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Local Government-owner Bidder and Corporate Control Transfer

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Local Government-owner Bidder and Corporate Control TransferLocal,and,local,AND

    Local Government-owner Bidder and

    Corporate Control Transfer

    Jun.2006,Vo1.2,No.6(SerialNo.13)JournalofModernAccountingandAuditing,ISSN15486583,USA

    LocalGovernmentownerBidderandCorporateControlTransfer

    ShufangDeng'TsinghuaUniversity

    Abstract:Inthisstudy,wediscussthefinancialconstraintsandthebehavioroflocalgovernments.We

    expectthatgovernmentsinrelativewealthyregionwillactasahelpinghandforcompaniesunderitscontrolon

    average,whilethoseinrelativepoorregionwillbeagrabbinghand.Bydividinglocalgovernmentsinto3

    categoriesaccordingtoitsGDPpercapitaandFiscalRevenuepercapita,wetesttherelationshipbetween

    governmentattributesandthelong-termperformanceoflistedcompaniesincorporatecontrolmarket.Wefind

    thattargetcompanieswhoarelatercontrolledbytllewealthiestgovernmentachievebetterperformance,while

    thosewhowerelatercontrolledbythepoorestgovernmentsalsoachievesignificantbetterlongtermperformance.

    Keywords:localgovernment;ultimateownership;controltransfer

    Recentresearcheshaveshownthattheultimateownershipofbidderswouldhavesignificanteffectonthe

    stockperform.anceofthetargetlistedcorporations.Onaverage,listedcompaniestakenoverbyprivatecontrolled

    biddershavegotbetterlong-runstockperformancethanthoseacquiredbystate.ownedbidders.Asmucheffort

    hasbeenputinthatrespect,littlehasbeendonetomakefurtherexplorationaboutstateownershipitself

    ,

    whichis

    nowpresentinggreatdiversity.Inthisstudy,wewillfocusonenterprisesownedbylocalgovernmentstodiscuss

    thebehaviorpatternsoflocalgovernmentsandtheireffectsoncorporatecontroltransfer. 1.Hypothesis

    Accordingtostatistics,theGDPofGuangdongprovinceis3.56timesgreaterthanthatofJiangxiprovince

    and34timesgreaterthanthatofNingxiaprovincein2004.Facingthegreateconomicgapbetweeneachother,

    localgovernmentspresentdifferentbehaviorpatternsunderthesameincentivemechanismpromotionrLiand

    Zhou,2004)andenlargingfinancialexpenditure(Jin,Qian,andWeingast1999),thusexertdifferenteffectson

    enterprisesundertheirauthority.Empiricalresearchesoffersomedetailexamples.FanandWaI1g(2004)found

    tllatinthoseareaswithrelativehigherunemploymentrateandworseeconomicdevelopment.morepoliticians

    obtainhi

    positionsinpubliccompaniescontrolledbylocalgovemment,whichimpliesmoregovernment

    interference.Li,Chen,andSu(2005)foundthatinareaswithhigherfiscaldeficitandseverediscretionaryfee

    items,politiciansoftentakepositionsinthefamily

    controlledlistedcompanies.Theyconcludedthatinpoorer

    area,theprotectionofpropertyrightsisweak,soindividualsprotecttheirwealthbyenhancingtherelationship

    withlocalgovernments.Basedondatafrom1999to2003,Sun,LiuandLi(2005)foundthatthe

betterthelocal

    marketdeveloped,thelowertherateoflong

    termdebttototaldebtforlistedcompaniesinthatareawas.In

    addition,theysuggestedthatthiswaswhylocalgovernmentexceedeffectsineconomicsindifferentway.Sojn

    areawithrelativeworsemarketdevelopment,localgovernmentplaysamoreimportantroleinbusiness'

    operations.Forexample,iturgescommercialbanktograntlong

    termloanstothelistedcompaniescontrolledby

    ShufangDeng,Ph.D.candidateofSchoolofEconomicsandManagement,TsinghuaUniversity;Researchfield:CorporateFinance;

    Address:Room403,Unit5,Building6,XinyuanXili,MiddleStreet,ChaoyangDis~ict,Beijing~P.R.China;Postcode:100027.

LocalGovernment-ownerBidderandCorporateControlTransfer

    localgovernments.Besidestheseempiricalevidences,newsreportsalsorevealthesameproblem.Forinstance,

    reportsshowthatinChibi,arelativelypoorcityofHubeiprovince,therearemorethan2500itemsof

    administrativefee.Suchlevyissohighthatlocalenterpriseishardtosurvive.Thegreatamountofadministrative

    feeismainlyusedtosatisfylocalgovernments'expense.Itissaidthatthenumberofpublicservantsisl0times

    largerthanrequired.Tosatisfythecorrespondingfiscalneed,localgovernmentinterferersheavilyineconomics.

