Study On Firm Value In A Share Market Of China:Perspective From The Ultimate Controller's Portfolio

Corporate governance is one of the core topics in the field of corporate finance Related research dates back to 1932,when Berle and Means put forward ownership dispersion hypothesis in their classic literature "the modern corporation and private property".From 1980s,with more and more phenomenon and research showing that equity concentration is the common characteristic of modern companies,the focus of corporate governance study has gradually shifted to the ultimate controller's separation of control right and cash flow right.In domestic market,most enterprises have complicated equity structure,such as pyramid structure and cross-shareholding structure,making it harder for supervision.So it is necessary to study the influence of the ultimate controller on firm value.Nowadays the ultimate controller usually controls multiple firms in China.For example,the Lu Guanqiu family controls several listed companies including Wanxiang Doneed,Lulu,Shunfa Hengye and Wanxiang Qianchao.When the ultimate controller(e.g.natural person,corporation and local government)controls several firms,these firms form a portfolio.It is worth attention to study whether and how the phenomenon affects firm value.Due to resource constraints,the ultimate controller cannot scale up information collection for companies in her portfolio.When deciding how much to analyze a firm,the ultimate controller will compare the importance of the firm to the other firms in her portfolio.Thus,this relative importance is more efficient in analyze the ultimate controller's impact on firm value,rather than absolute indicators such as control rights and cash flow rights.Theoretically,the more important a company is in the portfolio,the more incentives the ultimate controller has to gather private information about the company;and the informed an investor is,the more power she has to improve firm value through market trading,putting pressure on management or intervening corporate operation directly.Previous literature mainly focus on control rights and cash flow rights in single companies,the relative importance in the ultimate controller's portfolio being neglected.In order to study the effect of the ultimate controller characteristic on firm value more precisely,this paper constructs an index to measure the importance of firms in their ultimate controller's portfolio.We use the index to study its correlation with firm value.Furthermore,we explore the mechanism through which the influence is transformed:exit,learning,and voice.Our work has theoretical and realistic significance in China's special market circumstanceIn the empirical part,we using data of listed companies in A share market from 2009 to 2016 to test on the theory mentioned above systematically.We find that the importance of a company in its ultimate controller's portfolio is significantly positively related to future operational performance and valuation.It is also positively correlated with abnormal stock returns and stock price informativeness.Based on these conclusions,we builds a hedge strategy that each year takes a long position in the quintile of companies with the highest portfolio importance and shorts companies in the lowest quintile of portfolio importance.With our data,this trading strategy yields positive abnormal returns.