Divestiture, Tunneling And Firm Value

Based on the information asymmetry theory, minority shareholders cannotsupervise corporate managers effectively without the capability and motives. Under theconcentration of ownership structure, the corporate control rights lies in the hands of thecontrolling shareholder, and the problem of principle—agent transferred to thecontrolling shareholder and minority shareholders. In order to gain revenue, thecontrolling shareholder can manipulate enterprise daily management by taking controlof the board of directors or other authorities. In the contemporary researches, more andmore concrete evidences prove that listing corporation shareholders may take advantageof the affiliated transaction to transfer the economic interests by using their majorityownership advantage. In the recent years, with the increasing numbers of corporatedivestiture in our country, divestiture plays an important role in the strategic adjustmentand optimizing the resource allocation. However, in the situation of highly concentratedownership, it is still unknown that whether divestiture is also one of the ways ofinterests’ transportation. Theoretically, the interests of transportation are divided into“propping” and “tunneling”,“propping” can often improve enterprise performance inthe short term, however,“tunneling” is the damage to the interests of small shareholders.Scholars are often observing the changes in the value of the enterprise to verify theexistence of interests’ transportation. Therefore, in the frame of “divestiture—thechange of the enterprise value—the interests of transportation”, this paper tries todiscuss the issue that controlling shareholders take advantage of divestiture to transferthe listing corporation’s interests and damage the interests of small shareholders.This paper uses the method of normative research and empirical research. Theempirical study includes two parts: one is the empirical analysis which firstly sort outthe research results on the relationship between divestiture, the interests oftransportation as well as the enterprise value; and then combine with the theoreticalbasis, put forward the problems and methods of the research; then screen out the listedcompanies in Shanghai A Stock Market and Shenzhen A Stock Market which haveconducted divestiture transactions during2008—2010as the sample companies, andobserve the long term market reaction for three years after the divestiture by usingBHAR calculation method, in order to determine whether the tunneling exists in our country’s related divestiture transactions and it’s direction. The other one is the casestudy in which put emphasis on the case analysis. In this part, firstly introduce anoverview of Beidahuang Agriculture Co., Ltd (HACL) and its divestiture circumstancesand process；secondly observe the influence of divestiture on the company value anddiscuss the exits of tunneling in concert with above chapter of empirical study; thirdlyuse of financial management knowledge comprehensively to find out the doubts of theinterests of transportation and dig out the invisible “tunneling” motivation as far aspossible, with the method of checking enterprise annual financial statements analyzingthe operating condition compared with the same industry, judging the underlying assetvalue and so on. In a certain extent, the case analysis makes up for the deficiency thatutilizing the large sample data for empirical analysis only and lack of specific casesshow in existent researching files, and it also could strengthen related research practicalsignificance.Conclusion resulting from the empirical analysis demonstrates that the long termextra returns of related divestiture transactions are significantly negative in three yearsafter the transaction occurred, however, the result of non-related divestiture transactionsis positive benefit but not significant, and the difference between the two groupsgradually increased with the passage of time. It can be concluded that in our country,the motivation of “tunneling” exists in the related divestiture transactions. Conclusionresulting from the case study demonstrates that in the transaction price, the underlyingasset is bought high and sold low, and the concept of land transfer royalty is fuzzedwhen assesses the value of the underlying asset. Besides, in the author’s opinion, underthe banner of “stopping loss”, the management behavior of company’s top executivescannot be standardized because of radically amiss in internal control system, andindividual directors fall in their duty, which makes the management direction deviation.All of these are the main causes of performance loss. Moreover, the divestment businessstill has good prospects for development in the future, and after the completion of thetransaction, real loss making subsidiaries remains in listed corporation which makesother shareholders bear its high debt. So, the purpose of this reorganization is to makeall the investors afford the effect of major shareholders’ irregular actions. According tothis part, the analysis of examples shows that the “tunneling” is not exists in one orseveral reorganizations only. To conduct a comprehensive analysis of the “tunneling” ina case, it should be combined with a variety of business behavior of large shareholders and managements, and thus requires the medium and small investors to keep their eyesopen, in order to protecting their own interests from being infringed.