| The Reason for Return on Equity Decline of Listed Companies in China: an Empirical AnalysisINTRODUCTION AND RESEARCH QUESTION The operating performance of listed companies is the base of the security market. Although the listed companies in China were born with some advantages, such as Tax deduction, capital without paying interest, eliminating bad debt and so on, they have suffered from annual income declining, and the return on equity (ROE) declined to 4.09 percent in 1998 from 10.66 in 1995. All the statistics data shows that the earlier the company listed, the more loss they suffered. Many people think the main reason for this decline is due to the external factors, such as the domestic insufficient demand and the financial crisis in Southeast Asia and so on. This conclusion is lack of empirical test, and it may become the excuse of manager of those companies. This paper attempts to analyze the reason of the tremendous decline of ROE in the perspectives of quantity and quality with the factor-analysis, so as to explore the disguised further problems and seek the way to prevent the ROE of listed companies from declining. After providing the empirical evidence on reason for ROE decline, the author puts forward some proper suggestions.MODEL, METHODOLOGY AND DATA With reference to Du Pont analysis, this paper develops an analytical model to investigate the return on equity: Return on equity =Net income/Common equity =[Gross core sales profit/core sales + (Net income - Gross core sales profit)/core sales]*(Core sales/ Total assets)*(Total assets/Common equity) =Gross sales profit margin (GSPM)*Expenditure of other item (EOI)*Total assets turnover (TAT)*The rate of total assets to common equity (TAC) All data are available from the public sources, such as the China Security News and the Shanghai Security News and so on. Time-series data for five years (1995-1999) from 305 companies listed in the ShangHai and the Shenzhen Security Exchange Office in 1995 are used. TEST AND RESULTS The model shows the test results as follows:YEARITEM 19951996199719981999ROE10.66%7.89%7.37%4.09%5.22%GSPM20.30%18.43%19.63%20.45%19.49%EOI-11.11%-10.91%-12.20%-16.24%-14.44%TAT55.00%50.63%48.90%46.84%48.67%TAC210.94%207.29%202.80%207.37%212.37% YEARITEM 1996/19951997/19961998/19971999/19981998/1995GSPM-2.17%1.26%0.82%-0.93%0.18%EOI0.23%-1.35%-4.01%1.75%-5.95%TAT-0.69%-0.27%-0.18%0.19%-0.73%TAC-0.14%-0.16%0.09%0.12%-0.07%TOTAL-2.77%-0.52%-3.28%1.13%-6.57% The analysis shows that GSPM has increased by 0.15 percent from 1995 to 1998,at the same time, EOI has increased by 5.23 percent. From 1995 to 1998, ROE has decreased by 6.57 percent. Our findings demonstrate that EOI has decreased by 5.95 percent, why? The reason is that some listed companies had used the new accounting methods while they were required to change accounting system by the government in 1998. They have accrued a larger number of allowance for reduction of inventory to market, allowance for reduction of short term investment valuation, allowance for reduction of long term investment valuation and bad debt losses when they replaced Taking a Percent of Credit Sales Method with Aging the Accounts Receivable Method. The macroeconomic environment has little influenced on GSPM and TAT of listed companies, why there are so many losses on those items? These findings imply that the reason for the ROE decline was partly due to the fact that the internal administration is inefficient in these companies and the traditional explanation is out of scientific base. So improving internal management in listed companies is vital to increase the ROE.We have achieved influential research results with the support of systematic statistics. However, these... |
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