Chinese Securities Research Articles

Cumulative Voting: Investor Protection or Antitakeover? Evidence from Family Firms in China

AbstractManuscript TypeEmpiricalResearch Question/IssueThe Chinese government regulates on the adoption of cumulative voting (CV) in order to protect minority shareholders by allowing them to elect a dissident director. However, adopting CV may deter potential acquirers, reducing the effectiveness of corporate takeover as a governance mechanism. Even worse, lacking enforcement of CV adoption allows firms to adopt CV when they need to deter potential acquirers.Research Findings/InsightsFirst, we find CV adopters have better governance overall, but also have tightened control such as higher ownership concentration. This evidence hints that when a firm adopts better governance to signal the market, it may tighten control in other ways such as increasing shareholder power and adopting CV. Second, we distinguish the role of CV in investor protection by examining its competing effects on tunneling and antitakeover. We find that CV does not reduce tunneling but lowers the probability of CEO turnover and of the firm becoming a takeover target. These results indicate that CV is used as an antitakeover measure in family‐controlled listed companies. Finally, we find that adopting CV has no impact on company performance.Theoretical/Academic ImplicationsOur evidence sheds light on the incentives embedded in the ownership structure that can determine the governance mechanism in family firms.Practitioner/Policy ImplicationsSince 2002, the Chinese Securities Regulatory Commission requires firms with a controlling shareholder holding more than 30 percent of shares to adopt CV. Our study shows that this policy has unintended consequences and does not always protect minority shareholders.

Research on Forecast Model and Application of Customer Loyalty under the Background of Big Data

As competition of Chinese securities industry becomes increasingly fierce, customer loyalty management has become the core elements of enterprise competition. Combining cross industry standard process for data mining (CRISP-DM) process model, flow visualization, this article adopts the mining method of large data to find the key factors to describe customer loyalty, and establishes customer loyalty prediction model of two dimensions, according to the model can effectively predict customer loyalty degree, support enterprise decision makers develop corresponding retention strategies.

Editors' Note

One thing that is striking in reading the contributions for this issue is their breadth. With contributors from the UK, the USA, Poland, Singapore and Hong Kong and with topics as diverse as OTC derivatives regulation in Europe, the role of international investment arbitration, European regulation of emission allowances, how best to regulate forward-looking disclosure in the Chinese securities markets and an analysis of the tax treatment of frequent flyer benefits, there really is something from everyone. At their core, each of the articles is concerned with the operation of markets and the implementation or enforcement of the regulation of those markets, often at an international level and often illustrated by looking internationally to how different jurisdictions have approached the issue at hand. In some cases, the regulation is new, in other cases, our contributors argue for the review of an existing framework of regulation. What is also striking is how much all this illustrates that one feature of the development of a wide variety of capital markets is that they are subject to greater regulation, and that increasingly this is as a result of international efforts for the harmonization of global regulation, and that increasingly the markets look beyond borders to develop and attract investors. Where regulation is amiss or enforcement ineffective, we as participants in those markets have a role to play in identifying the problem areas and making the case for change.

Regulating forward-looking information in offering prospectus and periodic disclosures in Chinese securities market--past, present and future

Information disclosure has been recognized as the cornerstone of modern securities regulation. There are two categories of information disclosure: ‘historical information’ and ‘forward-looking information’. The former is characterized by information pertaining to events that have occurred, the most familiar example being accountingbased information such as that contained in a company’s financial statements, including reporting items such as the sales, expenses and income produced from operations for a specified period. The latter type of information usually refers to statements regarding the anticipated future performance of a company, and includes disclosures such as earnings projections and business development plans. Investors often tend to make investment decisions based not only on the factual statements of issuers, but also on forward-looking information like projections of issuers’ Key points

The complexity and fractal structures of CSI300 before and after the introduction of CSI300IF

This paper employs multifractal detrended fluctuation analysis (MF-DFA) approach to analyze the complexity and fractal structures of China Securities Index 300 (CSI300), which covers the period from April 5, 2006 to May 9, 2014. Through comparing the statistic properties before and after the introduction of CSI300 index futures (CSI300IF), we find that: (1) the price return series exhibits multifractal properties for the two periods; (2) by comparing the efficient measure based on the general Hurst exponent, we find the market becomes more efficient after the introduction of CSI300IF; (3) the width of multifractal spectrum becomes narrower, which means the complexity of the market is decreased. Therefore, the introduction of CSI300IF is beneficial to reduce the risk and increase the efficiency of Chinese securities market. Furthermore, the main sources of multifractality of these time series are examined through the shuffle method, and the results show that before CSI300IF the multifractality is mainly due to the long-range correlation properties between small and large fluctuations, while after CSI300IF it is more due to fat-tailed probability distributions.

