Author: 何寧
He, Ning
Title: The ownership structure, share transferability and firm performance : a study on red-chip shares and H shares in Hong Kong
Other Title: 股權性質, 股份可流通性和公司績效 : 紅籌股和 H 股研究
Degree: D.B.A.
Year: 2005
Subject: Hong Kong Polytechnic University -- Dissertations.
Stock exchanges -- China.
Department: Graduate School of Business
Pages: xv, 164 leaves : charts ; 30 cm.
Language: Chinese
Abstract: From the aspect of organization survival and evolution, all forms of organization exist to provide certain products and services. Competition exists between them. An important factor to determine the survival of an organization is the issue of agency control. Through various contractual relationships, an organization provides the relevant parties with fixed payoff or incentive payoff tied to specific measures of performance so as to control and solve agency problems. Among all contractual relationships, residual claim is the central one. Different forms of organization place different restrictions on the residual claim and thus organization's activities are affected differently. Compared with other forms of organization, the restriction placed on the common stock residual claim in large non-financial corporations are much smaller. This relative freedom in shareholding shows in that (1) stockholders are not required to have any other role in the organization, e.g. in its daily operation and management; (2) their residual claims are alienable without restriction; (3) they have the rights of obtaining the net cash flow of the enterprise. However, not every form of organization, every shareholder or every residual claimant has such kinds of right. Therefore different restrictions on residual claims will affect a company's investment behavior, financial decisions, and risk management, and thus the overall performance of the firm. Based on this theoretical background, this dissertation introduces the different characteristics of red-chip shares and H-shares in Hong Kong stock exchange, and proposes the assumption that the performance of the red-chip companies is better than that of the H-share companies. Red-chip companies are overseas companies in terms of the law, so their operation is mainly in accordance with the laws of the registration district and the international laws and practices. On the contrary, H-share companies get registered in the mainland, and their operations are thus regulated by laws and practices in mainland. Since Mainland China is still in the transitional period from planned economy to market economy, its financial markets are still in the early stage of development and the laws and regulations relating to listed companies are not fully developed. This fact causes critical differences in the restrictions of residual claims between red-chip shares and H-shares. Residual claims of H-share companies are under much more restrictions than that of red- chip share. Among the differences, the most important one is the transferability of shares. Red-chip companies are overseas companies, so all of their shares are transferable according to the international practice. The government is only one type of shareholders. Similar to A-share companies in mainland, the government or other government-controlled organizations own the state shares or legal-person shares in H-share companies. So these shares are not transferable. The differences in terms of the restrictions of residual claims between red-chip shares and H-shares have largely reduced the effectiveness of corporate governance mechanisms in H-share companies. The affected mechanisms include the transfer of ownership control, the evaluation of management labor market and the incentive contract of the management. Therefore compared with red-chip companies, the regulating and motivating of the management in H-share companies will be more difficult, which may downgrade company performance, making it inferior to that of red-chip companies. Samples from Hang Seng China Enterprise Index and Hang Seng China Affiliated Corporation Index are used to test the hypothesis. The research finding shows that the differences between red-chip shares and H-shares do affect the company performance. When other factors that may affect the company performance are taken into consideration or controlled for, the dummy variable for differentiating red-chip share and H-share is still significant, which verifies the basic assumption: the performance of red-chip companies is better than H-share companies. This dissertation also reported detailed case analysis based on three major operators in the telecommunication industry and the basic assumption is also verified. This research finding provides some hints to the state's macro economic policies especially regarding the listing of Chinese firms in Hong Kong stock market. And it provides solutions backed by theories in how companies ready to get listed should select the listing mode and how companies already are listed should choose effective financial methods. Meanwhile, the research finding offers immediate reference value for the reform of the possible H-share full circulation in the future. Since the Chinese stock market is mainly comprised of non-transferable state shares and legal-person shares, the research findings can provide reference to the current share ownership separation reform in mainland. Research shows that the transferability of shares, or different restrictions on residual claims, has tremendous effect on firm performance. The restrictions on residual claim, such as restricting the transfer of shares will largely weaken the corporate governance mechanisms and thus lower company performance. Compared to the fully transferable red-chip share, H-share, most shares of which are non-transferable, serves as an good example. This research result highlights the importance of the current share ownership separation reform in China. How to solve the problem of most shares in listed Chinese companies being non-transferable is one of the most important issues to guarantee the continuous stable development of the Chinese stock market.
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