity of the firms controlling shareholder. Nonetheless, our results do suggest that state-controlled firms benefit from easier stock market access.

Incidence and Structure of European Buyout Syndicates: Empirical Results from an Integrated Study

We empirically examine under what conditions lead financiers decide to finance a buyout through a syndicate of multiple investors and how these syndicates are structured, using a unique dataset of 865 European buyouts during 1999-2009. We rely on a theoretical framework that integrates the benefits of syndication, based on risk-diversification, resource-based, and deal-flow motives, and the costs of syndication, such as potential information and incentive problems within the syndicate. We find evidence that lead financiers syndicate to diversify target default and legal risk, and to learn about the institutions of the target country. Lead financiers subsequently decide on the fraction of the deal to retain and on the number of syndicate participants so as to minimize syndication costs while further maximizing syndication benefits. Interestingly, and after accounting for the endogeneity of syndication decisions, we find that the post-buyout profitability and growth of target firms are superior when buyouts are syndicated and when these syndicates are structured to maximize investor involvement while limiting conflicts of interest.