2014 Cambridge Conference Business & Economics ISBN : 9780974211428
The largest companies of China and its Annual General Meeting: Are they releasing any value relevant information?
Monica Martinez-Blasco*
Josep Garcia-Blandon**
Josep Maria Argiles-Bosch ***
*Associate Professor of Finance and Accounting. IQS School of Management-Universitat Ramon Llull, .
** Full Professor of Finance. IQS School of Management-Universitat Ramon
Llull, .
***Associate Professor of Accounting. Department of Accounting-Universitat de Barcelona, .
Corresponding author:
Monica Martinez-Blasco
IQS School of Management
Universitat Ramon Llull
Via Augusta 390
08017 Barcelona,Spain
+34.932.672.126
The largest companies of China and its Annual General Meeting: Are they releasing any value relevant information?
Abstract
The purpose of this paper is to assess the informative content of AGM in the People Republic of China. In this paper we investigate stock returns, volatility and trading volumes around the Annual General Meetings of companies belonging to the Shanghai Stock Exchange 50 index with the main purpose to evaluate the informational content of the information released. We propose the classical Brown and Warner (1985) event studies methodology to test for abnormal behaviour around Annual General Meeting days. The results will allow us to discuss about the relevance of the information realised during the Annual General Meetings. Additionally we have also analyzed differences in the information content depending on the company’s size.
Key words: Annual General Meeting, stock market reaction, market capitalization, Event Studies.
1. INTRODUCTION
Good corporate governance consists of a set of mechanisms to ensure that suppliers of finance get an adequate return on their investments (Shleifer and Vishny, 1997). Corporate governance varies widely across countries but two main systems have been recognized since the seminar paper of La Porta et al. (1998); the common-law, basically compound by Anglo-Saxon countries, and the civil-law system, commonly found in emerging economies and Continental Europe.
While Anglo-Saxon countries, specially the UK and the US, has been broadly investigated and they are pioneer in almost all the Financial Economics research fields, the interest in emerging economies is increasing as they weight in the international financial markets are growing. Maybe the most determining corporate governance characteristic between the two systems is the corporate ownership concentration: while in the US and the UK capital markets are characterized by diffused corporate ownership and a high level of investors protection, in most emerging markets like the People’s Republic of China (PRC), the ownership is concentrated in few hands and shareholders protection is weak. Under these circumstances, agency problems in common-law countries are generated by the relationship between outside shareholders and inside managers and in most emerging capital markets countries, the conflicts arise between majority and minority shareholders, La Porta et al. (1999). Based on that, we cannot expect that the set of corporate governance mechanisms, either internal or external, that corporate governance establish to protect investors works equal in both systems.
The primary concern of corporate governance is to protecting minority shareholders from expropriation by a controlling shareholders group (Shleifer and Vishny (1997), Johnson et al (2000)). In China, minority shareholders enjoy only moderate legal protection against expropriation but Chinese Securities Regulatory Commission is introducing new regulations aimed at reducing expropriation from minority shareholders by controlling shareholders group. For instance, on January 1, 2006 became effective the China New Company Law, which improve corporate governance by introducing fiduciary duties and minority shareholders protection. In this study we focus our attention on a main internal mechanism that allows guarantee good corporate governance, the Annual General Meeting (AGM). The AGM could be seen as a forum of discussion between managers and shareholders where the information about the company is expected to flow. There are four lines of research to approach the AGM research; first, studies that examine the informational content of the AGM, secondly the relation of AGM with corporate governance issues, like voting practices and participation at the event. The third line of research in AGM is based on the historical analysis of specific events occurred at the AGM; and lastly, the sociological theories of the meetings between investors and managers, Catasús (2007).
In this study, we follow the first line of research regarding the AGM and we apply it to the PRC. We are also interested if there is any informational content effect on the AGM after the New Company Law was approved. Thus, we analyze the AGM and its incremental informational content in the PRC after The New Company Law became effective in 2006. We extend the already existing literature that follows the first line of research on AGMs with the analyses of an emerging capital market for the first time.
The New Company Law requires every company to hold an AGM and, in general, creates better rules about shareholders meetings by ensuring information and proposal rights in the shareholder’ meetings for minority shareholders. The items in the agenda mainly consist on the examination and approval of the audited financial statements and the reports of the Directors and auditors, appointment or re-appointment of directors and compensation plans, shareholders compensation, and re-election of the auditors, among other issues. In addition, we can also find specific Board of Directors’ proposals that require shareholders approval. The AGM content after the New Company Law approval in the PRC is therefore close to any other AGM notice of a company belonging to a civil-law developed country.
The proposal rights give minority shareholders the opportunity to express their concerns during the AGM, without which the board of directors might control the agenda. By ensuring the regularity of AGM celebration and the minority shareholders participation, the Company Law enable the AGM as a constrain tool for the board of directors and managers, Feinerman (2007). Under these circumstances we should not only expect the release of information prepared by the board of directors but also a non-controlling board of directors agenda release of incremental information conducted by minority shareholders.
Listed companies ownership is highly concentrated in PRC. In Zeng et al. (2011) the authors state that the biggest shareholders in the PRC companies held in average 45 per cent of shares. Even more, the state-owned and legal-person shares representing indirectly the government, accounts for over the 70 per cent of total shares listed in the PRC, Liu and Lu (2007). Individual or private shareholders hold only less than one third of total shares listed. In fact, this represents that the state is, at the same time, controlling shareholder and regulator, and that too much power remains concentrated in few shareholders hands. The high ownership concentration in Chinese companies, combined by an excess of power in controlling shareholders, may reduce the AGM to a formality and therefore reduce it to a non-information content corporate event. In that case, we expect to see no or only a weak reaction around the AGM day.
