Three essays on empirical corporate finance and political economy
by Wang, Yongxiang, Ph.D., COLUMBIA UNIVERSITY, 2010, 186 pages; 3420879
Abstract: This dissertation is organized in three chapters. In the first chapter, which is a joint work with Charles W. Calomiris and Raymond Fisman (Forthcoming at the Journal of Financial Economics), we document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off. We argue that this results from the absence of a Chinese political transition to accompany economic reforms, so that the positive effects on profits of political ties through government ownership outweigh the potential efficiency costs of government shareholdings. Companies with former government officials in management have positive abnormal returns, suggesting that personal ties can substitute for the benefits of government ownership. In both cases, we may rule out explanations based on a supply effect of the share sales. We further find that the "privatization discount" is higher for firms located in Special Economic Zones, where local government discretionary authority is highest, And that companies with relatively high welfare payments to employees, which presumably would fall with privatization, benefit disproportionately from the privatization announcement.
The second chapter of the thesis analyzes the impact of mutual fund ownership on shareholder value in China. I take advantage of a government announcement that nontradable shares would become free to trade, but requiring that nontradable shareholders (mostly large block holders) pay compensation to tradable shareholders (mostly individuals and mutual funds). In the resultant contract negotiation over the rate of compensation, I find - in contrast to prior literature - that a high rate of mutual fund ownership negatively affects the compensation received by tradable shareholders. I argue that this is likely the result of agency problems among fund managers taking side payments (bribes) from non-tradable shareholders in exchange for poor bargaining outcomes. First, the negative impact of fund ownership exists primarily in state-controlled companies, which are less likely to face judicial action for making pay-offs. Additionally, the negative effect of fund ownership is concentrated among high-cash firms with funds available for side payments, and also firms that see a spike in "entertainment costs" in the year when negotiations took place. Event study analyses around the policy announcement provide consistent evidence - mutual fund ownership has a negative impact on announcement returns, particularly in state- controlled firms.
Finally in the third chapter of my thesis, which is a joint work with Raymond Fisman, we attempt to investigate the impact of corruption on firm performance and shareholder value in state asset sales in China. We document the under-pricing of state asset sales in China. Because these sales involved stakes in partially privatized firms, there is a credible benchmark - the price of publicly traded shares - to measure the extent and correlates of under-pricing. Shares sales of "dehat" owners - firms that misrepresent their state ownership status to elude regulatory scrutiny - are discounted 5-10 percentage points more than sales by other types of owners. We observe similar discounts for sales involving related party transactions. State asset sales have a positive effect on post-transfer performance based on event study evidence and also changes in ROA. However, these improvements are weaker among "dehat" sellers, highlighting the dependence of privatization outcomes on post-transfer ownership.
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