Author: Yang, Li
Title: Controlling shareholder buyout in Hong Kong
Degree: Ph.D.
Year: 2013
Subject: Consolidation and merger of corporations -- China -- Hong Kong.
Management buyouts -- China -- Hong Kong.
Corporations -- China -- Hong Kong.
Hong Kong Polytechnic University -- Dissertations
Department: School of Accounting and Finance
Pages: x, 147 p. ; 30 cm.
Language: English
Abstract: This study examines the going private transactions led by controlling shareholders in Hong Kong. A major concern around these transactions is that the controlling shareholders may use their power to pursue their own interests at the expense of other shareholders. We specifically try to answer the following four questions: (1) Is there any evidence of earnings management preceding going private transactions in Hong Kong? (2) What are the determinants of going private transactions? (3) Are there wealth gains to public shareholders in these transactions? If yes, why are the controlling shareholders willing to pay significant offer premiums to outside shareholders? (4) How does the ownership structure in Hong Kong affect the controlling shareholders' decision to privatize and the offer price? We first find evidence of earnings management prior to going private transactions, supporting the argument that controlling shareholders might try to opportunistically manipulate earnings in an attempt to depress stock prices. We find that controlling shareholders are willing to pay premiums of approximately 50% on average to buy back the publicly held shares. The market also reacts favourably to privatization announcements: an average of 35% cumulative abnormal returns (CARs) is realized around the announcement of a controlling shareholder buyout (CSBO). However, we find that the privatization offer prices of CSBO firms are not significantly different from their initial public offering (IPO) prices. The overall results suggest that the offer prices only represent an artificial premium due to the low market prices of CSBO firms before privatization. In the going private literature, hypotheses such as incentive realignment, free cash flow, financial visibility, and tax benefits are frequently cited as important factors in driving going private decisions as well as the sources of wealth gains in these transactions. Our study finds support for the undervaluation hypothesis: firms with a lower price-to-NAV ratio are more likely to be privatized by their controlling shareholders and tend to offer higher premiums. The incentive realignment hypothesis, free cash flow hypothesis, and tax benefits hypothesis have little explanatory power for our sample.
In this study, we further relate controlling shareholders' expropriation to going private transactions. We use earnings management and related-party transactions to proxy for controlling shareholders' expropriation. By examining how controlling shareholders' pre-buyout earnings management affects the likelihood of a firm being privatized and investigating controlling shareholders' pre-buyout expropriation as a source of offer premiums in CSBOs, we integrate the two strands of research that used to be isolated in the going private literature. We find that the relation between discretionary accruals and the odds of a firm engaging in a CSBO is significantly negative. We also find that lower discretionary accruals and larger connected transactions are associated with higher offer premiums and higher abnormal returns. The results are robust after controlling for a range of hypotheses which have been used to explain premiums in previous literature. The overall results suggest that controlling shareholders who have an agenda in privatizing the firm will engage aggressively in earnings manipulation. Those firms with negative discretionary accruals are more likely candidates for CSBOs. In addition, the results also suggest that controlling shareholders' expropriation through earnings management and connected transactions serves as potential sources of wealth gains in CSBOs. Controlling shareholders who have successfully exploited public shareholders would be willing to spare part of their expropriation as offer premiums to secure the success of privatization. Lastly, we find that the negative relation between discretionary accruals and offer premiums/CARs is more pronounced among CSBO firms with less analyst coverage and in firms with family ownership concentration, especially among firms where pyramid structures exist, cash-flow rights are largely deviating from voting rights, and firms with a single controlling owner (i.e., where there are no other large shareholders). Moreover, the positive relation between connected transactions and offer premiums/CARs is also much stronger in these firms. The overall results support the argument that since controlling shareholders having strong motivation to appropriate minority shareholder wealth in going private transactions, such expropriation is much more easily accomplished in family controlled firms and in firms with high information asymmetry.
Rights: All rights reserved
Access: open access

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