2. PREVIOUS RESEARCH
As far as we know, previous research on the issue only takes into account the informational content of AGM in developed countries. We have only found few articles addressing this event and, with an only exception, all of them have focused on companies listed in common-law stock markets. Firth (1981) conducts a research with a sample of 120 companies listed on the UK stock market using weekly data. The author fails to report an abnormal behavior of stock prices or trading volumes around AGM dates, therefore concluding that these meetings do not seem to provide higher levels of information. Some years later, Brickley (1985) carries out his research with a random sample of 100 firms listed in the Center for Research in Security Prices. The author finds positive and statistically significant abnormal returns around shareholder meetings, suggesting that AGM often contain important managerial announcements. Ten years later, Rippington and Taffler (1995) test the information content of four types of corporate relevant events, being one of them the AGM. The sample includes 337 UK companies listed in the London Stock Exchange. They find only a small price reaction to AGM, thus concluding that AGM seem to convey little relevant information to the market. Finally, Olibe (2002) addresses the effects of AGM on absolute and square returns, as well as trading values, with a sample of 227 firms registered in UK whose shares are traded on the NYSE and Amex. His results show significant price changes for both, absolute and squared returns, as well as abnormal trading volumes. He warns about the lack of generalization of his results to other stock markets.
The first investigation of the issue in a civil-law country is found in Garcia-Blandon et al. (2011, 2012) where the authors uses daily data and two different methodologies to assess the informational content of AGM in Spain. Both methodologies show that AGM have no significant effects in returns, volatility or trading volumes, indicating that no relevant information is released to the financial market during these meetings. Ownership structure is highly concentrated in Spain where, on average, 29 per cent of the voting rights are held by the main shareholder and two thirds of the firms are controlled by a single owner, Santana-Martin and Aguilar, (2007).
The purpose of our research is to assess the incremental informational content of the AGM held by the People’s Republic of China companies contributing to the already existing literature by analyzing this event for an emerging capital market for the first time. To assess the informational content of AGM in China we follow a standard procedure in Financial Economics to evaluate the informational content of an event: we empirically test whether there are differences on the stock returns, returns volatility and trading volumes for the day of the event compared with a window of days without conditioning of it. Thus, abnormal price changes (Beaver, 1968) and abnormal trading volumes (Kim and Verrecchia, 1991) are investors’ response to the disclosure of information. What we should expect is the existence of abnormal price changes and abnormal trading volumes whenever the event is translating new information to the financial markets.
The paper proceeds by describing the methodology section where both the data sample and the research design is explained. The results and a discussion of the findings are found in section 3. The final section presents the paper’ main conclusions.
3. METHODOLOGY
In subsections 3.1 and 3.2 we present the sample and dataset used in our research and the methodology we propose to address the informational content of AGM in the PRC.
3.1. Sample and Dataset
To accomplish our goal, we examine abnormal stock prices and trading volumes around AGM in PRC from January 2008 to June 2011. We selected the 50 companies listed in the Shanghai Stock Exchange 50 Index (SHSE50) by the end of December 2011.
[Insert table 1]
Daily trading data has been obtained from Thompson-Reuters 3000Xtra database. Information about AGM dates has been hand collected from Shanghai Stock Exchange website, in a first approach. When the date of the AGM was missing in our primary source it has been obtained from the China Securities Co Ltd web page.
The final sample includes 49 out of 50 firms and 188 events after excluding Tebian Electric Apparatus due to the fact that market data is not available in our database by the time this research is developed.
2.2. Methodology
We have followed the Brown and Warner (1985) (BW) event study methodology to assess the information content of the AGM. We have tested the aggregate market’s average reaction to the information released by testing the change in price through two different measures: abnormal and absolute value abnormal returns. Additionally, we have also tested the sum of all individual investors’ trades around AGM dates by analyzing the change of trading volumes.
We define abnormal returns (AR) as the difference between actual and normal returns, while normal returns are defined as the expected return without conditioning on the event.
The return of security i over period t is defined as:
Rit =+ ARit [1]
Where, Rit , and ARit are the actual, normal, and abnormal returns, respectively. Xt is the conditioning information set for the normal return model. We compute expected or normal returns by using the market model, thus we assume that normal return is given by a linear relationship between the stock return and the market return.
[2]
[3]
We estimate the security normal returns through a pre-event period of 151 days starting on day -170 to day -20 being day 0 the AGM day. Given the nature of the event, it is meaningful to address the behaviour of prices and trading volumes before and after the AGM. Under insider trading we should observe a reaction of the market before the AGM, while it could be also possible that the market reacts with a delay to the information released during the AGM. To capture these possible effects we have not limited our research to the day of the event but we have also examined an 11 days event window [-5, +5].
After estimating daily average abnormal returns for each firm, the average abnormal return for each country whole sample, in day t (AARt) has been calculated:
[4]
The t-statistic for AAR any day in the event period is given by:
[5]
Where is the standard deviation of the abnormal return over the pre-event period.
The cumulative average abnormal return (CAAR) is obtained by adding the average daily abnormal return for different time intervals (a, b), within the event window [-5, +5]:
The first null hypothesis states:
Hypothesis 1: Stock returns will not be affected by the AGM.
Unless all the companies experience the same positive or negative reaction to the AGM, positive and negative abnormal returns would cancel each other out, which would implies that we would not be able to detect changes in prices. To avoid this problem we have also examined the stock price volatility around AGM, measured as the absolute value of abnormal returns, and then we have proceeded similarly as with abnormal returns. The only difference arises in how abnormal returns are computed: when abnormal returns are computed in absolute values, they cannot be directly used to perform a parametric test, because the null hypothesis, that a sum of absolute values is zero, will be rejected. Therefore we correct absolute returns by the mean value of the pre-event period.