    Accordingto2002yearbook,theratioofadministrativefeetofiscalrevenueofeachprovincediversifiesgreatly,

    inShanghai,theratiois2.1%,whileinHunan,anditclimbstol2.1%.Thesefiguresimplythattoachievemore

    fiscalrevenue.1ocalgovernmentsadoptdifferentpolicies.

    Ye'anZhouf2003)defined3kindsofbehaviorpatternsoflocalgovemment-aggressive,conservativeand

    predatoryaccordingtowhetherthosebehaviorsaddvaluetoenterprises.Hesuggeststhat"aggressive''

    governmentsprotectenterprisesunderitsauthoritybyhelpingthemgetmorefavorableconditionsfromcentral

    govemmentand''conservative''governmentshelptheirenterprisebypreventingcompetitionfromexternal

    enterprises,while''predatory''governmentsharmtheirenterprisesbyappropriation.Thuswhenlocalgovernments

    actasultimateowner,theirbehaviorpaaernwillbedoomtoaffectthevalueofenterprises.AsGDPandfinancial

    constraintshavegreatintereststogovemmentofficials,wetakelocalGDPpercapitaandlocalFiscalRevenueper

    capitaasthecriteriatojudgegovernments'behaviorpaRern.Weexpectthatwhenfirmsarecontrolledbyrelative

    wealthylocalgovemment,i.e.withhigherGDPpercapitaorhigherFiscalRevenuepercapita,onaveragethey

    gethelpfromtheultimateowner-localgovernmentbecausethewealthylocaleconomyoffersenoughfiscal

    revenuetosupportgovernments'non-profitactivities.Inaddition.aslocalgovernmentsalsohavestrong

    economicappeal,therefore,theyhavetheabilityaswellastheincentivestohelplocalenterpriseswin

    advantageouspositionbyobtainlicensesorotherfavorabletermsthroughvalue-addedinterference.However,

    whenrelativepoorergovernmentsactasultimatecontroller,i.e.with1owerGDPpercapitaorlowerFiscal

    Revenuepercapita,onaverage,theyexpropriatemorefromfirmsbecause,ononeside,poorlocaleconomycould

    notofferenoughrevenuetosupportnon-profitactivitieswhileontheothersidetheneedstomaintainsocial

    stability.

    andenlargefinancialexpenseareurgent,solocalgovernmentsaremoreinclinedtotunnelwealthfrom

    finnsandthusdestroyvalue.Therefore,wegetourhypothesis.

    Hypothesis:Forlistedcompaniestakenoverbybiddersultimatelycontrolledbylocalgovemments,those

    acquiredbyrelativewealthygovernmentswillhavebeaerlong-termstockperformance,whilethosetakenoverby

    relativepooroneswillhaveworselong-termperformance.

    2.ResearchDesign

    WeusethefollowingmodeltotestOurhypothesis,

    Rao+al^+2hie+a3Govw+a4Govp+asherfin+a6fie+a7assets+asyear+a9method R

    isthelong-termstockperformanceofthetargetfirmsaRercorporatecontroltransfer.Itrecords480

    tradingdays'accumulatedabnormalstockreturnaftercontroltransfer,nearly2yearsabnormalreturn.The

    abnormaldailyreturniscalculatedbydeductingthemarketdailyreturndirectlyfromdailyrawreturn.

    ShufangDeng(2006)findsthatthereexistsasignificantinverseU

    shapedrelationshipbetweenthe

    long

    termperformanceoflistedfirmsandthelengthofcontrolchainofthenewcontroller.Whenthelengthofthe

    controlchainfromthelistedcompaniestotheultimatecontroll~isgreaterthan3,thelong

    termperformancewill

    beworst.Whenthelengthisequalto3,thelong

    termperformancewillbethebestfollowingthesamemethod,

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    wnerBidderandCorporateControlTransfer

    wedefinehietomeasurethelengthofcontrolchain.Whenthelengthofthecontrolchainisgreaterthan3,hie

    equals1.Whenthelengthofthecontroltrainislessthan3

    ,equals.1.Whenthelengthofthecontroltrainis

    equalsto3,h/eequals0.

    Ownershipconcentrationwillaffectperformance(Xu,1997,andWang,1999),sowecollectownershipdata

    Ofthe3largestownersaftercontrol,transferandcalculatethecorrespondingherfindaleindextomeasure

    ownershipconcentration,anddefineitasherfin.

    Accountingperformanceofthetargetcompaniesbeforecontroltransfermayinfluencebothaccountingand

    stockperformanceaftercontroltransfer.SowedefinevariableNItocontroltheeffect. WecomputeNIasthe3

    yearsaveragedinversevalueofPEratio,definedasepratio.Wealsocomputeaveragedretumonassetsfdeftned

    asroa)andaveragedreturnfromoperationsonassets(definedasoFoa)toexecuterobusttests. Variableassetsdefinesthelogvalueoftargetfirms'assetsbeforecontroltransfer.methodisusedtOcOntrl0l

    effectsduetocontroltransfermethods.Whenmethodequals0,controlisalwaystransferredongovemment,s

    demandwithoutcost?Whenmethodequals1,controlistransferredbynegotiationandthebuyeralwayshastopay

    something-Around1999,theChinasecuritymarkethasundergonemanypolicychanges ,

    tocontrolsucheffects,

    weincludevariableyearintheregression.Ifcontroltransferisbefore1999,thenyearequals0,otherwise."r

    equals1.

