Journal of Service Science and Management, 2011, 4, 22-26
doi:10.4236/jssm.2011.41004 Published Online March 2011 (
Copyright © 2011 SciRes. JSSM
Expected Difference, Equity Nature and the
Corporate Control Agreement Transfer
Failed - the Evidence from China
Xiaodong Li
School of accounting, ZhengZhou Institute of Aeronautical Industry Management, Zhen Zhou, China.
Received November 1st, 2010; revised December 24th, 2010; accepted December 29th, 2010.
This paper has researched the issue of corporate control transfer failed in china capital market, which is completely
different from existing studies in corporate control transfer field. The conclusion has shown that corporate control
transfer very likely fails when there is a great difference between two sides of deals. And the equity nature is another
affection factor. The corporate control transfer is not likely to fail when the equity nature is state-owned. The conclu-
sion implies that we should make more imp rovemen t for institutio n s of corpora te control tra n sfer, because of the lack of
market voluntary trade rule in china capita l market.
Keywords: Expected Difference, Equity Nature, Corporate Control Agreement Transfer
1. Introduction
There are “free-ride” and “non-efficiency” defects in the
market of corporate control transaction, while the market
plays an important role in improving the agent problem
for listed company. But the agreement transfer of corpo-
rate control can improve the two defects. The “free-ride”
problem will block the company’s voting efficiency, be-
cause the cost of proxy fight is afford by part of share-
holder, but the benefit is shared by all shareholders [1].
So, the agreement transfer of corporate control can pro-
vide more trade free for control shareholder. That will
prevent the small shareholder’s “free-ride”, and it is more
easily for the accomplished of corporate control transfer
In this paper, the agreement transfer fail of corporate
control is defined that the two sides of merging has a
intention deal for corporate control transfer, but the deal
is not actually accomplished finally. Many of researchers
had researched corporate control agreement transfer in
different fields, like as operating performance after
merging, market effect, the feature of merging company,
the price of merging, and the mode of control transfer etc.
[2]. But the reason of corporate control agreement trans-
fer fail is not concerned about. In this paper, the reason
of corporate control agreement transfer fail is the re-
searched subject which is neglected by most current
Section 2 review of the literature and develop the hy-
pothesis. Section 3 designs the research method and sam-
ple selecting. Section 4 examines the relationship be-
tween the expected difference and the transfer failed of
corporation control. Section 5 concludes.
2. Therotical Discussion and Hypothesis
In essence, the transfer of corporate control is the transfer
of decision-making power. The efficiency of transfer
price negotiations and the constraints of institutions en-
vironment are key factors that influence the result of
corporate control transfer. Jensen and Meckling believe
that the transfer of decision-making power based on
market participants voluntary transaction, can match well
the knowledge and decision-making power [3]. It is
benefit for economics efficiency. If the two side traders
have great difference about the future expectation of cor-
porate, the transfer deal will not easily to success, and
most likely to fail. Farther, the transfer of corporate con-
trol is not only effect by price negotiation, but also af-
fected by institutions environment. Such as, the transfer
of corporate control has deeply influenced by administra-
Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China23
tive intervention in china capital market. Therefore, there
are two views to explain the reason of corporate control
transfer fail. The first is the market trade influence, i.e.,
the great differences of traders will significant influence
the result of corporate control transfer. The second is
institutions constraint, i.e., the exogenous institutional
environment has the function to enhance or to block the
process of corporate control transfer.
