The Empirical Research On The Effects Of Ownership Concentration To Stock Market Valuation

Ownership concentration reflects how much percent of a stock investor holdscompany’s stock, which is closely related with the enterprise value of the company’soperating results, agency costs, as well as investors’ stock valuation. The issue ofownership concentration has been studied by many scholars, and they put forward anumber of criteria for the classification. Many scholars take the corporate ownershipstructure, corporate operating conditions, corporate profitability and corporategovernance relations in depth discussions. And researches have shown that there is asignificant correlation between the two. This article, however, places investors’determination in stock market as discussing perspective. It believes that theshareholding structure of the company, especially ownership concentration of thestock holders have significant impact on the accuracy of the judgment to market.Since this paper uses panel data model to analyze the correlation betweenownership concentration and stock valuation, so we use per capita stake in RESSETand CCER database as an indicator to represent ownership concentration. The stakeper capita equals to per capita number of shares held divided by total number ofshares. Through learning from scholars’ research in the past, this paper will use the30%and50%as sub-sites and divided firm ownership structure into dispersedownership, equity balance and concentrated ownership. After statistical analysis wefound that from2006to2010, most of our enterprises have balanced equity structureand a small number of corporate has high ownership concentration. Among them, in2006the ownership concentration is higher than the other years in the sample, muchof that is due to splitting shareholding structure reform to China’s stock market in2005, with the lifting of the state-owned holdings and non-tradable shares, itenhanced stocks and liquidity in the capital markets, and the related data shows thatin2007and2008, the reduction action become more and more popular.Factors affect investors’ valuation of stocks is diversified, for example, thesupply and demand of capital, firm performance and investors’ expectation. In addition, factors that affect stock valuation also include company’s operationcondition and the degree of ownership concentration. Moreover, the shareholdingstructure of the company is not only related to the operation of the business but alsoaffect the stock valuation accuracy. So, how ownership concentration affects theaccuracy of the investors’ stock market valuation? With this issue, in this paper, weuse panel data from2006to2010of1075listed companies in Shanghai andShenzhen stock market to do regression analysis. We use future market cumulativeabnormal returns (CAR) and stock price standard deviation as the indicators of stockvaluation accuracy. The market accumulated abnormal return rate equals to investors’rate of return minus the average yield in the market. It means the returns thatinvestors deviate from the market average. The stock price’ standard deviation equalsto the difference between the maximum minus minimum value and market averagevalue, it reflects stock price fluctuation and stability. As for China’s capital market isnot mature or does not meet the strong or semi-strong condition, the stock price doesnot react completely important information. Besides,"herding" behavior exists instock market, which means that investors do not make investment decisions byanalyzing transaction information and enterprise financial reporting. On the contrary,they follow the investment strategy of certain institutional investors or those whoconsidered to be successful investors. Thus it tends to follow the trend of the market,the phenomenon of speculation and noise transactions often occurred. Most of themarket traders and investors are irrational and the stock valuation has certain degreeof inaccuracy. The reasons for this phenomenon are not only investor factors, but alsoincluding internal ownership structures and insider trading. To explain from theperspective of information distance and disclosure, the closer the people from thecompany’s source of information, compared to external investors and the public, theycan get much more important information. It is more likely to cause insider tradingand disturb the market order. In the perspective of ownership concentration, thehigher the degree of concentration, the more rights are in the hands of a fewshareholders, the more price-sensitive events and information they know, the lesssmall and medium investors and the public to grasp, so it is not beneficial forinvestors to do correctly stock valuation. The empirical results in this paper also confirm this assertion. Therefore, to maintain an appropriate degree of ownershipconcentration is conducive incentive for shareholders and management to maximizethe effectiveness of the company. On the other hand, high ownership concentrationmay harm the interests of minority shareholders and the public, and it is notconducive for properly stock market valuation and efficient operation.