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Liquidity Versus Control: The Causes Of Discount On Nonmarketable A Shares And Its Impacts On Corporate Governance Of PLC In China

Posted on:2003-10-12Degree:DoctorType:Dissertation
Country:ChinaCandidate:S C HuangFull Text:PDF
GTID:1116360122955203Subject:Business management
Abstract/Summary:PDF Full Text Request
A typical listed company in China has several types of share outstanding: (i) common shares that are only tradable on stock exchanges, (ii) restricted institutional shares (RIS) that are not tradable and can only be transferred privately or through irregularly scheduled auctions, and (iii) state shares that are only transferable privately. These types of share are identical in every aspect, except that market regulations make state and RIS shares almost totally illiquid.State and RIS shares occupy about two third of total share outstanding issued by public listed companies (PLCs). The ownership structure of Chinese PLCs is highly concentrated and the owners of State and RIS shares are usually hold most parts and control the companies. Those stocks cannot be exchanged in stock markets or in any public way. As they are not permitted to trade at Shanghai or Shenzhen Stock Exchange and prohibited from public offering, the only ways to exchange these shares are private transfers and auctions. However, the average discounts are around 70% to 85% relative to their marketable counterparts. The prices are about the same as their book values of net assets.The illiquidity discount is so high that it significantly raises the cost of equity capital. The different prices for different categories of shares but with same ownership rights distort the pricing mechanism in equity market, damage the market efficiency in resources allocation, and destroy the incentive and constrain mechanism of control shareholder. The segment of common shares, which distorts the market structure, is a unique phenomenon in world capital markets. Lots of problems in Chinese stock market and PLC's inefficiencies can be attributed to the market segment.The relevant problem is how to sale state-owned shares, which occupy most of nonmarketable outstanding shares. The so-called SIP(state-owned shares issuing privatization) problem, which will change greatly the PLCs ownership structure, has serious impact on Chinese secondary stock market. The SIP related problems aroused the most intensive debates in the 11 years history of Chinese stock market. Thedebates focus on both the ways and pricing of SIP. The problem also involved how to balance benefits of the various market participants. Although the government has broadly collect various public opinion and many proposals on SIP were discussed in details, there is no common ground. After several unsuccessful experiments, in June, 2002, the government formally notified to stop State-owned shares issuing privatization, the reform of stock market structure seems is in a dilemma. Current researches mostly focus on formal aspects such as policy judgment. They emphasized the interest balance and adjustment among market participants. Under this principle, they then estimated SIP pricing based on various historical costs, trading data, demand and supply analysis and valuation. Therefore concrete feasible scheme can be designed. However, their shortages are obvious. Those researches ignored analyzing economically the causes and decisive factors of the discount on non-marketable shares' transferring pricing. They also did not give a reasonable explanation on various pricing models which should be consistent with modern financial economics. Based on the fundamental theories in financial economics, especially in corporate finance, this thesis analyze the causes and effects of the discount on non-marketable shares' transferring pricing in the perspective of both liquidity and control. We try to set up a framework for analyzing the pricing of non-marketable A shares and the positive tests have been done using stock market data in recent two years. Additionally, to suggest relevant institutional reforms, this thesis combines recent researches on corporate governance, exit and voice mechanism theory, and methodology in new institutional economics to analyze the potential contradiction between liquidity and control in stock market and its impacts on corporate governance. Policy suggestions have also been gi...
Keywords/Search Tags:Liquidity, Control, Nonmarketable Stock Pricing, Corporate Governance, Exit and Voice, Share Issuing Privatization(SIP)
PDF Full Text Request
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