On the one hand, if the trade of corporate control is
based on market voluntary transaction system, the trad-
ers’ large difference which caused the different future
expectation of corporate control income could block the
processing of corporate control transfer. Despite the
agreement transfer of corporate control has a framework
in beginning, but the detail of the trade has not been de-
termined, further, both sides of trade must negotiate all of
the issues of corporate control transfer. Therefore, the
differences of the expectation income of corporate con-
trol become a crux factor that affect the success of cor-
porate control transfer, because the great differences of
expectation income will result in the difference of trans-
action price. In capital market, for a certain stock, the
changing of stock price is partly reflected the difference
of future expectation income of the listed company. If
stock price has more synchronicity with the market index,
that meaning the firm-specific information has little enter
the decision of market participants [4], i.e. , the private
information of listed companies has less concerned by
investors. So, for this kind of corporation, the differences
of future expectation income are not likely being great,
same is the difference of transaction pricing. Roll is the
first researcher who note that the influence of firm-spe-
cific information to stock price. He divided the stock
return into system risk return and specific return, former
is the market return, and the latter is firm-specific risk
return which has captured a part of stock return which
couldn’t explained by market public information, i.e., the
affection of private information on stock return. For the
classical regression model of stock return, if stock price
more dependent on the firm-specific information, then
the residual of regression model would be greater and the
less adjusted R2 of regression model would be [5]. Simi-
larly, Durnev’s researching has shown that the more ad-
justed R2 is, the more related between stock return and
the firm future income, i.e., the lower adjusted R2 has
shown that the stock price has absorbed more firm-spe-
cific information [6]. For the heterogeneous noise, while
it can weaken the capability of stock price reflecting firm
future income, but it has little effect on stock price syn-
chronicity. So the firm-specific information is still a main
factor to affect the stock price [7]. Ferreira and Laux
noted that good corporate governance would less its
anti-takeover provisions, and that is benefit for its private
information using by investors, thereby enhancing its risk
characteristics [8].
In summary, the firm’s specific risk could be boosted
when market investors are more concern the private in-
formation of listed company. Accordingly, the investors
expected deference of the company future value will in-
crease. If the expected difference become to the extent of
that it can not be negotiate. The agreement transfer of
corporate control is most likely to fail. Therefore, the
author proposes the first hypothesis.
H1: the investors expected difference is a crux factor
which affects the process of corporate control transfer,
when there is a great difference between two sides of
trader, the agreement transfer of corporate control would
likely be to fail.
On the other hand, the agreement transfer of corporate
control is deeply affected by the circumstance of institu-
tions. The institutions constraints could result in the
phenomenon of vote-right heterogeneity. Hart believes
that the voting structure of one shares one vote system is
a crucial fundamental to ensure the transfer efficiency of
corporate control [1]. Although it has shown the charac-
ter of one shares one vote in china capital market, but
most corporate control transfers is not based on the mar-
ket voluntary trade mechanism. The administrative intent
is a crucial role in china capital market. Therefore, vote-
right heterogeneity is a general phenomenon in china
capital market. For different equity nature of corporate
control transfer, the focus of administrative supervising
is different. Despite the supervising procedure of state-
owned equity transfer is more complex than others. But
which doesn’t mean that state-owned equity transfer
more difficult than nonstate-owned equity transfer. Be-
cause it has shown strong administrative intention that
state-owned equity transfer, then, those deals are immune
from the price dispute and the payment method. In the
counter cases, the nonstate-owned equity transfer is af-
fected by price dispute and payment method, and if the
difference couldn’t be coordinated, then the corporate
control transfer is most likely to fail. Therefore, the au-
thor proposes the second hypothesis.
H2: the equity nature is another factor which affects
the progress of corporate control transfer. For the case of
state-owned equity transfer, the deal of corporate control
transfer is not likely to fail.
3. Researching Design
3.1. Sample Selection
Since 1990s, it has gone three stages for corporate M&A
(merge and acquisition) in china capital market. First
stage is the initial phase (1993-1996), in which period the
objective of M&A is to improve the poor performance of
Copyright © 2011 SciRes. JSSM
Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China
state-owned firms. The second stage is development phase
(1997-2005), in which period the objective of M&A is to
protect and to acquire the “shell” resource because of the
scarcity of qualification in china capital market. The third
stage is maturity phase (after 2006), in which period the
objective of M&A is changed from financial purpose to
industry strategic plan [9]. In this paper, to exclude the
specific influence of first and second stages, our re-
searching is focus on the third stage.
The samples are selected by following steps: first, we
select all cases of corporate control agreement transfer in
china capital market since September 1, 2006. Second,
we eliminate the cases which has no statement date for
corporate control transfer success, because it is difficult
to judge the consequence of corporate control transfer.
