Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China

doi:10.4236/jssm.2011.41004

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Journal of Service Science and Management, 2011, 4, 22-26

doi:10.4236/jssm.2011.41004 Published Online March 2011 (http://www.SciRP.org/journal/jssm)

Expected Difference, Equity Nature and the

Corporate Control Agreement Transfer

Failed - the Evidence from China

Xiaodong Li

School of accounting, ZhengZhou Institute of Aeronautical Industry Management, Zhen Zhou, China.

Email: lxdlls[email protected]

Received November 1st, 2010; revised December 24th, 2010; accepted December 29th, 2010.

ABSTRACT

This paper has researched the issue of corporate control transfer failed in china capital market, which is completely

different from existing studies in corporate control transfer field. The conclusion has shown that corporate control

transfer very likely fails when there is a great difference between two sides of deals. And the equity nature is another

affection factor. The corporate control transfer is not likely to fail when the equity nature is state-owned. The conclu-

sion implies that we should make more imp rovemen t for institutio n s of corpora te control tra n sfer, because of the lack of

market voluntary trade rule in china capita l market.

Keywords: Expected Difference, Equity Nature, Corporate Control Agreement Transfer

1. Introduction

There are “free-ride” and “non-efficiency” defects in the

market of corporate control transaction, while the market

plays an important role in improving the agent problem

for listed company. But the agreement transfer of corpo-

rate control can improve the two defects. The “free-ride”

problem will block the company’s voting efficiency, be-

cause the cost of proxy fight is afford by part of share-

holder, but the benefit is shared by all shareholders [1].

So, the agreement transfer of corporate control can pro-

vide more trade free for control shareholder. That will

prevent the small shareholder’s “free-ride”, and it is more

easily for the accomplished of corporate control transfer

[2].

In this paper, the agreement transfer fail of corporate

control is defined that the two sides of merging has a

intention deal for corporate control transfer, but the deal

is not actually accomplished finally. Many of researchers

had researched corporate control agreement transfer in

different fields, like as operating performance after

merging, market effect, the feature of merging company,

the price of merging, and the mode of control transfer etc.

[2]. But the reason of corporate control agreement trans-

fer fail is not concerned about. In this paper, the reason

of corporate control agreement transfer fail is the re-

searched subject which is neglected by most current

studies.

Section 2 review of the literature and develop the hy-

pothesis. Section 3 designs the research method and sam-

ple selecting. Section 4 examines the relationship be-

tween the expected difference and the transfer failed of

corporation control. Section 5 concludes.

2. Therotical Discussion and Hypothesis

Development

In essence, the transfer of corporate control is the transfer

of decision-making power. The efficiency of transfer

price negotiations and the constraints of institutions en-

vironment are key factors that influence the result of

corporate control transfer. Jensen and Meckling believe

that the transfer of decision-making power based on

market participants voluntary transaction, can match well

the knowledge and decision-making power [3]. It is

benefit for economics efficiency. If the two side traders

have great difference about the future expectation of cor-

porate, the transfer deal will not easily to success, and

most likely to fail. Farther, the transfer of corporate con-

trol is not only effect by price negotiation, but also af-

fected by institutions environment. Such as, the transfer

of corporate control has deeply influenced by administra-

Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China23

tive intervention in china capital market. Therefore, there

are two views to explain the reason of corporate control

transfer fail. The first is the market trade influence, i.e.,

the great differences of traders will significant influence

the result of corporate control transfer. The second is

institutions constraint, i.e., the exogenous institutional

environment has the function to enhance or to block the

process of corporate control transfer.

