An Empirical Study On The Senior Managers’ Shareholding Increase And Corporate Performance In Listed Companies

In the western developed financial markets, as all shares of listed companies could be exchanged freely in the secondary market, senior executives increase their holdings has been extremely common. Related information must be disclosed only when the number of transactions is over a certain proportion. Compared with the western developed financial markets, senior executives’ shares of listed companies couldn’t be free flow in the secondary market, because share is spilt in China capital market before. The value of their equity is generally measured by net assets. Net assets are also the main pricing standard when share transfer. Wealth of executives doesn’t have a great deal to do with the share prices, which leads directly to that they don’t pay much attention to the share prices. However, with the reform of spilt-share is gradually completing, and the Incentive Measures for the Administration of Listed Companies issuing and implementation, executives could transaction their holdings freely in secondary market by degrees. From2008to2011, the capital market set off a wave of increasing holdings among executives, which arouses wide concern day by day. First of all, system-reforming and policy supporting give executives a strong incentive of increasing their company’s shareholdings. Then the behavior becomes normalized after. Secondly, compared with other minority shareholders and ordinary potential investors, as the direct administrators and operators, executives have a fuller and more comprehensive understanding about company, and they acquire more accurate and timely information. Therefore, when they appear in the capital market as investors, their holding act is given a special meaning, which has aroused widespread concern in theory and practice.Insider trading has become a focus of Western academia since the1960s and1970s in foreign research. Their research focused on whether insiders use inside information to obtain excess returns. The so-called insiders mainly refer to all the people who know the company information, such as the major shareholders, directors, supervisors, managers, and so on. While in the domestic research, executives of listed company mustn’t transfer his shares during his tenure before Company Law was made to effect in China. This means much domestic research on executives increasing holdings is in the blank by2006. With the completion of spilt-share reforming and implement of equity incentive, the increasing holdings among major shareholders and executives is legalized and normalized day by day. Due to equity in our capital market is relatively concentrated, and executives’ number and frequency of increasing holding is far below the major shareholders, domestic research scholars put the spot on the major shareholders, most of which is only in the theoretical analytical phase, so that the research about the former’s behavior is little. These researches focused on two sides, the motivation of holdings and the market response, from a few studies of executives’increasing holdings. Few researches combined the holding behavior with the corporate performance. In the signals given by the executive holdings, a very important thing is the company has a better prospect. While after executive increased, whether the company performance is improved just as the signal given by? It needs to be verified. Based on above, with the behaviors of executives shareholding increase from the end of2008to2011as the subjects, my article analyzes the corporate short-term market performance and long-term financial performance after executives increased shares by theoretical and empirical method.This article is divided into six chapters, and the main contents of each part are summarized as follows:Chapter Ⅰ, Introduction.There are three sections in total. The first section introduces the background and significance. The second part introduces the research methods and train of thought, and gives the logical framework map of this article. The last section proposes the innovation points.Chapter Ⅱ, Literature Review.This Chapter is divided into three sections. First part is a review of researches on market reaction of executives shareholding increase. This paper also carried out a literature review on market response of the major shareholders, which is very similar to executives’ holdings, based on the only few researches. From the existing opinions, there’s a common view in general, that is, the holding behavior of major shareholders and executives could cause a positive market reaction. These will offer some guidance and reference to this article. Second part is mainly a literature review of executives’holding and corporate long-term performance. However, the combination of these two is very few. As a result of increasing holdings of executives, they must hold company’s shares. So executives increase shares and just hold shares have some similarities in theoretical analysis. Therefore, this paper makes a literature review from the perspective of executives’ shareholding increase and corporate performance. From the existing studies, the result of executives’shareholding increase and corporate performance study is divided into two kinds. One is that, executives hold stocks will lead the interests of shareholders and themselves to be consistent, reduce the agency conflicts, thus contributing to enhance corporate value. The other is that executives holding stock isn’t working the way it’s supposed to, so that can’t produce a positive impact on corporate performance, because of lower proportion of managerial stock ownership and concentration of listed companies’equity. These studies also have a certain reference to the article. The third part is the general comment and analysis about the document, including the summary and analysis of the existing research perspective, methodology and conclusions. The difference between mine and the formers is also included.Chapter Ⅲ, Theory Analysis.There are two sections in this chapter. First is the definition of certain concepts, mainly including executives of listed companies, as well as their behavior of increasing holdings. The second part expounds the theory "asymmetric information theory and signal transmission