Research On The Influence Of Non-tradable Share Reform On Large Shareholder Agency Problem In Listed Companies

The traditional agency theory is based on the standpoint of Berle and Means on the high degree of separation between the ownership of the modern enterprises and the control right, researching the conflict between managers and shareholders. With the gradual penetration of countries' corporate governance management and comparison research in the late 1980s and the corporate governance research of emerging markets at the beginning of the century, more and more scholars find that the high concentration or the relative concentration of stock right is a common feature of the stock right structure of countries' companies. However, the stock right concentrates on a handful of large shareholders, which causes another agency problem that the large shareholders encroach small shareholders' interests by means of their control right to maximize their personal interests, which is called "the Large Shareholder Agency Problem".In China's capital market, the stock right of listed companies is not only highly concentrated, but also the stock right arrangement-Non-tradable Share exists compared with other countries. The Non-tradable Share breaks the foundation of the uniformity of listed companies' interests and mechanism and makes large shareholders' motivation that large shareholders encroach on assets of listed companies become strong. In order to solve the institutional flaw in China's capital market, China officially launched "Non-tradable Share Reform" in April, 2005. By the end of 2006, Non-tradable Share Reform was basically completed. The non-tradable shares of the shareholders with more than 5% of total shares have a 3-year restricted stock trade period, so in normal circumstances, if a listed company implements Non-tradable Share Reform, it needs 3 years to realize a full circulation. After Sany Heavy Industrial Co., Ltd, which was one of the first listed companies participating Non-tradable Share Reform, achieved a full circulation on June 16,2008, China's listed companies successively entered a full-circulation age.Non-tradable Share Reform makes the pricing mechanism of original non-tradable shares and circulating shares unified. The stock price directly determines large shareholders' wealth and the interests of large shareholders and small shareholders begin to converge, so large shareholders' behaviors will be limited by the minority shareholders in the secondary market. Is large shareholder agency problem eased after Non-tradable Share Reform? What do large shareholders' behaviors change? Solving these problems is a research focus of the paper. The paper studies those listed companies which had carried out Non-tradable Share Reform and accomplished a full circulation of shares by the end of 2009 in terms of the cash dividend policy, the embezzlement of funds and the earnings management.The empirical study of the cash dividend finds that:after Non-tradable Share Reform, the mean level of listed companies' distribution will and distribution intensity visibly reduces; after Non-tradable Share Reform, the large shareholder agency problem relieves with respect to the cash dividend policy of listed companies; after Non-tradable Share Reform, state holding listed companies' cash dividend distribution will weaken, but non-state holding listed companies are not obvious in the context of the shareholding ratio of large shareholders in terms of the cash dividend distribution will from the influence of Non-tradable Share Reform between the shareholding ratio of large shareholders and the cash dividend policy; after Non-tradable Share Reform, the cash dividend distribution intensity of listed companies recedes clearly in the context of the shareholding ratio of large shareholders in terms of the cash dividend distribution intensity. This suggests that the large shareholders' cash dividend distribution preference decreases. A conclusion that large shareholder agency problem relieves will be drawn from different angles. Non-tradable Share Reform weakens the effect of the "Tunneling" of larger shareholders' cash dividend. The cash dividend distribution level of large shareholders is lower in a full-circulation age than that in a Non-tradable Share age and large shareholders' cash dividend preference greatly reduces after a full circulation. After the lock-up shares of large shareholders circulate, the large shareholder agency problem further relieves with respect to the cash dividend distribution.The empirical study of the embezzlement of funds finds that:after Non-tradable Share Reform, the mean level of listed companies' embezzlement of funds declines obviously. Non-tradable Share Reform attains the result of improving the large shareholder agency problem on the embezzlement of funds; after Non-tradable Share Reform, the shareholders' embezzlement of funds decreases visibly in the context of the shareholding ratio of large shareholders. This suggests that large shareholders' embezzlement of funds preference slacks up after Non-tradable Share Reform and further proves that the large shareholder agency problem relieves after Non-tradable Share Reform in term of the shareholders' embezzlement of funds. Non-tradable Share Reform greatly improves the interests' conflict between shareholders with non-tradable shares and shareholders with circulating shares. Stepping into a post-Non-tradable Share age and a full-circulation age, the expected value of stock price and the market price are main causes of changing behaviors of large shareholders' embezzlement of funds. The listed companies' embezzlement of funds is lower after a full-circulation than that in a post-Non-tradable Share age and large shareholders' embezzlement of funds preference further reduces. It means that large shareholders' embezzlement of funds limited by the stock price of the secondary market will further relieve after a full-circulation.The empirical study of the earnings management finds that:after Non-tradable Share Reform, the mean level of listed companies' earnings management improves evidently; the large shareholder agency problem is more severe on the listed companies' earnings management after Non-tradable Share Reform; after Non-tradable Share Reform, the stock price directly determines shareholders' wealth; large shareholders with large amounts of non-tradable shares control the stock price through the earnings management to maximize their personal interests. The application of accounting standards especially the fair value measurement model makes the earnings management more flexible. The paper argues that large shareholders' current market price management preference is a root cause of enhancing the earnings management after Non-tradable Share Reform. The listed companies' earnings management obviously increases in the context of the shareholding ratio of large shareholders after Non-tradable Share Reform. This suggests that large shareholders' earnings management preference enhances after Non-tradable Share Reform and further proves that the large shareholder agency problem is more serious from different angles after Non-tradable Share Reform. The listed companies' earnings management improves in a full-circulation age compared with the post-Non-tradable Share, which argues that large shareholders will have a motivation to control the stock price by the earnings management with large shareholders' shares entering the secondary market. The large shareholder agency problem is more aggravated on the earnings management after a full-circulation age.The innovation of the study is mainly reflected in the following aspects:First, the previous study of the large shareholder agency problem is conducted under the context of the Non-tradable Share, though a handful of study samples on the Non-tradable Share Reform are in the lock-up period of shares. The paper first introduces the data of listed companies with full-circulation shares to research the effect of Non-tradable Share Reform on the large shareholder agency problem.Second, the previous research studies the behaviors of large shareholders from a single prospective. The study problem is single and the study result is one-sided. The paper researches the changes on the behaviors of large shareholders from different angles before and after Non-tradable Share Reform to reach an innovative conclusion.Third, Non-tradable Share Reform attains a result of improving the large shareholder agency problem on the cash dividend policy of listed companies and the embezzlement of funds, but large shareholders' control of the current market value increases after Non-tradable Share Reform; the large shareholder agency problem is more severe with respect to the earnings management of listed companies after Non-tradable Share Reform.Fourth, as a member of emerging market countries, China's listed companies' stock right is characterized by a high concentration as well as other emerging market countries. The main problem of listed companies is a conflict between large shareholders and small shareholders. However, foreign scholars exclude China on the large shareholder agency problem in the comparative study of differences among countries and the corporate governance research of emerging markets. The paper study the changes of behaviors of large shareholders before and after Non-tradable Share Reform on the basis of China's Non-tradable Share Reform, by which the effectiveness of Non-tradable Share Reform will be examined, and enriches the literature of Non-tradable Share Reform and the large shareholder agency problem.Fifth, the paper puts forward policy recommendations of relieving the large shareholder agency problem according to analyzing the factors of influencing the behaviors of large shareholders after Non-tradable Share Reform and further analyzing the effects of Non-tradable Share Reform on the large shareholder agency problem.