The Value of Corporate Control : Evidence from China's Distressed Firms

This paper hypothesizes that the threat of losing listing status in China's distressed ST (special treatment) firms initiates a corporate control market that does not exist otherwise. The incumbent controlling shareholder, facing the possibility of losing control right, is forced to 'tunnel back' the value he has extracted from the firm before to boost the distressed firm's operating performance. This part of value is captured by the cumulative abnormal returns (CARs) surrounding ST announcement. We further argue that CAR is an alternative measure of private benefits of control, in contrast with the ones used in Barclay and Holderness (1989) and Nenova (2000). Using the sample of 66 listing companies that had become ST between 1998 and 2000 in China's stock market, we find that the 22-month cumulative abnormal returns are as high as 29% on average. Our game theoretic model shows that the control value released through the contest for corporate control is positively related to the largest shareholder's shareholding percentage and concentration of shares held by other largest shareholders, but negatively correlated with the firm's leverage ratio. The empirical evidence confirms these predictions