Paul B. McGuinness

The ownership structure of listed Chinese State-owned enterprises and its relation to corporate performance

In this study, the extant literature relating to the link between the ownership structure of Mainland PRC-incorporated enterprises and firm performance, is extended and updated by considering SOEs with substantial ‘foreign’ (i.e., non-Mainland) ownership. This analysis is carried out for the population of H-share issuers listed on HKExs Main Board as of May 2004. As with several of the previous studies, evidence of a negative association between ‘free-float’ size and corporate performance is apparent. Moreover, it is found that despite sizeable foreign ownership stakes, such stakes are not significantly associated with corporate performance. However, there is some preliminary evidence to indicate that profitability is generally higher in issuers where two or more major foreign investors are present.

Small new firms and the return to alternative sources of finance

This study analyses the returns to alternative sources of finance in the small new firm sector. Prior work in this area has concentrated on large established firms and has been subject to significant problems of interpretation. Many of these problems are absent when considering small new firms and this paper suggests that the various forms of finance used differ in terms of the return on capital employed they are associated with. In particular, sources of bank finance for small new firms are associated with higher returns than other available sources of finance.This paper, therefore, supports the results of Baumol et al. (1970, 1973) that externally raised finance is associated with higher returns vis-à-vis internally raised finance and suggests that small new firms are either inefficient in their use of funds or suffer from imperfections in capital markets. The determination of which of these arguments applies, however, awaits further research.

A re-examination of the holiday effect in stock returns: the case of Hong Kong

A strong pre-holiday effect is revealed in this study of Hong Kong stock returns. Importantly, the effect does not appear to be modulated by day-of-the-week effects, which themselves are highly volatile and inconsistent across various sub-periods. As documented in earlier studies for the 1970s and 1980s, a Chinese Lunar New Year (CLNY) effect has been highly significant in explaining Hong Kongs overall pre-holiday return effect. Re-examination of the issue here indicates that the effect has continued throughout the last 15 years. More tellingly, after controlling for Hong Kong holidays, a pre-US holiday return effect is absent from Hong Kong returns for the 1990–2005 sub-period despite its significance between 1975 and 1990. Besides confirming earlier evidence of an inherited US holiday effect in Hong Kong returns during the 1970s and 1980s, it is instructive to note that the waning US pre-holiday effect, as documented in various studies since, can be viewed through the prism of Hong Kong returns. While the US pre-holiday effect appears to have been purged, Hong Kongs own holiday effect, other than that relating to the CLNY, has generally weakened. Finally, despite the persistence of a strong CLNY pre-holiday daily return effect, a ‘seasonal’ run-up in stock returns in the weeks prior to the CLNY is less apparent than hitherto.

An Empirical Investigation of the Role of Signalling in the Valuation of Unseasoned Equity Issues

Abstract This paper investigates the role of signalling in the valuation of unseasoned equity issues on the Unlisted Securities Market (USM) in the UK. It extends the existing US literature by considering a wider range of signals and by taking note of the complexities of the issuing process. From the signals considered, firm value is significantly and positively related to the percentage of equity retained by the pre-offering entrepreneurs, the level of planned capital expenditures, the degree of underpricing, the quality of the reporting accountants and the relative costs of flotation. Additional results indicate that firm size and the motivations behind the seeking of a stock market listing affect firm valuations.

Changes in settlement regime and the modulation of day-of-the-week effects in stock returns

During the period 1989 to 1996, the New Zealand Stock Exchange modified the settlement regime of its listed stocks on six separate occasions. These changes provide an opportunity to assess the impact of settlement practice upon day-of-the-week returns in a more meaningful fashion than has, hitherto, been the case. The time-series approach suggested avoids many of the confounding effects, pertaining to differences in market micro-structure and trading characteristics, that plague inferences drawn from cross-market analyses. The precise impact of settlement on day-of-the-week returns is assessed using a methodology incorporating orthogonal contrasts. This approach avoids issues of multiple-testing and, as a result, offers new insights into the influence of settlement regimes on day-of-the-week returns. The results indicated little support for priors determined from standard settlement arguments. However, as in other markets, a depressed Monday return was evident.

An overview and assessment of the reform of the non-tradable shares of Chinese state-owned enterprise A-share issuers

Purpose - The purpose of this paper is to provide an updated and critical assessment of the share reforms relevant to Chinese A-share issuers listed in the two mainland markets of Shanghai and Shenzhen. The reform programme first began in 2005 and has now spread widely across issuers in the two markets. It is therefore timely to assess how effective the reforms have been as well as gauging the ongoing effects of the transformation (of non-tradable scrip into tradable form) on A-share prices. Design/methodology/approach - The “Split Share Structure” reform programme represents a major policy initiative in China and potentially opens-the-door to large-scale state-share disposals. The evidence to date however suggests that the Chinese authorities are primarily concerned with the reconfiguration of the array of share types that presently exist into a more comprehendible, streamlined form. The various checks and balances imposed on controlling shareholders engaged in the transformation of their shares from non-tradable to tradable form suggest that eventual re-designation of the holdings into an unfettered tradable type will not necessarily translate to the states acquiescence in the disposal of such shares. On the contrary, state holdings in the most strategic of assets are likely to be retained more or less intact. Insights are developed by focusing on examples involving major A-share issuers. In particular, a case study of the Sinopec reform proposal of August/September 2006 is set out to help illuminate the principal features of the reform package. Critical examination of the empirical literature relating to the A-share price effects of the share reform programme also features. Findings - There is little evidence to date of significant stock disposals amongst the largest and most strategic of Chinas issuers. However, for a number of A-listed issuers, parts of the lock-up moratoria have already expired or are set to do so in the very near future. Given the precipitous fall in A-share prices (in Shanghai and Shenzhen) since late 2007, largely wrought by the enveloping global credit-crunch, the Chinese authorities have an even more compelling case than hitherto to assiduously dampen fears of large-scale state-share disposals. Notwithstanding this, at least a small part of the drop in A-share values during 2008 derives from the building risk-premium on this issue. Research limitations/implications - As the trading moratoria on re-designated shares still applies in most cases, at least in respect of the majority of domestic stock holdings, a clearer picture will not emerge until 2009-2011 when all such moratoria would have lapsed. Originality/value - The discussions in this paper help to bring into focus a highly topical issue within the context of the Chinese equity market.

