Comparable Study On The Relationship Between Ownership Concentration,Equity Balance With Corporate Performance Before And After The Non-tradable Shares Reform

The relationship between shareholder structure and corporate performance has been the focus of corporate finance research since several years ago. The ownership structure is the foundation of corporate governance, reflecting income distribution mechanism and the company’s risk。The ownership structure contains two aspects: one is quantitative aspect (the ownership dispersion or concentration):the other is qualitative aspect (the nature of different shareholders). Quantitative dimension contains two aspects including the relationship between power balance with shareholder structure and corporate performance. ownership concentration and corporate performance. This paper will discuss the relationship between corporate performance and power balance with shareholder or ownership concentration in quantitative dimension. About the relationship between shareholder structure and corporate performance, scholars study the issue from each one’s country reality But each country cannot reach a same conclusion on the relationship between shareholder structure and corporate performance. Unlike the western development countries’all-round circulation, equity division existed in China’s stock market before non-tradable shares reform. Through non-tradable shares reform, tradable shares shareholders pay reasonable price get access to rights of trading freely in capital market. Thus the structure of shares in company changes overall after the reform. As a result, listed company take an opportunity of raising corporate performance through the adjustment of shareholder structure. Will the shareholder structure undergo a significant change in listed companies? The highly concentrated shareholder structure will have a negative effect because of the tunneling behavior of large shareholders or positive effect for the efficient supervision of them. Similarly, will power balance with shareholder structure affect the corporate performance negatively because of larger shareholder’s conspiring together or inefficient decisions or positively since reducing the tunneling of large shareholders? Non-tradable shares reform have influenced this relationship?To answer problems above.this paper based the previous study adopts methods of theoretical research and empirical research, analyzing the relationship between corporate performance and power balance with shareholder or ownership concentration on contrast,providing reasonable advices for listed corporate in all-round circulation period, thus guaranteeing the healthy development of listed company and capital market.The paper can be divided into five parts:First, it is introduction. In this part, the background, meaning, the focus the paper aims at, the path in paper’s logic, ways by the paper follow and strength and weakness in the paper will be discussed in detail.Literature review is in the second place in which the outcome between corporate performance and ownership concentration as well as equity balance will be summarized both in domestic and abroad. The domestic researches summarize and illustrate studies before and after non-tradable shares reform. Nowadays, the relationship between shareholder structure and corporate performance are mainly four types in domestic:a positive correlation, inverted U-shaped relationship, U-shaped relationship, and no significant connection. About the relationship between power balance with shareholder and corporate performance, most scholars reach a conclusion that power balance with shareholder have a positive effect on corporate performance in theory, but it does not exist in empirical study. Summarizing and analyzing the previous studies can prepare for the following parts of this paper.Theoretical analysis is placed in the third part. To begin with, the paper discusses the theory about corporate governance and shares structure such as Two Rights Theory of Separation, principal-agent theory and Incomplete Contract Theory. Moreover, it introduces the definition of power balance with shareholder, ownership concentration and corporate performance,analyzing non-tradable shares reform’s impact on shareholder structure and different situation of power balance with shareholder and ownership concentration affect corporate performance. Last but not the least, put forward the relationship between power balance with shareholder structure and corporate performance, ownership concentration and corporate performance of this paper.The forth part is the empirical research. Based on above theoretical analysis, the paper put forward four hypotheses:(Hypothesis 1,the relationship between corporate performance and ownership concentration is inverted U-shaped before the non-tradable shares reform:Hypothesis 2. there is positive correlation between equity balance and corporate performance before the non-tradable shares reform: Hypothesis 3. ownership concentration and corporate performance have an U-shaped relationship after the non-tradable shares reform; Hypothesis 4, There is positive relationship existing in equity balance and corporate performance after the non-tradable shares reform. Listed corporates in Small and Medium Enterprises Board which have completed non-tradable shares reform during 2008-2014 are choosed as sample after reform and listed corporate in Small and Medium Enterprises Board data during 2005 as sample before reform. With the maturity of China’s capital market, Tobin’s Q is inappropriate in our country. Hence. ROA is defined as explained variable to assess corporate performance and ownership concentration, equity balance are defined as independent