An empirical study about catering theory of dividends: The proof from Chinese stock market

Purpose: This paper aims to study the remarkable effect of dividends catering in Chinese stock market, and its significance on dividend policy and investment decisions. Is there a significant difference in operation status of companies between issuing cash dividend and those without cash dividend, and which one is the better? Is there a significant difference in income level of stocks between issuing cash dividend and those without cash dividend, which one is the higher? Is the irrational preference of cash dividend detracting along with the development and improvement of securities market? All issues above need the market inspection. Design/methodology/approach: Based on related dividend theories and the empirical data of Chinese securities market, we construct three portfolios including stock dividend, cash dividend and non-dividend. The paper studies the returns from these three kinds of portfolios which is analyzed by the least significant difference method, co-integration model, Sharpe index model, and error correction model, and then finally comes to the conclusions. Findings: The main finding is that there is significant effect of dividends catering in Chinese stock market; the income level of cash dividend portfolio is significantly lower than that of other portfolios; the listed companies issuing stock dividend have a high investment value. Originality/value: Through collecting a lot of data from the year 2004 to 2009 and developing models to analyze, the paper deem that whether the earnings growth or not determines the dividend policy of listed companies, and that stock dividend is the natural choice for those listed companies which have sustainable development advantages.

Robust Factor Analysis and Its Applications in the CSI 100 Index

We apply the object-oriented robust factor analysis R package robustfa to the 28 financial indicators of the 100 listed companies in China’s Chinese Securities Index (CSI) 100 index in the first quarter of 2013. First of all, according to the size of the data, we automatically choose a robust estimator, the robust Ogk estimator. By the Mahalanobis distances which are computed by the robust Ogk estimator, greater than the critical value, we find a total of 47 abnormal points. This paper discovers that the results of the sample correlation matrix, the rotated factor loading matrix, the contribution of the factors to the original variables, the contribution rate, the cumulative contribution rate, the screeplot of the eigenvalues of the sample correlation matrix, the scatter plot of the first two factor scores, factor scores, and the sorted scores according to factor scores etc. computed by the classical estimator and the robust Ogk estimator are quite different. Finally, we condense the 28 financial indicators to 5 factors by combining the principal component analysis method and the robust Ogk estimator: Provident fund market value factor, profit factor, market value profit rate factor, value per share factor, and asset liability factor. Finally, we sort the 5 factor scores from high to low of each factor, and also get some special stocks according to the factor scores. The robust factor analysis results provide a good basis for investors to choose the stocks.

金融股票分析师的建议真的有投资价值吗？——来自中国证券市场的一个实证报告

本文随机选取了中国证券市场30支1股票，就其2012年12月25日至2013年12月25日的投资评级报告和股票价格数据来对股票的收益率与投资评级间的关系进行了统计规律的研究。其中，为保证统计分析的有效性，采用了统计分析中著名的Box-Cox变换，并使用了最优化方法。通过极大化F统计量来构造股票收益率与投资评级、前一期收益率间的最优线性回归模型。实证分析结果表明，股票收益率的后续表现与相应前一期的收益率相关，而与分析师的投资评级无关。 In this paper, we randomly selected 30 stocks from the Chinese securities market. We carried out research about the relation between the stock yield rate and the investment rate in the laws of the statistics, using its investment rate reports and stock prices from December 25th in 2012 to December 25th in 2013. Among them, in order to ensure the validity of the statistical analysis, we use the famous Box-Cox Transformation in the statistical analysis and adopt the optimization method. By maximizing the F-statistic, we could choose the optimal linear regression model among the stock yield rate, the investment rate and the previous stock yield. The empirical analysis results show the correlation between stock returns and its early returns; however, the analysts’ investment rate has nothing to do with the subsequent performance of the stock yield rate.

Capitalism with Chinese Characteristics? – the Case of the Developing Securities Law in China

This article first examines the reasons behind the initial emergence of the securities market in post-Mao China. It then provides a narrative of the rapid development of the market, which is followed by an examination of the features of Chinese securities and futures regulation. The aim of analysis here is to highlight some specific features of the Chinese securities market and its regulation and thus, to shed light on the potential for corruption in the present system as a result of the dual-system scheme – capitalist practice within a socialist setting without an effective regulatory framework that also incorporates checks and balances.

Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee

This paper extends research on the corporate governance practices of transitional economies by examining whether the ability of the audit committee to constrain earnings management in Chinese firms is associated with the listing environment and the presence of government officials on the audit committee. Despite considerable regulatory reforms by the Chinese Securities Regulatory Commission, there remain incentives for Chinese firms to manage earnings. However, government initiatives to encourage domestic firms to cross-list on the Hong Kong Stock Exchange are accompanied by improved governance. We find that the expertise and independence of the audit committee for cross-listed (CL) Chinese firms are associated with lower abnormal accruals, our measure of earnings management. Both domestic only listed firms and CL Chinese firms appoint government officials as independent members on the audit committee. However, due to the political connection between government officials and the controlling shareholder (the State), these appointments can severely mitigate audit committee independence. Subsequently, we find a significant and positive association between audit committee independence and experience and earnings management when there are government officials on the audit committee.

Empirical Research of Portfolio Selection under M-SAD Model

The mean semi-absolute deviation is the extension and development from the mean-variance theory which proposed by Markowitz. This paper studied the Mean-SAD (semi-variance deviation) model without the short selling and used the Chinese securities markets 20 stocks to test the efficient of the model. We got the conclusion that M-SAD model can effectively direct the decision in portfolio selection. Based on the result of the empirical research, the paper prospects the application of M-SAD model in our country.

Political resistance in Chinese mergers and acquisitions: An interview with Ted Tokuchi

Introduced in Ted’s interview in introductory section, Ted Tokuchi built CITIC Securities’ investment banking division from a nascent group into the top investment banking department in China. A significant part of CITIC Securities’ IB work is advising multinational firms, both Chinese and foreign, about cross-border mergers and acquisitions. In this interview, Ted discusses these efforts and the resistance which different firms encounter when pursuing a foreign target. Again, Ted is tri-lingual in English, Chinese and Japanese, is presently managing director of CITIC Securities Co Ltd and chairman of CITIC Securities International, and is the first foreign senior manager employed by Chinese securities industry.

Building China's top investment banking franchise: Do not become caught in ‘isms’— An interview with Ted Tokuchi

Ted Tokuchi has a truly global background. The son of a Japanese trading house owner, he first went to China when he was just 11 years old. He lived there for the next 13 years, studied at both Peking and Stanford Universities, and held middle and senior management roles at Daiwa Securities in the U.S., Hong Kong, Beijing, Singapore, and Japan. In 2002, Mr. Tokuchi signed on with CITIC Securities, a Chinese-based company. He joined CITIC Securities’ foundling investment banking division and helped develop it into the top investment banking department in China, rising to become the managing director of CITIC Securities Co. Ltd and chairman of CITIC Securities International, responsible for investment banking, marketing, and transacting of equities and bonds. Mr. Tokuchi is the first foreign senior manager employed by the Chinese securities industry, and is identified as a symbol of an age. He was awarded the Friendship Prize by the Chinese government in 2009, which is the highest accolade granted to foreign experts who work in China. Ted and I started these Executive Focus interviews in a Beijing hotpot restaurant last December (2012), and continued over a Skype call a month or so later. As is our custom when conversing, the interviews were conducted mostly in English, but when a concept was better explained using Chinese or Japanese, we shifted languages. A more technical discussion of political constraints on cross-border acquisitions in which one party is a Chinese firm appears in Section 2 of this special issue.

The quality of securities firms' earnings forecasts and stock recommendations: Do informational advantages, reputation and experience matter in China?

Do informational advantages, reputation and experience lead to better earnings forecasts and stock recommendations? It is shown that for local Chinese securities firms both earnings forecasts and stock recommendations are, in general, biased upwards and financial markets view stock recommendations as having new information. Contrary to the literature, securities firms who acted as investment bankers and securities firms with headquarters close to the stock's headquarters do not issue better or worse earnings forecasts than the average securities firms nor do financial markets view recommendation for these as having more information than recommendations issued by the average securities firms. But financial markets view recommendations from securities firms located in the financial centres as having more information. “Star” analysts do indeed issue more accurate earnings forecast but highly ranked securities firms do not. Finally, general experience of the securities firms reduces forecast errors.

