Study On The Transmission And Control Mechanim Of Important Shsareholders’ Behavior In China Stock Market

Important shareholders are those who play a key role in the company’soperating. Their market behavior has a positive effect on increasing the stockmarket’s price discovery function and enhancing market efficiency. But their marketbehavior also results in a series of issues such as conducting market arbitrage,affecting the stock price, earnings management by virtue of information, capital andcontrolling advantages,, which has brought serious challenges to the stabledevelopment of the capital market and to the equalization of market interest.Therefore, their behavior aroused much attention of scholars, and researchers comefrom different angles, their observations and recommendations are varied. Nosystematic methodology available so far to address this issue, from the behaviorpatterns, the outcomes, and the root causes of the important shareholders’ marketbehavior. Considering its importance to China stock market, we believes this needsto be addressed systematically.This thesis focuses the investigation on important shareholders’ marketbehavior. We derive a behavior transmission mechanism system, and study the keyfactors and motivation, as well as the market reactions and company growth impacts.According to the reactions and impacts, leveraging the feedback mechanism ofconduction system, we establish a behavior control mechanism base on systemstability theory. With such behavior control mechanism, we can restrict andminimize the negative impact of important shareholder’ market behavior. Thisresearch is valuable for ensuring the stability of China stock market and the companysustainable growth. The idea of using control and system stability theory to restrictimportant shareholder’s behavior also provides a new direction for the study in thisarea.This thesis uses the research methodology combining normative research,empirical research, event research and automatic control theory. We evaluate the motivation, the influence factors and the influence mechanism of the behavior ofimportant shareholders (either sell or buy), and discuss the feasibility of importantshareholders to make profit, the benefits and risks, the arbitrage methods andconsequences of market arbitrage. We use market reaction and growth variation toevaluate the impact, and establish a practical feedback loop with three levels fromup-stream: influence factors, motivation and behavior itself, and study how torestrict important shareholder’ market behavior via control variables based on theimpacts of the behaviors. The main contents and innovative work are as follows:1. This thesis theoretically analyses the internal mechanism on how criticalshareholders’ shareholding could influence the company’s growth. We start with themodern company management structure, discuss the model which combines capitalelement and human capital element, and investigate how to solve the “free-riding”problem in modern company management structure by proper shareholding structure.Then we consider how to handle the need in the company’s specific growth stage byequity set during the different stages of company life cycle. With this, we lay afoundation for the follow-up study-if and how important shareholder’s buyingbehavior or selling behavior of important shareholder impacts their own company’sgrowth.2. This thesis investigates the conduction mechanism of important shareholders’market behavior from both theoretical and empirical aspects. It analyzes theinfluencing mechanism and level of various factors impacting the market behavior,and investigates the influence and impact of the market behavior to the market priceand company growth. Both theoretical analysis and empirical results indicate that thetwo levels of behavior transmission mechanism indeed exist, i.e. importantshareholders’ market behavior is correlated with their company’s stock price andcost, growth and market trends, which also impacts their company’s future growthand market prices.3．Based on the theoretical analysis and taking into consideration of thepractical problems in China IPO, this thesis analyzes the existing arbitrage mechanism in the secondary market. We include some detail analysis on how thearbitrage takes place, the arbitrage interval, and the risks and benefits, and believethat this type of arbitrage is inevitable under the current system and environment. Asexcessive arbitrage could damage the company’s growth and market stability, weshould definitely understand its impact and establish some policy to minimize thenegative impact to the stock market.4. This thesis explores a variety of positive feedbacks and negative feedbacks inthe behavior transmission mechanism, i.e. the impact of behavior disturbance factorsof the system, either enhancing the original disturbance factors, or weakening theoriginal disturbance factors. We use the market reaction and the company growthvariation (both are the consequence of the behavior) as the control variables, andmake recommendations on using regulatory to take some control when necessary,especially on how to avoid the positive feedback to the system, as the positivefeedback system potentially unstable, this can be done via monitoring the system andsetting up a threshold, the control mechanism (regulatory policy) can be taken intoeffect if the threshold exceed. This can be realized via adding negative feedbackcontrol to the system. Specifically, we recommend actions in three different levels:the first level is to control the behavior influence factors; the second level is tocontrol the behavior motivation; and the third level is to control the behavior itselfdirectly. Considering the fact that arbitrage in IPO is quite excessive, we propose aself-constraint methodology among the IPO pricing, the company growth, the pricechange and the buying or selling behavior of important shareholders, this could helpto maintain company’s growth and market stability. This is an important innovationpoint of this thesis.