    Controltransferisalwaysaccompaniedwithhighlyinformationasymmetry ,

    forwhichonlythosewhOhave

    acquiredthetargetcompaniescouldreallyunderstand.Forthosetargetfirmswhosecontrolsrightshavebeen

    transferredforseveraltimes,weinferthattheremaybeexistmoreseverproblemsinthem. Wedefinevariable

    tocontroltheeffects.Iffreequals1,controlrightofthefirmhasbeentransferredmorethanonce,otherwise,

    equals0.

    Wedividetheeconomicstatusoflocalgovernments

    GovwandGovptomeasurethem.WhenGovwequals1,

    into3levels:wealthy,modest,poor,andusevariable

    itsuggeststhatthebidderisultimatelycontrolledby

    wealthygovemments,otherwiseGovwequals0.WhenGovpequals1,itmeansthatthebidderisultimately

    controlledbypoorgovernments,otherwiseGovpequals0.Specifically,weuseGDPpercapitaaswellasFiscal

    Revenuepercapitaasthecriteriatojudgetheeconomicstatusoflocalgovernments.Foreachprovince,ifit,s

    GDPpercapitaisrankedbetweennumber1andnumber10,thegovernmentisdefinedaswealthy:ifit,sGDPper

    capitaisrankedbetweennumber10andnumber20,thegovernmentisdefinedasmodest;andtheJeftisdefined

    aspoor.ForFiscalRevenuepercapita,weusethesanlecriterion.WeexpectthesignofGovwtobepositiveand

    Govptobenegative.

3.Data

    Wecollectallcasesofcontroltransferfrom1994to2001.Wegetinformationaboutbiddersandse11ers,

    methodforcontroltransfer,andtherelevantfinancialandmarketreturnfromtheGeniusDatabase.

    WetracethecontroltrainofthebidderstogetinformationaboutitsultimateownerandthelenP=thofthe

    controltrain.Sourceforthisinformationiscomplex,

    fromprospectus,boardannouncements,restructuring

    announcements,controltransferannouncements,toallnualreports.Wealsoseeksomeinformationfrominternet.

    Wefindonly4observationswhosecontrolchainisgreaterthan3(i.e.,hie=1).Thenumberistoosma11to

    supportrelativeconvincingresult,wedeletethoseobservations.Sowefinallygetl27observationswhosehieis

    eitherequalto-1or0.

LocalGovernment-ownerBidderandCorporateControlTramfer

    Table1presentsthestatisticdescriptionofthevariablesintheregression. Table1Statisticdescription

    Note:Variableasset8describesthetotalassetsofthetargetfirmaccordingtotheupdatedfinancialreportjustbeforethe

    controltransfer.

    ?

    G0andGovwarcdeterminedaccordingtoGDPpercapitaofeacharea.Asthereexistslittledifferencewhenwe

    changethecriterionandusefiscalrevenuepercapitatodetermineGovpandGovw,TableIonlyreportstheformerone,

    4.Hypothesistesting

    Table2andTable3presentthetestresultsofthehypothesis.ForTable2,wedividelocalgovern

mentsinto3

    categoriesaccordingtotheirGDPpercapita,whileforTable3,wejudgetheattributesofgovernmentsbasedon

    theirFiscalRevenuepercapita.

    Accordingtobothtables,thesignofGovwispositive,althoughwithweaksignificance,whichpartially

    supportedthehypothesis.However,thesignofGovpistotallypositiveandwithsignificance,violatingour

    hypothesis.Wefurthertestthehypothesisbycomparingthepoorwiththemodestandthewealthseparately,but

    getthesameresult.Thisimpliesthattheoriginalexpectationisincorrect.Onepossibleexplanationmaybethat

    theextentofgovernmentinterventionmakesthedifference.aswehavediscussedthedirectionofinterventionby

    differentgovernment,butwehaveignoredtheextent.Incontrastwithgovernmentsinpoorregions,local

    governmentsinrelativewealthyareainterveneinbusinessaffairsless.Sun,LiuandLi(2005)provideapieceof

    evidence.Theyfoundthatgovernmentsinrelativepoorareaoffermoreguaranteebasedongovernmentcreditto

    localcompaniestohelpthemobtainlongtermloanfrombanks.

    Accountingperformancebeforecontroltransferisirrelevanttothetargetfirms'longtermperformance,the

    resultthatisconsistentwiththefrequentrestructuringpracticeaftercontroltransfer.Thelengthofthecontrol

    chain,variableh/e,althoughpositive,showslowsignificance.Variablehe~fi.,year,andmethodareallnot

    significant.Inconsistentwithourexpectation,thesignforvariablefreisnegativeandsignificant.

    4

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