An Empirical Study On The Large Shareholders&Executives’ Selling Behaviors In GEM Of China

Since large shareholders and executives’ up-locked shares expired, the GrowthEnterprise Market (GEM) have been suffering massive selling, and three-high IPO is animportant reason, as well as the imperfect corporate governance structure, unstablefinancial performance and unreal high-growth expectation of the companies in the GEM.The large shareholders and executives’ reduction of their holding is a profoundphenomenon, but these insider transactions’ motivation, timing and market response arethe focused issues in academic and investment communities. This thesis studies the fouraspects of performance, motivation, timing and market response systematically andprofoundly.For GEM companies, there are a variety of executives and corporate shareholders incompanies’ governing structure. Due to the differences of their positions in the corporategovernance and the numbers of the shares owned, the market’s response is fairly not thesame. GEM listed companies’ executives are important insiders, for their different stockholding numbers, positions and insider relationships, the process, approaches and marketresponse of their selling are also different. For GEM companies the large stockholders(i.e. Venture Capital, Private Equity and Industrial Capital etc.), their holding is not solarge as the controller’s, but they have a very strong motivation to sell, therefore, themarket response is very strong too. The third chapter of this thesis analyzes this issue.Large shareholders and executives have multiple motives to selling their holdingstocks. Literature review shows that there are five major theoretical hypotheses:ownership, macroeconomic performance, market trends, valuation and financialperformance. According to the theoretical hypothesis, the fourth chapter put forwardseveral assumptions, and an econometric analysis model is constructed. In the model, theDependent Variable is the stock sold by large stockholders and executives, the thesis tryto explain it with a series of variables, such as the shareholding structure of the Company,macro-economic, corporate valuation, corporate financial performance, marketconditions, and board governance and so on. The results of the model prove theassumptions. In order to assure the robustness, the author changes two variables to checkthe model and the results show that the model is very stable.There are an important relationship between the information disclosure and thereduction of the stock. Literature studies show that the large shareholders and executivesas well as the other insiders have private information to pricing the stock. The ShenzhenStock Exchange has a clearly defined regulation in the GEM. In order to understand thelockup expiration and the time of large stockholders and executives selling, the papercompares the time of expiration days and selling days, and finds that there are different characters of large stockholders and executives. By discussing the disclosure andviolation issues, the author finds that there are selling in forbidden period and buyingstocks on the day of IPO. In order to find investigate whether large stockholders controlthe disclosure and sell, the thesis constructs a Logistic econometrical model. The resultsshow that the Abnormal Return (AR) curve is upside down V style, which means insidersget more profits and better in timing. In order to study whether GEM large stockholdersand executives manage the earnings, the author constructs an econometrical model basedon the Jones Model. The regression results indicate that the controllable profits are higherin the one year before than the year of selling, which means the positive earningmanagement is apparently.The expiration and selling of the lockups is profoundly responded in the GEM inChina. Even though the expiration and selling is integrated, they are two differentprocesses. The sixth chapter analyzes the market effect by the methodology of EventHistory Study. On the one hand, the thesis reviews the regulation of the lockups andexpiration and analyzes the market response wholly. In order to study the primarystockholders’ selling and the market response, the author figure out the AverageAbnormal Return (AAR) and cumulative Average Abnormal Return (CAAR), then findthat shock in the market is significant. On the other hand, the author analyze the marketresponse in six different levels, including the whole selling, different holders, volumes,financial performance, valuation and growth rate. And the author finds out the marketresponses are quite different.