Case Study On The Causes Of Suntech Power’s Bankruptcy

Photovoltaic industry has been a new energy industry in China over the past years. It has advantages of no pollution, wide application range, high sustainability and a good prospect for development. Photovoltaic industry in our country develops rapidly under the support of government, with lots of industrial parks founded in more than100cities. A number of overseas listed photovoltaic companies are established in China including Suntech Power, which is China’s largest photovoltaic enterprise. In2013, Suntech Power declared bankruptcy and reorganization, which caused a sensation in the capital market in China. Suntech Power is China’s first private enterprise listing in the US capital market and the leader of photovoltaic industry. The author makes a deep research on the question why Suntech Power goes to bankrupt within such a few years.The study based on the sample of Suntech Power’s financial information from2005to2011shows that Suntech Power has serious problems of overinvestment and transporting profits through related transactions among major shareholders. This paper tries to explore the causes of Suntech Power’s bankruptcy from these two perspectives.This paper summarizes the domestic and foreign scholars’research achievements about the overinvestment and related transactions firstly. And then the author defines the two concepts. Next, it explains Suntech Power’s behaviors from three perspectives-principal-agent theory, information asymmetry theory and transaction cost theory. When it comes to overinvestment, the author selects investment scale data from15listed companies to analyze the investment standard of photovoltaic industry and compare it with social investment standard. The author finds that the photovoltaic industry has a certain tendency of overinvestment. Later, the paper is divided into two parts to analyze the investment efficiency of Suntech Power, according to the analyses, the author finds that Suntech Power’s overinvestment tends to be more serious than the photovoltaic industry. It is concluded that overinvestment is a important reason for Suntech Power’s bankruptcy. What’s more, the author finds the evidence of major shareholders transporting profits from the listed company via the analyses of related transactions data between major shareholders’ private companies and Suntech Power, and it proves that the related transactions is the other important reason for Suntech Power’s bankruptcy. Then the author analyzes the Suntech Power’s profitability and solvency to further prove these conclusions. Finally, the author offers some proposals to prevent enterprises’overinvestment and transporting profits through related transactions.The contribution of this paper lies in the following two points:firstly, according to the analyze of Suntech Power’s overinvestment behavior, the author finds the reason for the decline of photovoltaic industry, and probes into the reason of inducing photovoltaic industry’s overinvestment from the perspective of the external factors such as government and bank’s support. This conclusion can be extended to the whole photovoltaic industry and provide a reference for setting industrial support policies by the relevant departments, developing industry access conditions, and guiding the development of the industry. The paper suggests building a system of risk prevention basing on the reasons causing the enterprise’s overinvestment such as having the risk from poor defensive and inadequate understanding about the industry. This is significant for the enterprises which have a strong cyclicality and volatility. Secondly, the paper analyzes the forms of related transactions which is choosed by Suntech Power’s big shareholders under different conditions. These forms can also be applied to other industries.The paper here provide a reference for the regulators to find the transporting profits behavior of big shareholders as early as possible so that to protect the interests of small and medium-sized investors.The shortcoming of this paper is that the paper uses the case analysis method. Case analysis method just studies one case and lack of a more comprehensive empirical data and careful theoretical analysis,so part of the conclusion has certain limitations, and the related transactions behavior has no comparability in the industry except for the overinvestment in common. Suntech Power is administered by SEC, and the corporate governance has a certain difference with China’s listed companies. In order to do a further research, we can compare with other companies in photovoltaic industry listed overseas, and this needs further study.