hypothesis, the principal-agent theory and interest convergence hypothesis", which this paper is based on, and the relationships with the article in details.Chapter Ⅳ, Empirical Analysis of executives shareholding increase and corporate short-term market performance.This chapter collected qualified companies as samples first, and then tested the market reaction after that behavior through the event study. On the basis, the market reaction caused by state-owned and private executives’ holdings is compared from the nature of enterprise.Chapter Ⅴ, Empirical Analysis of executives shareholding increase and corporate long-term financial performance.1-3years’corporate long-term financial performance before and after executives increased their stocks is compared and analyzed in this chapter, through using the paired sample T-test. Then the result is explained and expounded. Finally, the samples were divided into ascent and descent groups of long-term performance, according to the changes after executives increased holdings. The two groups are compared from the perspective of the corporate characteristics.Chapter Ⅵ, Conclusions and Recommendations.This chapter begins with summary of previous chapters, and in the study of short-term performance we found that, this behavior of executives shareholding increase can cause a positive market reaction and bring significant positive abnormal returns, which have some continuity, so as to enhance the corporate short-term market performance. In addition, the market reaction caused by the executives’ shareholding increase between private enterprise and state-owned enterprise was not different obviously on the day. But after the day, the private corporations’ share price is more volatility than that of the state-owned corporations, so the cumulative excess revenues received by stated-owned companies are obviously higher than the private enterprise, from a longer window period (about15days). In the study of corporate long-term financial performance, no matter the profitability, development perspective, or the profitability of shareholders, nothing has been effectively enhanced, after executives increased holdings1-3years later, and even a marked decline was appeared. Corporate long-term financial performance hasn’t been improved. The article expounds from the four sides as below.(1) The behavior of executives increasing holdings, may intend to ensure big events implement smoothly and be received by market, such as following equity issuance, rationed shares, mergers and acquisitions. So they could prop up share prices in advance and create momentum.(2) This behavior probably just is because of personal profit motive. After price rising, they reduce holdings to obtain high invest returns.(3) This behavior may be to meet the government’s policy, in order to stabilize the stock price and boost market confidence.(4) Probably due to the lower proportion of stock holdings and little incentive effect, executives don’t have enough motivation to improve the corporate performance after they increased the stocks. That is the consistent interests can’t be reflected adequately. Based on above four analyses, the article believes that, the behavior of executives’shareholding increase perform more as a short term fix, not a real consideration for companies’ long-term development. Comparative analysis found that, in long-term performance of sample companies, company size, equity concentration and the book value of descent group is obviously higher than ascent group. Secondly, this paper puts forward suggestions from corporate point of view, the perspective of investors and regulators. Finally, this paper elaborates the limitations of the research and the future directions.The Main Contributions(1) This research enriches domestic study content of executives shareholding increase in some sense, and provides a new idea for further research.Firstly, the themes have a certain novelty. It expands perspectives of domestic research on executives shareholding increase, by combination of executives’ shareholding increase and corporate performance. Though the behavior appeared in large numbers since2008, only a few studies were mainly about the motivation of the behavior and the market response, and none is in the perspective of corporate performance. Therefore, this research enriches domestic study content of executives shareholding increase in some sense.Secondly, the research of this article is further than before. Firstly, this paper studies the market reaction caused by executives shareholding increase. On the basis of early researches, we carry out a comparative analysis on state-owned enterprises and private companies based on the enterprise nature. Secondly, this article does a long time research, and does a more in-depth study and analysis for executives’increasing behavior in the perspective of enterprise long-term financial performance. The samples in the research can be divided into performance rising and declining performance group according to the changes of the enterprise long-term performance. And we carry out a comparative analysis of the two sample groups in the perspective of firm characteristics in order to help investors and regulators to know the Chinese executives better. It also provides a new idea for further research.(2) The research will help investors and regulators to deepen the knowledge of the executives’shareholding increase.According to the study, when the executives raise their holding, the market will have positive reaction in the short term, and enterprises’performance will improve; but in the long run, when the executives raise their holding, enterprises’ performance will not improves, instead they will have significantly worse performance than before. We analyze the short-term and long-term affect, and find out that the conclusion of the research in this paper supports that executives-holding behavior is a kind of short-term behavior. Investors should have a rational opinion to the executives-holding behaviors, in order to make the right decisions both for the short term and the long term; and at the same time, regulators should give more stringent restrictions and regulation to executives-holding behaviors, to avoid the executive’s short-term speculative behaviors do some harm to the interests of investors.