The Value of Corporate Control: Evidence from China's Distressed Firms

31 Pages Posted: 19 Jun 2002

See all articles by Chong-En Bai

Chong-En Bai

The University of Hong Kong - School of Economics and Finance; University of Michigan - William Davidson Institute

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Abstract

This paper hypothesizes that the threat of losing listing status in China's distressed ST (special treatment) firms initiates a corporate control market that does not exist otherwise. The incumbent controlling shareholder, facing the possibility of losing control right, is forced to 'tunnel back' the value he has extracted from the firm before to boost the distressed firm's operating performance. This part of value is captured by the cumulative abnormal returns (CARs) surrounding ST announcement. We further argue that CAR is an alternative measure of private benefits of control, in contrast with the ones used in Barclay and Holderness (1989) and Nenova (2000). Using the sample of 66 listing companies that had become ST between 1998 and 2000 in China's stock market, we find that the 22-month cumulative abnormal returns are as high as 29% on average. Our game theoretic model shows that the control value released through the contest for corporate control is positively related to the largest shareholder's shareholding percentage and concentration of shares held by other largest shareholders, but negatively correlated with the firm's leverage ratio. The empirical evidence confirms these predictions.

Keywords: private benefits of control, tunneling, corporate governance, special treatment, China

JEL Classification: G32, G34

Suggested Citation

Bai, Chong-En and Liu, Qiao and Song, Frank M., The Value of Corporate Control: Evidence from China's Distressed Firms. Available at SSRN: https://ssrn.com/abstract=314802 or http://dx.doi.org/10.2139/ssrn.314802

Chong-En Bai (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
(852) 2859-1036 (Phone)
(852) 2548-1152 (Fax)

University of Michigan - William Davidson Institute ( email )

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,065
Abstract Views
3,684
rank
22,146
PlumX Metrics