On the one hand, if the trade of corporate control is

based on market voluntary transaction system, the trad-

ers’ large difference which caused the different future

expectation of corporate control income could block the

processing of corporate control transfer. Despite the

agreement transfer of corporate control has a framework

in beginning, but the detail of the trade has not been de-

termined, further, both sides of trade must negotiate all of

the issues of corporate control transfer. Therefore, the

differences of the expectation income of corporate con-

trol become a crux factor that affect the success of cor-

porate control transfer, because the great differences of

expectation income will result in the difference of trans-

action price. In capital market, for a certain stock, the

changing of stock price is partly reflected the difference

of future expectation income of the listed company. If

stock price has more synchronicity with the market index,

that meaning the firm-specific information has little enter

the decision of market participants [4], i.e. , the private

information of listed companies has less concerned by

investors. So, for this kind of corporation, the differences

of future expectation income are not likely being great,

same is the difference of transaction pricing. Roll is the

first researcher who note that the influence of firm-spe-

cific information to stock price. He divided the stock

return into system risk return and specific return, former

is the market return, and the latter is firm-specific risk

return which has captured a part of stock return which

couldn’t explained by market public information, i.e., the

affection of private information on stock return. For the

classical regression model of stock return, if stock price

more dependent on the firm-specific information, then

the residual of regression model would be greater and the

less adjusted R2 of regression model would be [5]. Simi-

larly, Durnev’s researching has shown that the more ad-

justed R2 is, the more related between stock return and

the firm future income, i.e., the lower adjusted R2 has

shown that the stock price has absorbed more firm-spe-

cific information [6]. For the heterogeneous noise, while

it can weaken the capability of stock price reflecting firm

future income, but it has little effect on stock price syn-

chronicity. So the firm-specific information is still a main

factor to affect the stock price [7]. Ferreira and Laux

noted that good corporate governance would less its

anti-takeover provisions, and that is benefit for its private

information using by investors, thereby enhancing its risk

characteristics [8].

In summary, the firm’s specific risk could be boosted

when market investors are more concern the private in-

formation of listed company. Accordingly, the investors

expected deference of the company future value will in-

crease. If the expected difference become to the extent of

that it can not be negotiate. The agreement transfer of

corporate control is most likely to fail. Therefore, the

author proposes the first hypothesis.

H1: the investors expected difference is a crux factor

which affects the process of corporate control transfer,

when there is a great difference between two sides of

trader, the agreement transfer of corporate control would

likely be to fail.

On the other hand, the agreement transfer of corporate

control is deeply affected by the circumstance of institu-

tions. The institutions constraints could result in the

phenomenon of vote-right heterogeneity. Hart believes

that the voting structure of one shares one vote system is

a crucial fundamental to ensure the transfer efficiency of

corporate control [1]. Although it has shown the charac-

ter of one shares one vote in china capital market, but

most corporate control transfers is not based on the mar-

ket voluntary trade mechanism. The administrative intent

is a crucial role in china capital market. Therefore, vote-

right heterogeneity is a general phenomenon in china

capital market. For different equity nature of corporate

control transfer, the focus of administrative supervising

is different. Despite the supervising procedure of state-

owned equity transfer is more complex than others. But

which doesn’t mean that state-owned equity transfer

more difficult than nonstate-owned equity transfer. Be-

cause it has shown strong administrative intention that

state-owned equity transfer, then, those deals are immune

from the price dispute and the payment method. In the

counter cases, the nonstate-owned equity transfer is af-

fected by price dispute and payment method, and if the

difference couldn’t be coordinated, then the corporate

control transfer is most likely to fail. Therefore, the au-

thor proposes the second hypothesis.

H2: the equity nature is another factor which affects

the progress of corporate control transfer. For the case of

state-owned equity transfer, the deal of corporate control

transfer is not likely to fail.

3. Researching Design

3.1. Sample Selection

Since 1990s, it has gone three stages for corporate M&A

(merge and acquisition) in china capital market. First

stage is the initial phase (1993-1996), in which period the

objective of M&A is to improve the poor performance of

Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China

state-owned firms. The second stage is development phase

(1997-2005), in which period the objective of M&A is to

protect and to acquire the “shell” resource because of the

scarcity of qualification in china capital market. The third

stage is maturity phase (after 2006), in which period the

objective of M&A is changed from financial purpose to

industry strategic plan [9]. In this paper, to exclude the

specific influence of first and second stages, our re-

searching is focus on the third stage.

The samples are selected by following steps: first, we

select all cases of corporate control agreement transfer in

china capital market since September 1, 2006. Second,

we eliminate the cases which has no statement date for

corporate control transfer success, because it is difficult

to judge the consequence of corporate control transfer.

Third, we eliminate the cases which part of the research-

ing data is unobtainable. Finally, we have acquired 394

effective samples. All data are collected from the CSMAR

database.

