The effect of foreign strategic investors on the performance of PRC H-firms before and after IPOs

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The effect of foreign strategic investors on the performance of PRC H-firms before and after IPOs


Author: Chan, Eva
Title: The effect of foreign strategic investors on the performance of PRC H-firms before and after IPOs
Degree: D.B.A.
Year: 2007
Subject: Hong Kong Polytechnic University -- Dissertations.
Corporations -- China -- Evaluation.
Investments, Foreign -- China.
Going public (Securities) -- China.
Department: Graduate School of Business
Pages: v, 93 leaves ; 30 cm.
Language: English
InnoPac Record:
Abstract: Foreign strategic investor ("FSI") is a recent form of entry for foreign investors in the PRC entities. FSI is a non-PRC investor which has equity stake in an H-firm listed in the Hong Kong Exchange and aims to maintain long term relation with the H-firm. FSI has board representation which gives the strategic investor the ability to intervene. Based on the transaction cost theory, my first hypothesis is that less efficient H-firms attract FSIs and less efficient H-firms have different characteristics. After the entry of the FSIs into the H-firms, my second hypothesis is that performance of H-firm shows improvement. Furthermore, in order to test the efficiency of the Hong Kong stock market, I make a correlation analysis on the market-based share-price performance and the long-term accounting-based measures. I study the 141 H-firms at the end of December 2006, in which 95 are in the Main Board and 46 are in the GEM Board. As there is only 1 H-firm in the GEM Board has FSI and in view of the relatively smaller firm size and lower profitability requirement of the GEM Board companies, my study only focus on the 95 H-firms in the Main Board. I test the corporate performance of H-firms both by accounting-based and market-based measures. My study supports my first hypothesis, H-firms with FSIs are initially less efficient H-firms as they underperform their peers before IPO. The target less efficient H-firms have the characteristics of bigger size. The larger the firm, the greater the state's holdings and the state's holdings do not change because of stock performance or profitability. As the state does not want to give up the majority shareholding in these SOEs, the ability for foreign investor to select investment in PRC is restricted. It is influenced by political environment and government initiation. One of the ways for foreign investor to invest in the bigger size PRC firms is to take up "a minority with strategic role". Less efficient PRC H-firms seek the help of FSIs to improve their performance while FSIs see that there is more room for performance improvement in the underperformed H-firms. Regarding the second hypothesis, the performance of H-firms improves after the entry of FSIs, my result shows weak evidences to support the hypothesis due to the mixed results from the accounting-based measures and the share price performance. For accounting-based measures, H-firms with FSIs show significant improvement in return on asset and return on equity on the t-test and z-test when compared with their peers. FSIs also have significant relation with the improvement of return on asset and return on equities in the cross-sectional analysis. However, when looking at the share prices of H-firms, there is no significant difference on the abnormal returns of H-firms with or without FSIs and FSIs do not have significant relation with the abnormal return on the regression analysis. This may be due to two factors. First, the market perceives the primary objective of FSIs is not financial gain. FSI is aiming at the China market after its accession to WTO. Second, there is no deep IPO underpricing for H-firms with FSIs. When testing the market efficiency, there is significant correlation between the return on sales and abnormal share price returns in the medium and long-terms, suggesting that the market have the ability to make use of the public information to reflect future gains and performance of H-firms. My study differs from the previous studies in several ways. First, to invest in PRC companies, H-share trading is the main channel for international investors. Only limited research is examined on the characteristics of H-firms before IPOs. Second, prior researches evidence that foreign investor has a positive impact on the SOE performance, my study further extends the understanding of the role of foreign shareholder and their effect to the invested firms, particularly the form of foreign investor to participate in the PRC firm without dominant control. This study has two major limitations. First, with only 95 H-firms in the Main Board, the sample size is small. Second, the comparison of performance change of the H-firms may be affected by other firm level and macroeconomic factors. A more in-depth study on the role of foreign strategic investors on the performance of H-firms is needed when more data are available.

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