Study of large shareholders' behavior after non-tradable shares reform: A perspective of related party transactions

Abstract

Purpose: The most important feature of modern corporations is the separation of investors' ownership and managers' control. With the development of modern corporate system, principal-agent problem has been replaced by the agent problem between large shareholders and small shareholders gradually. The reform of rights and interests started from April 30, 2005 is aimed to realize the convergence of the interests of shareholders, improve the corporation management and reduce the controllers' private benefits. However, with the strengthening of market mechanisms large shareholders possibly grab private benefits by means of multiple controls of corporation and the secondary market. According to statistics, by the end of 2012, more than 95% of the original state-owned listed company completed the reform of rights and interests. With the banning of non-tradable shares has been relieved, China capital market starts to embrace the new era of full share circulation, which could further aggravate big shareholders encroaching upon small ones. Therefore, the purpose of this paper is to provide an approach to study the large shareholders behavior after the Non-tradable Share Reform especially from the view of Related Party Transactions. Design/methodology/approach: This paper explores the behavior choice of large shareholders in the related party transactions which occur between the large shareholders and listed companies by using the data of shares from 2007 to 2010. Based on the classical research paradigm (that is, LLSV), this article analysis controlling shareholders' propping and tunneling behaviors aiming to make sure their impacts to the medium and small shareholders in theory. Findings: We get the following findings: After our capital market entering the era of full circulation, we find that the relationship between the ratio of controlling shareholders and the related party transactions present (RPTs) an inverted "U" shape curve, which means that it exits a typical "Grab-synergy" effect. We should take different measures to the transactions occurred between the large shareholders and listed companies according to the property nature of the large shareholders. State-owned shareholders choose to realize their private benefits by means of RPTs, while the non-state-owned shareholders conduct RPTs with an expectation of reducing costs. Practical implications: Since Guo Shuqing, the Chairman of China Securities Regulatory Commission, took office, he has taken a lot measures to curb the related party transactions harshly. Under this circumstance, it is just the right time to have a research on large shareholders' behavior. It has important significance both in theory and practice. Originality/value: Considering the Chinese special national conditions, this paper added lots of comprehensive facts to study large shareholders' behavior including the rate of the share held by indirect controller, the probability of thievish behaviors have been discovered, and the strict punishment regulations. The discussions in this paper help to bring into focus a highly topical issue within the context of the large shareholders' behavior after Non-tradable Shares Reform.