Comparison of the ‘turn-of-the-month’ and lunar new year return effects in three Chinese markets: Hong Kong, Shanghai and Shenzhen

Within the context of the mainland Chinese (Shanghai and Shenzhen) and Hong Kong market places, we investigate two of the most important documented calendar anomalies: the ‘turn-of-the-month’ and Chinese Lunar New Year (CLNY) return effects. Both appear as features of all three markets over the 1995 to 2010 time-frame. However, the ‘turn-of-the-month’ effect is much more pronounced in Hong Kong and the mainland B-markets than it is in the more segmented and less international (mainland Chinese) A-market. The CLNY effect is concentrated in returns over four trading days: three days prior to and one day after the CLNY holiday. Moreover, the effect is common to all major sectors of the Hong Kong market as well as to the Shanghai and Shenzhen A- and B-markets. Despite an elevation in mean return levels at the ‘turn-of-the-month’ and CLNY, volatility levels appear little different to other periods. In addition, as in McGuinness (2005), a pre-CLNY seasonal effect is absent from results. A post-CLNY seasonal effect, capturing the earnings reporting season in Hong Kong, also proved elusive. Consistent with McConnell and Xu (2008) for the US, we also offer no discernible evidence of a ‘turn-of-the-month’ effect at quarter ends. Finally, and importantly, we find strong evidence that Hong Kong short-sales turnover shrinks as the calendar month-end nears. This is consistent with some participants delaying or bringing-forward short positions so as to avoid an anticipated upturn in returns at month-end.

The Listing of Chinese State-Owned Banks and their Path to Banking and Ownership Reform

Chinas leading state-owned banks have undergone radical transformation in recent years, with six of the countrys top seven players listed in both Hong Kong and Shanghai. We first consider how the banks were reorganized for initial public offering, in terms of the removal of non-performing loans and the massive recapitalization of their balance sheets. Second, and more importantly, we consider whether they have been able to retain market share, further commercialize and enhance overall financial positions post-listing. Through in-depth case analysis of the six state-owned banks, we show that post-initial public offering they have significantly improved profitability, loan book size, loan book quality and capital reserve protection. However, we caution that the debilitating effects of the global credit crunch may slow or even arrest further progress across these dimensions in the near term. We conclude that Chinas leading banks have benefited materially from their transition, and have accordingly developed a range of competitive and co-operative strategies not only to sustain domestic market advantage but also to penetrate overseas markets.

The role of ‘cornerstone’ investors and the Chinese state in the relative underpricing of state- and privately controlled IPO firms

In recent years, China has partially privatized some of its most important state-owned enterprise companies. Hong Kong has been host to the largest of these issues and during the five-year period, 2005–2009, more initial public offering (IPO) funds were generated through this market than any other. A key development in this market has been the emergence of ‘cornerstone’ investor agreements, which earmark stock allocations to privileged investor parties in the immediate run-up to prospectus release. This study offers a number of important contributions. First, after assessing the characteristics of such agreements, multivariate results point to some evidence of a positive association between the presence of such agreements and initial IPO returns. Second, the Perotti (1995) model contention of increased initial returns in state-controlled entities fails to garner support. Third, as an extension of work on the ‘political connections’ of Chinese A-share issuers (Fan et al., 2007; Francis et al. 2009), the political importance of issuers in the Hong Kong market-place is assessed. This study finds little evidence to support the notion that Chinas most politically important (strategic) issuers face lower underpricing levels than other issuers. Fourth, IPOs pitched between the incipient phase of the Global Credit Crunch (November 2007) and the Lehman Brothers’ Collapse (September 2008) generated significantly weaker initial returns than issues in other periods. Fifth, IPO clustering, underpricing rates on concurrently positioned offerings and an issuers price-to-earnings ratio also function to explain initial returns. This last area supports the contention that offer prices fail to fully impound publicly available information (Bradley and Jordan, 2002; Loughran and Ritter, 2002).

Reform in China's 'B' share markets and the shrinking A/B share price differential

The use of capital controls in mainland China has meant that shares in listed PRC state enterprises - traded in either Shenzhen or Shanghai - have been broadly separated into ‘A’ and ‘B’ share categories. ‘A’ shares are traded in Chinese RenMinBi and are restricted to trades between indigenous investor concerns, whilst ‘B’ shares trade in US