Third, we eliminate the cases which part of the research-
ing data is unobtainable. Finally, we have acquired 394
effective samples. All data are collected from the CSMAR
3.2. Researching Model and Variables
According to the above mentioned hypothesizes, we set
up the following model to verify our speculation.
uccessdifference sharenature
control s
 
 
where the success denotes the consequence of corporate
control transfer, if the transfer is failed then the success
variable value is 0 otherwise is 1. The difference denotes
the extent of traders expected difference. The sharena-
ture denotes the nature of corporate equity, if the sample
corporate is state-owned, then the value is 1, otherwise is
0. The controlvars denotes other control variables.
Based on the Section 2 of this paper, the adjusted R2 of
sample stock return regression to the market return can
partly represent the difference of traders anticipation of
listed company. Therefore, we use the adjusted R2 to
represent the expected difference variable. The greater
adjusted R2 imply great expected difference, and the
lesser adjusted R2 imply less expected difference. We
calculate all of the adjusted R2 of 394 samples one by
one. The regression model of adjusted R2 is as following:
itmt it
where, rit is the real stock return calculated by monthly,
the period is 12. And rmt is the same period market re-
In addition, there are different market characteristics
between Shanghai Stock Exchange and the Shenzhen
Stock Exchange. Those two markets have different regu-
lation mechanism, for example, the Shenzhen Stock Ex-
change is the first market to score the listed company’s
of listed company. So, the level of investors using the
firm-specific information must have difference. There-
fore, in this paper, besides the adjust R2 of all samples
enter the regression model, we add in a new variable
which is cross variable of market type (Shanghai and
Shenzhen, if the market type is Shanghai, then the value
is 1, otherwise is 0) and adjusted R2.
For the control variables, we se
information disclosure, and has established the credit file
lected the financial
ptive Statistic
ded in Ta-
data, if
viously different characteristic in Shanghai market and
ver and the payment method and the industry factor. In
the process of M&A, the creditors are playing an impor-
tant role, because they have the rights conferred by con-
tract law to claim the transfer contract invalid, and credi-
tors exercising the right would block the deal of M&A.
For the payment methods, there are three main methods:
cash, and share, and convertible bonds. Because the cash
payment is more difficult for buyer than other methods,
so in our model, if the payment method is cash then the
variable value is 1, otherwise is 0. In addition, according
to the china antitrust law, the industry factor must be
concerned in this researching field, so this paper has con-
trolled the industry variable.
3.3. The Results of Descri
The variables results of all samples have provi
bles 1 and 2. The ratio of corporate control agreement
transfer failed is 9.6 percent in all 394 samples. That
means the agreement transfer is efficient in corporate
control transfer. In Table 1, the equity nature variable
has a significantly different for two group samples, but
the expected difference variable does not. However, in
Section 4 of this paper, we will add in the cross variable
which is taking into account the difference characteristic
of two stock market (Shanghai and Shenzhen).
In Table 2, the expected difference has sig
fferent between the state-owned group and the non-
state-owned group. This implies that there is more pri-
vate information concerned in pricing for nonstate-
owned corporate stock. In Table 3, the simple correlation
coefficient has been provided. The results have initially
proved the hypothesis above mentioned.
4. The Results of Multiple Regre
We use the logistic model to examine the samples
the corporate control transfer successful then the de-
pendent variable’s value is 1, otherwise is 0. As the Ta-
ble 4 shown that the researching hypotheses have been
proved. For the single variable of expected difference,
there are no significantly coefficient in model 1 and
model 3, but in model 1 and model 3 the cross variable of
expected difference and market type has a significantly
positive coefficient. This result implies that there are ob-
Copyright © 2011 SciRes. JSSM
Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China
Copyright © 2011 SciRes. JSSM
successful group and failed group.
in max
Table 1. The variables description of
Group n variable mean median m
Expected difference 0.3984 0.4155 0.10 0.92
Equity nature 0.4860 0 0 1
Financial lever 0.5381 0.10.
success 356
E0.4320 0.
Financial lever 0.5788 0.5.
fail 38
0.5796 02 03
ment method 0.9326 1 0 1
xpected difference 0.4019 10 0.88
Equity nature 0.1842 0 0 1
0.6876 07 40
ment method 0.9474 1 0 1
Table 2. The variabof state-ow-owned g
group max
les description ned group and nonstateroup.
n variables mean median min
Expeence cted differ0.4378 0.4690 0.10 0.90
Financial lever 0.5208 0.5464 0.02 1.07
State-owned 180
E0. 0
nonstate-owned 214
Payment method 0.9167 1 0 1
xpected difference 0.3659 3845 0.10 .92
Financial lever 0.6483 0.5367 0.07 10.03
Payment method 0.9486 1 0 1
Table 3. The simple correlation coefficient (s
iled test).
difference variable nature
pearman one-
Expected Cross Equity
sucss ce1
d 0.7
Eqe 0.118***
ifference 001
variable 0.094** 1
uity natur0.179*** 0.146*** 1
**fir resent lever
zhen market. Therefore, the hypothesis 1 has been
roved only in Shanghai market, but in pool samples of
transfer of corporate control
rule nstate-oed corporate control transfer. Be-
cause it is play a very important role that expected dif-
riod. If there are great differences
e expected
rs and the equity nature. This re-
otally different from existing resear-
*represent signi
cant level unde1%, **repnt significal unde
two markets we had not found the evidence of the posi-
tive correlation between expected difference and corpo-
rate control transfer failed.