variables. The ratio of the top five shareholders illustrates ownership concentration and the outcome of the quantity of the largest shareholder’s shares divided by top five shareholders’shares excluding the largest one represents equity balance. Corporate size and finance leverage are also independent variables which are not the most important variables we want to study. Commonly, they are also called control variables in economical study. After, establish empirical model based on hypotheses above and perform Fixed Effect model about statistic using statal 1.From the empirical outcomes,we learn that:(1)The descriptive analysis of sample data illustrate that check-and-balance ownership structure and corporate performance is positively correlated before and after the non-tradable shares reform.Although check-and-balance ownership structure increase while it is still in a lower level.(2)The regression results show that there is inverted U-shaped relationship before the non-tradable shares reform. When ownership concentration meets the critical value 0.3896, the corporate performance is the best. By contrast, there is U-shaped relationship after the non-tradable shares reform as the critical value 0.461 is knee point. There is positive relationship between corporate size and corporate performance as well as negative relationship between corporate performance and financial leverage.In the end of the paper are suggestions and summary. From the previous analysis, we conclude that:First, the relationship transfer from inverted U-shaped relationship before the non-tradable shares reform to U-shaped relationship after the non-tradable shares reform. This approves that Entrenchment Effect and Alignment Effect exist in small and medium enterprises for different shareholders’ proportions. The definition of Entrenchment Effect is:When the largest shareholder’s stake is in a lower degree, the motivation of the largest shareholder invading smaller shareholders’benefit increases as the ration of share increasing, resulting in the damaging of smaller shareholders’benefit and declining of corporate performance. The definition of Alignment Effect is:When the largest shareholder’s stake is in a higher degree, the motivation of the largest shareholder invading smaller shareholders’ benefit decline as the ration of share increasing, resulting in the improving of smaller shareholders" benefit and developing of corporate performance. In the case of ownership concentration in our country, the changing of relationship before and after non-tradable shares reform means that the higher ownership concentration existing in small and medium enterprises after non-tradable shares reform, the better corporate performance is. Secondly, there is positive relationship between corporate performance and equity balance no matter it is before or after the non-tradable shares reform. It suggests that the higher power balance with shareholder structure existing in small and medium enterprises after non-tradable shares reform, the better corporate performance is. which is in line with most previous researches. The non-tradable shares reform has completed and all shares can be tradable in securities market. the paper advice to take actions as follow:how to further improve corporate performance after non-tradable shares reform.First of all. build the reasonable power balance with shareholder structure system while keeping the appropriate ownership concentration. The reasonable power balance with shareholder structure and ownership concentration should be the largest shareholder controlling relatively and that stake is apparently different from other bigger shareholders but the amount is less than the second to fifth largest shareholders’. Secondly, put importance on the construction of securities market laws and regulations. The completion of the non-tradable shares reform does not mean the disappearing of damaging behavior about smaller shareholders’ benefit. It is possible that the largest shareholder rig the parallel market. All of these require the supervision of market such as improving the disclosure of information, investor protection and listing specific illegal acts and punishment measures. Last, intermediaries should also been instructed.The contribution of this paper is as follows:First, the previous research about the relationship between power balance with shareholder structure and corporate performance, ownership concentration and corporate performance usually select listed corporate of main board market in stock markets of Shanghai and Shenzhen. However, the China government is emphasizing more on enterprises in Small and medium sized enterprises board, we should pay more attention to the performance of them. Secondly, most previous studies about the relationship between power balance with shareholder structure and corporate performance choose samples before or after the non-tradable shares reform, while this paper uses data of listed companies before and after the non-tradable, which can make contrast in these two periods. Based on the above analysis, this paper can give an instruction of the policy impact on the relationship between power balance with shareholder structure and corporate performance.The weakness also exists in the paper. Firstly, this paper don’t take nature of stock rights into account. What is more, however reform cannot be achieved in one step but be implemented step by step. Because of timing difference, the result may be influenced. Thirdly, industrial dummy variables cannot exist in Fixed Effects model. The model y_it=u_i+x_it*b+e_it embodies all the observable effects. If a variable is fixed, it cannot be contained in the model. Consequently, the connection is general and common.