تونلینگ، نگه داری و سلب مالکیت: شواهد حاصل از معاملات حزبی مربوطه در هنگ کنگ

We examine a sample of connected transactions between Hong Kong listed companies and their controlling shareholders. We address three questions: What types of connected transactions lead to expropriation of minority shareholders? Which firms are more likely to expropriate? Does the market anticipate the expropriation by firms? On average, firms announcing connected transactions earn significant negative excess returns, significantly lower than firms announcing similar arm's length transactions. We find limited evidence that firms undertaking connected transactions trade at discounted valuations prior to the expropriation, suggesting that investors cannot predict expropriation and revalue firms only when expropriation does occur.

In companies with concentrated ownership, controlling shareholders can expropriate wealth from minority shareholders in many ways. For example, they can extract cash by selling assets, goods, or services to the company through self-dealing transactions; they can obtain loans on preferential terms; they can transfer assets from the listed company to other companies under their control; and they can dilute the interests of minority shareholders by acquiring additional shares at a preferential price (Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000). However, despite considerable anecdotal evidence, little direct systematic evidence is available on the specific transactions through which expropriation occurs. Most of the academic literature has attempted to measure expropriation indirectly (see, for example, Bertrand, Mehta, and Mullainathan, 2002; La Porta et al., 2000a and La Porta et al., 2002; Claessens, Djankov, Fan, and Lang, 2002; Faccio, Lang, and Young, 2001). Moreover, the literature offers mixed evidence that minority shareholdings lose value as a result of specific expropriation actions (see, for example, Bae, Kang, and Kim, 2002; and Buysschaert, Deloof, and Jegers, 2004). In contrast to earlier studies, we directly examine all transactions between publicly listed firms in Hong Kong and their controlling shareholders and directors, where expropriation might be likely to occur, and show their incidence and valuation effects. We derive our data from a sample of 375 filings of connected transactions, worth a combined HK$123 billion (US$16 billion), by companies listed on the Stock Exchange of Hong Kong during 1998–2000. In addition, we compile a comprehensive database of financial, ownership structure, and corporate governance data for 609 publicly listed Hong Kong firms, allowing us to compare the firms undertaking these types of transactions with firms that do not. Our data enable us to describe in detail the mechanisms through which controlling shareholders might expropriate minority shareholders and to substantiate the occurrence of real tunneling in the Hong Kong market. We attempt to answer three questions: (1) What types of connected transactions are likely to lead to expropriation of minority shareholders? (2) What are the characteristics of firms more likely to expropriate? (3) Does the market anticipate the expropriation by firms? Questions (1) and (3) are not independent. Prior research has suggested that firms that are ex ante more likely to expropriate minority shareholders trade at discounted valuations (Claessens, Djankov, Fan, and Lang, 2002; Lemmon and Lins, 2003). Consequently, investors arguably could be protected from the expropriation by purchasing their shares at a discount (Fan and Wong, 2002). If investors anticipate the expropriation, as the previous literature seems to suggest, then we would expect to find that firms undertaking connected transactions trade at a discount prior to the expropriation. They will not earn any negative excess returns around the announcement of the transaction. The Hong Kong market is appropriate for conducting this research for three reasons. First, the Hong Kong stock market is dominated by firms with concentrated ownership. In two–thirds of publicly listed Hong Kong firms, a family controls at least 20% of voting rights (Claessens, Djankov, and Lang, 2000). This ownership structure implies that agency costs arising from the separation of ownership and control are less likely to be prevalent. However, conflicts of interest could arise between controlling shareholders and minority shareholders, making the expropriation of the latter a distinct possibility. Second, shareholder protection in Hong Kong is relatively good, and we would expect the incidence of expropriation to be less pronounced in the Hong Kong market. Expropriation effects are likely to be even stronger in other markets. Furthermore, the corporate governance environment in Hong Kong has been influenced by developments in the United Kingdom (UK) (particularly the Cadbury committee report on corporate governance; Cadbury, 1992) and disclosure of connected transactions is mandated in the listing rules of the exchange, which allows us access to relevant data. Third, approximately one-fifth of the firms listed in the exchange have ownerships that can be traced to mainland China, and a large number of the remaining firms have close business relationships with firms in China. The different legal systems between Hong Kong and China create additional opportunities for expropriation by companies that can shift assets across the border, because rulings by courts in Hong Kong are not enforceable in the mainland. We