For the variable of equity nature, our researching has
founded that the agreement
not likely to fail when the corporate is a state-owned,
while the nonstate-owned corporate control transfer is
more easily failed. This result has been proved according
to the model 2 and model 3 in Table 4. Further, we can
draw the conclusion that it is based on voluntary trade
ference of traders in such deals. When the expected dif-
ference is great enough, the deal would be failed, i.e., in
for nown
state-owned corporate control transfer, the administrative
intention is more important than nonstate-owned corpo-
rate control transfer, and the administrative authority is
the decisive factor affected the success or fail of corpo-
rate control transfer.
Finally, we had made a robust testing for this re-
searching. The binary dependent variable of corporate
control transfer has been substituted by the duration of
M&A negotiation pe
tween two side traders, then the period of negotiation
is likely extended until there are no opposite opinions
about this deal. The result of robust testing is consistent
with above conclusion, i.e., the more great expected dif-
ference is, the more negotiation time will spend. And the
equity nature variable has the same evidence.
5. Conclusions
In this paper, the agreement transfer of corporate control
has been researched which is focused on th
difference of trade
searching view is t
Expected Difference, Equity Nature and the Corporate Control Agreement Transfer Failed—the Evidence from China
Table 4. The resultslogistic regression.
Variables Model 3
Model 1 Model 2
constant 2.421* 2.344* 2.375* *(4.192)*(4.633)*(3.809)
Expected difrence
1.8***(2.429) 1.
Financial lever 0.193(1.068)
2log-d 235.223.219.
fe 0.564(0.504) 0.95(1.31)
Cross variable 1.718**(4.01) 791**(3.984)
Equity nature 1848***(12.607)
0.133(0.499) 0.136(0.513)
ment method 0.169(0.047) 0.083(0.011) 0.107(0.018)
industries yes yes yes
year yes yes yes
likelihoo9 86 18
Nagelkerke R 0.075 0.136 0.16
Which is the WALets, *** represent signivel under 1%, ** represeificant level under 5%. Model 1l 2 and model 3 is that
expected differencnd equity nature variar into the regression modetively.
perating performance of M&A. Our research has drawn
mportantly basic
he humanity and social sci-
on Ministry (10YJC79014
ess, 1998, pp. 233-256.
[2] S. M. Li andonal Environment,
Transaction R
m-Specific Information and the Synchronic-
Firm-Specific Return Variation Mean More or
D value in brack
e, cross variable a
ficant le
ble ente
nt sign
l respec
, mode
ches which were mostly concern the market effective and and the Young Teacher project of Henan province (2010
the conclusions that the process of corporate control
agreement transfer is significantly affected by the ex-
pected difference of traders in Shanghai capital market,
i.e., the greater differences of traders expect is, as the
consequence, the higher probability of M&A failing will
be. Furthermore, when the controlling shareholders are
state-owned, then the agreement transfer deal of corpo-
rate control is unlikely to fail. This conclusion has shown
that there is lack of the voluntary trade rule in state-
owned corporate control transfer cases.
To improve the efficiency of capital market transac-
tions, the voluntary trade rule is most i
nditions abided by all market exchanges. So the mech-
anism of corporate control agreement transfer must be
consistent with the voluntary trade rule. But the corporate
control agreement transfer is still in an imperfect circum-
stance of china capital market, which can be inferred
clearly according this paper’s conclusion. In which insti-
tution circumstance, the voluntary trade rule is ignored,
that is harmful for the market exchange efficiency.
Therefore, we must radically improve the provisions of
agreement transfer of corporate control to avoid the in-
volvement of non-market factors. Thus the method of
equity exchange, which is the agreement transfer of cor-
porate control, will notable enhance the efficiency of
resource allocation of china capital market.
6. Acknowledgements
This paper been funded of t
ence project of China Educati8),
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