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| Major Individual Shareholders and Stock Price Crash Risk |
| TAN Songtao, HUANG Junkai, DU Anran
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China's Fiscal and Financial Policy Research Center, Renmin University of China;
China Securities Depository and Clearing Co., Ltd. |
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Abstract Individual major shareholders (IMSs) are the natural shareholders in listed companies who hold a high proportion of shares but are not the actual controller or controlling shareholder of the company. People often regard IMSs and general minority shareholders as the same kind of investor. However, as IMSs hold a higher proportion of shares and a larger capital scale than general minority shareholders, they are more willing to spend time collecting information about the company's operation and supervising the behavior of the company's managers, rather than adopting the “free-rider” behavior of minority shareholders. Compared to institutional investors, they pay more attention to absolute returns than to short-term rankings of relative performance. Therefore, when asset prices overreact to negative information in the short term, their dominant strategy may be to hold shares to reduce short-term selling pressure. As Chinese institutional investors have developed recently and relatively slowly, IMSs have, for a long time, played an important role in the equity structure of listed companies, and they have important effects on asset price characteristics.
Based on data on China's A-share listed companies from the 2007 to 2016 period, this study investigates the relationship between IMSs' shareholdings and the risk of stock price crashes. Following Chen et al. (2001) and Kim et al. (2011a, 2011b), we construct two variables to measure a company's stock price crash risk in a specific year. The first measure is the negative conditional skewness, NCSKEW, calculated by taking the negative of the third central moment of the firm-specific weekly return scaled by the sample variance of firm-specific weekly return raised to 3/2. The second measure is the down-to-up volatility, DUVOL. In the first step, we calculate the standard deviations of firm-specific weekly returns during the up (down) weeks when the firm-specific weekly returns are above (below) the annual mean. DUVOL is defined as the log of the ratio of the standard deviation on down weeks to the standard deviation on up weeks. In this study, we regress these two variables on the shareholdings of a company's IMSs.
Our results are as follows. First, there is a significant negative correlation between IMS shareholdings and the future crash risk of stock prices. As the proportion of shares held by IMSs increase, the risk of stock price collapse decreases significantly. This conclusion remains valid after eliminating the shares held by the directors of the board, supervisors, and senior executives of the company, after endogenous treatment, and using several alternative statistical test methods. Second, the effect of IMSs' shareholding on the supervision of corporate management is not significant. Increases in the proportion of IMSs' shareholding has no significant impact on operating indicators that may affect the crash risk of stock price such as accrual earnings management, real earnings management, investment efficiency, or overinvestment of the company.Although IMSs' shareholding is positively related to management shareholding and management power, these two indicators do not significantly affect stock crash risk. Third, the influence of the IMSs on the stock price crash risk is mainly realized through strengthening the company's ownership balance mechanism. The mediating effect test shows that the ownership balance mechanism explains more than 50 percent of the effect of IMSs on crash risk.
The main contributions of this study are as follows: First, from the perspective of crash risk, this study examines the impact of IMSs, an important investment group in the stock market, on asset prices, and reveals their role as price “stabilizers.” This analysis helps us to fully understand the role of IMSs in China's stock market. Second, this study verifies the role of IMSs in corporate governance, that is, the role of IMSs in stabilizing the market by strengthening the company's ownership balance rather than supervising the managers. Third, from the perspective of shareholder structure, this study further enriches our understanding of stock price crash risk.
The IMSs are the kind of investors generated by a specific developmental stage in China's stock market. They play a unique role in the market, and will continue to exist for a long time. Therefore, their behavioral characteristics and effects on asset prices require careful study. This study shows that IMSs play an active role in reducing the crash risk of stock prices and stabilizing market prices. Future studies can explore the impact of IMSs on the stock market from other perspectives.
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Published: 29 May 2019
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