3.2. Researching Model and Variables

According to the above mentioned hypothesizes, we set

up the following model to verify our speculation.

var

uccessdifference sharenature

control s

 



 



where the success denotes the consequence of corporate

control transfer, if the transfer is failed then the success

variable value is 0 otherwise is 1. The difference denotes

the extent of traders expected difference. The sharena-

ture denotes the nature of corporate equity, if the sample

corporate is state-owned, then the value is 1, otherwise is

0. The controlvars denotes other control variables.

Based on the Section 2 of this paper, the adjusted R2 of

sample stock return regression to the market return can

partly represent the difference of traders anticipation of

listed company. Therefore, we use the adjusted R2 to

represent the expected difference variable. The greater

adjusted R2 imply great expected difference, and the

lesser adjusted R2 imply less expected difference. We

calculate all of the adjusted R2 of 394 samples one by

one. The regression model of adjusted R2 is as following:

itmt it







where, rit is the real stock return calculated by monthly,

the period is 12. And rmt is the same period market re-

turn.

In addition, there are different market characteristics

between Shanghai Stock Exchange and the Shenzhen

Stock Exchange. Those two markets have different regu-

lation mechanism, for example, the Shenzhen Stock Ex-

change is the first market to score the listed company’s

of listed company. So, the level of investors using the

firm-specific information must have difference. There-

fore, in this paper, besides the adjust R2 of all samples

enter the regression model, we add in a new variable

which is cross variable of market type (Shanghai and

Shenzhen, if the market type is Shanghai, then the value

is 1, otherwise is 0) and adjusted R2.

For the control variables, we se

information disclosure, and has established the credit file

lected the financial

ptive Statistic

ded in Ta-

nificantly

ssions

data, if

viously different characteristic in Shanghai market and

ver and the payment method and the industry factor. In

the process of M&A, the creditors are playing an impor-

tant role, because they have the rights conferred by con-

tract law to claim the transfer contract invalid, and credi-

tors exercising the right would block the deal of M&A.

For the payment methods, there are three main methods:

cash, and share, and convertible bonds. Because the cash

payment is more difficult for buyer than other methods,

so in our model, if the payment method is cash then the

variable value is 1, otherwise is 0. In addition, according

to the china antitrust law, the industry factor must be

concerned in this researching field, so this paper has con-

trolled the industry variable.

3.3. The Results of Descri

The variables results of all samples have provi

bles 1 and 2. The ratio of corporate control agreement

transfer failed is 9.6 percent in all 394 samples. That

means the agreement transfer is efficient in corporate

control transfer. In Table 1, the equity nature variable

has a significantly different for two group samples, but

the expected difference variable does not. However, in

Section 4 of this paper, we will add in the cross variable

which is taking into account the difference characteristic

of two stock market (Shanghai and Shenzhen).

In Table 2, the expected difference has sig

fferent between the state-owned group and the non-

state-owned group. This implies that there is more pri-

vate information concerned in pricing for nonstate-

owned corporate stock. In Table 3, the simple correlation

coefficient has been provided. The results have initially

proved the hypothesis above mentioned.

4. The Results of Multiple Regre

We use the logistic model to examine the samples

the corporate control transfer successful then the de-

pendent variable’s value is 1, otherwise is 0. As the Ta-

ble 4 shown that the researching hypotheses have been

proved. For the single variable of expected difference,

there are no significantly coefficient in model 1 and

model 3, but in model 1 and model 3 the cross variable of

expected difference and market type has a significantly

positive coefficient. This result implies that there are ob-

Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China

successful group and failed group.

in max

Table 1. The variables description of

Group n variable mean median m

Expected difference 0.−3984 0.4155 0.10 0.92

Equity nature 0.4860 0 0 1

Financial lever 0.5381 0.10.

success 356

90.4%

Pay

E0.4320 −0.

Financial lever 0.5788 0.5.

fail 38

9.6%

Pay

0.5796 02 03

ment method 0.9326 1 0 1

xpected difference 0.4019 10 0.88

Equity nature 0.1842 0 0 1

0.6876 07 40

ment method 0.9474 1 0 1

Table 2. The variabof state-ow-owned g

group max

les description ned group and nonstateroup.

n variables mean median min

Expeence cted differ0.4378 0.4690 −0.10 0.90

Financial lever 0.5208 0.5464 0.02 1.07

State-owned 180

45.7%

E0. − 0

nonstate-owned 214

54.3%

Payment method 0.9167 1 0 1

xpected difference 0.3659 3845 0.10 .92

Financial lever 0.6483 0.5367 0.07 10.03

Payment method 0.9486 1 0 1

Table 3. The simple correlation coefficient (s

iled test).

success

difference variable nature

pearman one-

Expected Cross Equity

sucss ce1

Expected

d −0.7

0.309***

Eqe 0.118***

ifference 001

Cross

variable 0.094** 1

uity natur0.179*** 0.146*** 1

**fir resent lever

zhen market. Therefore, the hypothesis 1 has been

roved only in Shanghai market, but in pool samples of

transfer of corporate control

rule nstate-oed corporate control transfer. Be-

cause it is play a very important role that expected dif-

riod. If there are great differences

e expected

rs and the equity nature. This re-

otally different from existing resear-

*represent signi

cant level unde1%, **repnt significal unde

Shen

two markets we had not found the evidence of the posi-

tive correlation between expected difference and corpo-

rate control transfer failed.