classify the connected transactions in our sample into three broad categories: transactions that are a priori likely to result in expropriation (asset acquisitions, asset sales, equity sales, trading relationships, and cash payments to connected parties), transactions that are likely to benefit the listed firm (cash receipts and subsidiary relationships), and transactions that may have been driven by strategic rationales (takeover offers and joint ventures, joint venture stake acquisitions and sales). For the first category of connected transactions, we find that considerable shareholder value is destroyed both during the initial announcement of the transaction and during the 12-month period following the announcement. On average, during the 10-day window following the announcement, firms announcing different types of connected transactions earn significant market-adjusted abnormal returns of −7.1% for acquisitions of assets to connected parties, −6.7% for asset sales, −10.1% for sales of equity stakes, and −7.5% for trading relationships with the parent firm. These results are robust to using a market model methodology and to alternative event window specifications. Firms undertaking connected transactions also under-perform during the post-event 12–month period following the announcement month, earning significant size and market-to-book bias-adjusted abnormal returns of −12.6%, on average. Firms selling assets earn returns of −27% during the post-event period, firms selling equity to connected parties earn −20.3%, firms initiating a trading relationship with their parents earn −21.6%, and firms making cash payouts earn −18.7%. Compared with a sample of similar arm's length transactions in Hong Kong during the same time period, connected transactions are associated with significantly lower excess returns. Multivariate analysis shows that these abnormal returns are negatively related to the percentage ownership by the main shareholder, suggesting that firms with concentrated ownership experience the largest value losses. The abnormal returns are also negatively related to proxies for information disclosure. Firms that do not provide an assessment of the deal by an independent financial adviser, firms that do not disclose the value of the transaction, and firms whose auditors are not one of the Big 5 audit firms experience a negative market reaction, while the presence of an audit committee is associated with a positive market reaction. In contrast, we find little evidence that the proportion of independent non-executive directors on the board affects the market reaction. In addition to these variables, the connections themselves are important. Firms announcing connected transactions of the types that are a priori likely to expropriate minority shareholders earn significantly lower abnormal returns than firms announcing similar arm's length transactions, even after controlling for the variables above. The likelihood of undertaking connected transactions is higher for firms whose ultimate owners can be traced to mainland China. Furthermore, conditional on undertaking a connected transaction, the likelihood of poor information disclosure and the likelihood of undertaking transactions that violate the exchange's listing rules are both higher for firms with mainland Chinese ultimate owners and for firms with concentrated ownership. The relation between expropriation and the firm's ultimate parent provides direct evidence of the impact of the legal system in allowing firms to undertake actions that benefit the controlling shareholders at the expense of minority shareholders (La Porta et al., 1998 and La Porta et al., 2000b; Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000). Rulings by courts in Hong Kong are not enforceable in China, and therefore Hong Kong investors have little chance of recovering expropriated assets. Finally, in contrast to prior literature, we find limited evidence that the market anticipates the expropriation by discounting firms that undertake connected transactions. On average, these firms trade at positive industry-adjusted market-to-book ratios and do not earn consistently negative abnormal returns during the 12-month period preceding the deal. The only exception is firms with Chinese ultimate parents cross-listed in Hong Kong; these firms are heavily discounted. Given our previous evidence of negative excess returns at the announcement of connected transactions, it is not surprising that we do not find evidence that investors discount these firms ex ante. Contrary to the more widely-accepted paradigm (Claessens, Djankov, Fan, and Lang, 2002; Lemmon and Lins, 2003; Fan and Wong, 2002), our results indicate that investors cannot predict tunneling episodes, and so they revalue the firms when the tunneling actually occurs. The paper is organized as follows. Section 2 discusses prior evidence on the expropriation of minority shareholders. Section 3 describes the regulatory framework governing the disclosure of connected transactions in Hong Kong, presents our sources of data, and defines the variables used in the empirical analysis. It also presents a descriptive analysis of the connected transactions included in our sample. 4, 5 and 6 report our empirical results, by addressing successively the three questions raised earlier. Section 7 reports results from other robustness tests. It also examines pyramids, the divergence between cash flow and control rights, and propping up through asset injections. Section 8 concludes.