Ownership balance, supervisory efficiency of independent directors and the quality of management earnings forecasts

In the Chinese securities market, with its characteristics of influence through personal relationships (Guanxi) and underdeveloped standards of law and enforcement, can independent directors play the supervisory role expected by securities regulators? In this study we use the degree of precision and accuracy in corporate earnings forecasts as proxies for the quality of information disclosure by listed companies and examine the supervisory efficiency of independent directors with respect to information disclosure. Using data from 2007 to 2009, we find that in the absence of ownership balance, independent directors have a significant positive effect on the accuracy of management forecasts. In addition, the personal backgrounds of independent directors have specific effects on management earnings forecasts. Directors with certified public accountant (CPA) expertise significantly improve the precision of management forecasts. However, directors with industrial expertise significantly reduce the precision of management forecasts. In other words, having directors with CPA expertise improves the independence of boards, but having independent directors with industrial expertise has the opposite effect.

New Portfolio Optimality in Multi-objective Programming with Chinese securities market

New Portfolio Optimality in Multi-objective Programming with Chinese securities market

Minority Shareholders' Control Rights and the Quality of Corporate Decisions in Weak Investor Protection Countries: A Natural Experiment from China

ABSTRACT Using a 2004 Chinese securities regulation that requires equity offering proposals to obtain the separate approval of voting minority shareholders, we examine whether giving minority shareholders increased control over corporate decisions helps to reduce value-decreasing corporate decisions for firms domiciled in weak investor protection countries. We find that the regulation deters management from submitting value-decreasing equity offering proposals in firms with higher mutual fund ownership. There is also weak evidence that minority shareholders are more likely to veto value-decreasing equity offering proposals in firms with higher mutual fund ownership in the post-regulation period. Overall, our evidence suggests that in weak investor protection countries, the effect of granting minority shareholders increased control over corporate decisions on the quality of corporate decisions depends on the composition of minority shareholders. JEL Classifications: G32; G34; G38

Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

We examine the extent and type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, the characteristics of firms committing fraud, and the association between institutional ownership and financial fraud. One of our objectives is to study the monitoring role of different types of institutional investors, such as mutual funds, pension funds and insurance companies. Using fraud data from the Chinese Securities Regulatory Commission between 2001 and 2011, we find wide occurrences of fraud and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to take place at firms that have a smaller proportion of independent directors and at poorly performing firms. We find firms with higher mutual fund ownership subsequently have fewer incidences of fraud. We do not find any association between ownership by grey financial institutions, such as insurance companies and pension funds that are likely to have business ties with firms, and future corporate fraud. Our results are consistent with the hypothesis that ownership by independent

Is refinancing solely motivated by misappropriation?

Misappropriation has become the accepted explanation for the refinancing behavior of Chinese listed companies, although the evidence in support of such an explanation is worthy of further discussion. We argue that if a planned refinancing exercise does not become a reality, post-refinancing performance depends on the initial motivation for refinancing, i.e. misappropriation or the maximization of firm value. The success and failure samples provided by the approval system of the Chinese securities market provide us with a natural laboratory in which to distinguish between these two possible motivations for the refinancing behavior of Chinese listed firms. The results show the post-refinancing performance of firms in the success sample to be significantly better than the performance in the failure sample, with the difference even more significant when larger agency costs or more financial constraints exist. These findings indicate that Chinese listed companies do not engage in refinancing for misappropriation purposes alone. Rather, refinancing is more likely to be a rational choice made in full consideration of the costs and benefits. This paper provides new ideas for reexamining the motivations for the refinancing behavior of China’s listed firms. It also has one major policy implication. That is, relaxing and/or simplifying the country’s refinancing regulations could help to improve the efficiency of resource allocation in the Chinese securities market.

Determinants of ownership structure and performance of seasoned equity offerings

PurposeSince the initiation of the share split reform by the Chinese Securities Regulatory Commission (CSRC) in 2005, the private placement has become the major source of raising equity after IPO. The purpose of this paper is to investigate why listed firms in China prefer private placements compared to other options of raising capital.Design/methodology/approachThe ordinary least squares regression, the piecewise regression and the cross‐sectional regression analysis were undertaken to investigate the determinants and characteristics of the seasoned‐equity offerings announcement effects. Probit regression analysis was taken to estimate the probability of a firm choosing private placements.FindingsThe authors find positive significant announcement abnormal returns for private placement. The findings also indicate that operating performance deteriorates immediately after announcement and poor operating performance is more likely to be contributed by large size portfolios, which suggests size effect.Research limitations/implicationsThe paper's evidence contributes to an understanding of the wider implication of the share split reform undertaken by the CSRC.Practical implicationsThe paper provides insights for policy makers in China and around the world who have and wish to adopt similar practices within their jurisdictions. Similar research can be conducted in other emerging markets to enable better understanding and implications of seasoned equity offerings on firm financial performance.Originality/valueThe paper is novel in regard to the data and the wider research paradigm used.