For the variable of equity nature, our researching has

founded that the agreement

not likely to fail when the corporate is a state-owned,

while the nonstate-owned corporate control transfer is

more easily failed. This result has been proved according

to the model 2 and model 3 in Table 4. Further, we can

draw the conclusion that it is based on voluntary trade

ference of traders in such deals. When the expected dif-

ference is great enough, the deal would be failed, i.e., in

for nown

state-owned corporate control transfer, the administrative

intention is more important than nonstate-owned corpo-

rate control transfer, and the administrative authority is

the decisive factor affected the success or fail of corpo-

rate control transfer.

Finally, we had made a robust testing for this re-

searching. The binary dependent variable of corporate

control transfer has been substituted by the duration of

M&A negotiation pe

tween two side traders, then the period of negotiation

is likely extended until there are no opposite opinions

about this deal. The result of robust testing is consistent

with above conclusion, i.e., the more great expected dif-

ference is, the more negotiation time will spend. And the

equity nature variable has the same evidence.

5. Conclusions

In this paper, the agreement transfer of corporate control

has been researched which is focused on th

difference of trade

searching view is t

Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China

Table 4. The resultslogistic regression.

Variables Model 3

Model 1 Model 2

constant 2.421* 2.344* 2.375* *(4.192)*(4.633)*(3.809)

Expected difrence

1.8***(2.429) 1.

Financial lever −0.193(1.068)

Pay

−2log-d 235.223.219.

fe −0.564(0.504) −0.95(1.31)

Cross variable 1.718**(4.01) 791**(3.984)

Equity nature 1848***(12.607)

−0.133(0.499) −0.136(0.513)

ment method −0.169(0.047) −0.083(0.011) 0.107(0.018)

industries yes yes yes

year yes yes yes

likelihoo9 86 18

Nagelkerke R 0.075 0.136 0.16

Which is the WALets, *** represent signivel under 1%, ** represeificant level under 5%. Model 1l 2 and model 3 is that

expected differencnd equity nature variar into the regression modetively.

perating performance of M&A. Our research has drawn

mportantly basic

he humanity and social sci-

on Ministry (10YJC79014

GGJS-144).

ess, 1998, pp. 233-256.

[2] S. M. Li andonal Environment,

Transaction R

m-Specific Information and the Synchronic-

Firm-Specific Return Variation Mean More or

D value in brack

e, cross variable a

ficant le

ble ente

nt sign

l respec

, mode

ches which were mostly concern the market effective and and the Young Teacher project of Henan province (2010

the conclusions that the process of corporate control

agreement transfer is significantly affected by the ex-

pected difference of traders in Shanghai capital market,

i.e., the greater differences of traders expect is, as the

consequence, the higher probability of M&A failing will

be. Furthermore, when the controlling shareholders are

state-owned, then the agreement transfer deal of corpo-

rate control is unlikely to fail. This conclusion has shown

that there is lack of the voluntary trade rule in state-

owned corporate control transfer cases.

To improve the efficiency of capital market transac-

tions, the voluntary trade rule is most i

nditions abided by all market exchanges. So the mech-

anism of corporate control agreement transfer must be

consistent with the voluntary trade rule. But the corporate

control agreement transfer is still in an imperfect circum-

stance of china capital market, which can be inferred

clearly according this paper’s conclusion. In which insti-

tution circumstance, the voluntary trade rule is ignored,

that is harmful for the market exchange efficiency.

Therefore, we must radically improve the provisions of

agreement transfer of corporate control to avoid the in-

volvement of non-market factors. Thus the method of

equity exchange, which is the agreement transfer of cor-

porate control, will notable enhance the efficiency of

resource allocation of china capital market.

6. Acknowledgements

This paper been funded of t

ence project of China Educati8),

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