Intra-Group Propping

Many domestic and foreign studies have found that propping is prevailing in the countries which legislation is imperfect about investors’ interests. That is, controlling shareholders will transfer company’s resources through related transactions in order to achieve personal maximum gain; this is at the expense of interests of minority shareholders. However, the controlling shareholders will prop their holding companies under certain conditions. Friedman et al(2003) prove that in equilibrium conditions, the controlling shareholders take tunneling or propping behavior depends entirely on the extent of external economic shocks.In this paper, we study the group’s internal propping from the perspective of earnings announcement based on the framework of pyramid ownership structure. At the same time, we analyze the effect of financial crisis, corporate nature and company size to propping. The sample composed by the Chinese listed companies’ annual data from2005to2012.This provides some empirical evidence for the study of Chinese enterprise group’s propping. Results show that when a company release earnings announcement ahead of market expectations, not only the company’s stock price generates positive excess returns, but the portfolio which constituted by the other unreleased companies also produce positive excess returns; while when a company release earnings announcement below market expectations, not only the company’s stock price generates negative excess returns, but the portfolio which constituted by the other unreleased companies also produce negative excess returns. In other words, when CAR of announcement company increase10%, the CAR of portfolio will increase0.849%. In addition, the thesis also find that the sensitivity of the portfolio’s CAR to the announcement company’s CAR will improve with higher ratio of debt guarantees and better historical performance of the announcement company, but will decrease with higher Institutional shareholding of the announcement company. On this basis, we analyze the effect of financial crisis, corporate nature and company size to propping. First of all, with2008as the dividing point of the financial crisis, we compare the difference of propping before and after the financial crisis, and discover the significance of propping enhances after the financial crisis (2008-2012), which is consistent with the findings of Friedman, scilicet, propping usually occurs when external shocks leads to a sudden economic downturn, many companies fall into financial difficulties but not appear large-scale collapse; secondly, the paper combines China’s national conditions, and analyzes the effect of corporate nature and company size to propping. We find that propping is more obvious in state-owned enterprises and large companies compared to private enterprises and small companies, these are consistent with the expected.