Effect of structure choice on firm’s market performance; Evidence from Chinese firms cross listed on US exchanges   Authors: Abdullah Dr. Zhou Jia’nan Muhammad Hashim Shah School of Economics and Management Southwest Jiaotong University, Chengdu, China.

Outline of presentation Introduction to dual class firms. Why studying Chinese cross listed firms is important? Literature review. Data, descriptive analysis and methodology. Discussion of results. Conclusion and Recommendations.

Dual class firms Dual class firms have two types of shares (Smith, Amoako-Adu, and Kalimipalli (2009)): 1) Superior voting shares 2) Restricted voting shares Senior officers usually hold superior voting shares. In 2010, total market capitalization of dual class firms was 8% (Gompers Ishi and Metrik (2010)). In 2015, 13.5% of IPO chose dual class structure (Wall Street Journal) . Dual class firms are small in numbers in major stock exchange because of their prohibition (Rydkvist (1992)).

Why studying Chinese cross listed firm is important ? China is growing exponentially. Very few studies have been carried out to study Chinese cross listed firms. It is difficult for companies to obtain equity in China. Jiang and Kim (2015) encourage future researchers to study Chinese cross listed firms in their recent corporate governance review.

Two School of thoughts (Jog, Zhu, & Dutta, 2010) Literature Review Two School of thoughts (Jog, Zhu, & Dutta, 2010) Entrench management. Expropriate minority shareholder’s wealth. Firm value increase with increase in cash flow rights. Differentiation in voting rights has negative impact on firm value. Manager’s voting control has a positive impact, but it has negative impact when control becomes large. (Grossman & Hart, 1988, Gompers et al., 2010, Bjuggren, Eklund, & Wiberg, 2007, Adams & Santos, 2006). Allow insider’s and entrepreneur to keep control over firm. Leads to investment in long term value projects. Firm can innovate. Decisions can be made, which are either costly or difficult to communicate to outside shareholders. (Amoako-Adu & Smith, 2001; Bergström & Rydqvist, 1990; Cronqvist & Nilsson, 2003; Share, 2004, Wen, 2013, Attari & Banerjee, 2005; Banerjee, 2006; Chemmanur & Jiao, 2007)

Literature Review (cont…) (Claessens et al., 2002; Cronqvist & Nilsson, 2003; Lins, 2003) observe that when degree of divergence between voting rights and cash flow rights increases, firm value decreases but (Lins, 2003) do not find this applicable in developed countries. (Chaudhuri & Seo, 2012) witness that firm underperform when the insiders and shareholders interest is not aligned as insiders invest in the value destroying avenues to extract private benefits. (Claessens, Djankov, & Lang, 2000; Gompers et al., 2010; Yeh & Woidtke, 2005) also conclude that separation of ownership and control leads to lower the firm value as well as affects performance negatively. (Smart, Thirumalai, & Zutter, 2008) find dual class firms neither show better nor worse than single class counterparts.

Data, Descriptive Analysis and Methodology Total Sample Size is 121 Chinese firms cross listed in different US exchanges out of which 33 are dual class firms and 88 are single class firms. We use F-1 and S-1 filings to collect data prior to IPO and use 20-F and 10-K filings to collect the data for the period after the IPO. We collect stock price data from NASDAQ official website and also use Yahoo and Google finance for several firms. The OLS regression model is mentioned below: Y= β0 + β1S + β2C+e

Data, Descriptive Analysis and Methodology (Cont…) We observe dual class firms underperform single class firms in terms of operating performance measured by ROA and EPS prior to IPO, show improvement in first after IPO and outperform in second year after IPO. We observe that 42.42% of Chinese dual class firms belong to IT industry which runs on innovation and it does produce results in short term. This may be the reason why dual class firms outperform in second year after IPO. We also witness that dual class firms outperform single class firms in terms of market performance measured by P/E ratio, Tobin’s Q and abnormal stock return. This finding is contrary to literature

Discussion of Results

Discussion of Results (Cont…) Tobin’s Q First year after IPO Second year after IPO Anova Model Sum of Squares Df Mean Square F Sig Regression 991.768 2 495.884 2.624 .077 516.778 258.389 4.950 .009 Residual 20602.676 109 189.015   5794.394 111 52.202 Total 21594.444 6311.172 113 Coefficients Unstandardized Coefficients Standard Coefficients B Std. error Beta T Constant 8.018 1.602 5.005 .000 4.242 .808 5.253 ROA1 9.221 7.692 .112 1.199 .233 ROA2 7.382 4.379 .153 1.686 .095 Structure 5.935 2.939 .189 2.020 .046 3.992 1.521 .239 .010 R2 4.6% 8.2%