In this paper we report direct evidence of expropriation of minority shareholders using data on connected transactions between companies listed in the Stock Exchange of Hong Kong and their main shareholders or directors during 1998–2000. In contrast to previous studies, which use indirect proxies for the likelihood of expropriation (LLSV, 2002; Claessens, Djankov, Fan, and Lang, 2002; Lemmon and Lins, 2003; Joh, 2003), we analyze specific transactions that could lead to expropriation and substantiate the presence of real tunneling in the Hong Kong stock market. We find that minority shareholders experience significant value losses when companies undertake connected transactions, and our data allow us to explore in detail the mechanisms through which the expropriation takes place. Our results provide support for some earlier studies. The effect of the legal system on expropriation (La Porta et al., 1998 and La Porta et al., 2000b; Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000) is highlighted in our data by the higher likelihood of connected transactions by firms whose ultimate ownership can be traced to mainland China and that are therefore partially protected from litigation by transferring assets outside the jurisdiction of Hong Kong courts. Bertrand, Mehta, and Mullainathan (2002) suggest that tunneling within Indian business groups occurs primarily through non-operating earnings items. Our evidence supports this view, because less than 15% of the transactions in our sample would impact operating earnings and the majority of transactions would give rise to exceptional non-operating earnings items. Finally, consistent with Bae, Kang, and Kim (2002), we find that firms providing cash assistance to third parties experience value losses. Some of our results, however, conflict with conclusions reached in the earlier literature. In contrast to Buysschaert, Deloof, and Jegers (2004), who do not find any evidence of expropriation of minority shareholders in equity transfers within Belgian business groups, we show that equity sales to connected persons in Hong Kong are associated with large value losses for minority shareholders. This suggests that their results could stem from Belgian groups that were in the process of simplifying their complex cross-ownership structures in the late 1990s instead of firms expropriating minority shareholders. More significantly, earlier studies suggest that East Asian firms trade at a discount that is cross-sectionally related to the divergence between the cash-flow and control rights of the main shareholders (Claessens, Djankov, Fan, and Lang, 2002; Lemmon and Lins, 2003; Joh, 2003). This divergence proxies for the likelihood of expropriation. Although the divergence between cash-flow and control rights could proxy for expropriation that is not reflected in our data (small transactions that fall below the threshold requiring stock exchange notification or illegal transactions that the companies do not disclose), we fail to find that firms in which controlling shareholders do expropriate trade at discounted valuations relative to other Hong Kong firms in our sample (with the exception of firms whose ultimate owners can be traced to mainland China). This creates an interesting puzzle. While the market seems to punish firms for tunneling episodes, there does not seem to be a systematic discount when we directly examine companies that have the potential to engage in such transactions. A number of explanations can be offered for this contradiction. First, the discount observed when the divergence between cash-flow and control rights is used to proxy for expropriation either might be related to factors other than expropriation or might proxy for forms of expropriation that our data do not capture. Second, investors could be overoptimistic, systematically underweighting the probability that firms might engage in expropriating wealth from their minority shareholders. Consequently, they revalue firms only when tunneling actually happens. Third, the contradiction could arise as an outcome of optimal firm contracting. For example, while controlling shareholders might extract wealth in periods when the economy is stable, they might choose to prop up firms in periods of macroeconomic shocks. Overall, therefore, we would not see investors a priori discounting firms with potential for expropriation. Because we examine the Hong Kong market over a period of time when the markets are stable, our data will not allow us to capture this effect. Finally, our results leave open the possibility that the entire Hong Kong market is discounted to reflect the possibility of expropriation. In summary, our analysis allows us to understand in greater detail the ways through which expropriation of minority shareholders takes place in firms with concentrated ownership. Given that connected transactions feature prominently in many recent corporate scandals around the world, such as the Enron collapse in the United States, a systematic analysis of such deals can improve understanding of different types of agency costs.