Discussion of Results (Cont…) Abnormal Return First year after IPO Second year after IPO Anova Model Sum of Squares Df Mean Square F Sig Regression 1.977 2 .989 3.231 .043 1.700 .850 3.213 .044 Residual 36.101 118 .306   30.961 117 .265 Total 38.078 120 32.661 119 Coefficients Unstandardized Coefficients Standard Coefficients B Std. error Beta T Constant -.189 .063 -2.982 .003 -.226 .056 -4.002 .000 ROA1 .545 .275 .178 1.980 .050 ROA2 .324 .189 .156 1.720 .088 Structure .193 .113 .153 1.705 .091 .106 .152 1.685 .095 R2 5.2%

Discussion of Results (Cont…) P/E Ratio First year after IPO Second year after IPO Anova Model Sum of Squares Df Mean Square F Sig Regression 186103.378 2 93051.689 2.691 .072 193571.806 96785.903 3.274 .041 Residual 3873401.706 112 34583.944   3340289.238 113 29560.082 Total 4059505.084 114 3533861.044 115 Coefficients Unstandardized Coefficients Standard Coefficients B Std. error Beta T Constant 44.975 23.638 1.903 .060 52.826 19.999 2.641 .009 ROA1 208.165 124.815 .154 1.668 .098 ROA2 226.707 124.550 .167 1.820 .071 Structure 63.765 38.355 1.662 .099 59.356 35.461 .153 1.674 .097 R2 4.6% 5.5%

Discussion of Results (cont…) We find Chinese dual class firms are outperforming in terms of market performance compare to single class firms which is contrary to most of the literature available on this dimension. We find significantly positive relationship between Tobin’s Q, abnormal return and P/E ratio with structure choice of firm. It means that firms listing with multiple classes of shares are outperforming single class firms in both years after IPO. (Baulkaran, 2014; Claessens, Djankov, Fan, & Lang, 2002; P. A. Gompers et al., 2010; Lins, 2003) argue that insiders of dual class firm who usually own superior voting shares entrench management to extract private benefits which hurt minority shareholder’s wealth therefore, investors attach low value to dual class firms.

Discussion of Results (cont…) We find contrary to these studies that Chinese dual class firms are showing good performance in market compare to single class counterparts. We also find ROA is positively related with market performance variables used in this paper. It means that market performance is also dependent on firm’s operating performance, we also witness through descriptive analysis that Chinese dual class firms are outperforming single class firms in second year after IPO in terms of ROA and EPS.

Discussion of Results (cont…) Overall, we find support for group of researchers belong to second school of thought who argue that dual class structure allow insiders to keep control of firm and invest in long term value projects which are either costly or difficult to communicate to outside shareholders. We do not observe investors attaching low value to Chinese dual class firms. We propose several possible reasons for our contrary results. The first possible reason for getting contrary results from literature is that Chinese dual class firms bonded themselves to higher standards from low Chinese standards therefore, they intend to perform well, compete and survive in the market rather they extract private benefits which is not easy in US.

Discussion of Results (cont…) (Doidge, 2004) witness firm that bond itself to US exchanges result in improvement of minority shareholders rights as well as decreases ability to expropriate minority shareholder’s wealth to extract private benefits as extracting private benefits is not easy there. Chinese dual class firms bond themselves to high US exchange standards which show their credible commitment to shareholder’s rights as they do not choose to list with low Chinese standards where they can expropriate wealth easily. The another possible reason for Chinese dual class outperformance may be is that Chinese dual class firms are hiring more independent directors and possess more institutional ownership compare to single class counterparts highlighted by (Abdullah, 2017). Investors’ confidence increases with increase in institutional ownership in firm, when institutions choose to invest in any firm, other individual investors also likely to invest in same firm as they believe that institutions have more knowledge and experience.

Conclusion & Recommendations We compare 121 Chinese firms cross listed in US exchanges consisting of 33 dual and 88 single class firms. We find support for the group of researchers who argue that dual class structure allow insider’s to keep control in their hand, invest in long term value projects which are either costly or difficult to communicate outside shareholders. We do not witness for our sample firms that insiders of dual class firms are destroying shareholder’s wealth and extracting private benefits.

Conclusion & Recommendations The limitation of this study is the duration of analysis as several dual class firms cross listed in 2014. Future researchers can examine the performance after several years in order to confirm our findings. Future researchers also can compare the performance of Chinese dual class firms with other developed countries dual class in order to understand crux of difference we witness in this study.

Thank you for your attention. Your valuable suggestions are welcome!