PREFERENCES
4.3 Data and Descriptive Statistics
To avoid the infancy period of the Chinese stock markets and RMB’s foreign
exchange rate regime adjustment periods in 1994 and 20056
6 From January 1994, China started a market-based, managed floating exchange rate system pegging to U. S.
dollars; from 21 July 2005, China switched its exchange rate regime to a managed float linked to a basket of currencies after a 2.1 percent appreciation against the dollar.
, the sample period starts
from 1994 and ends in 2004. The 11 years sample period covers the period before
Chinese do mestic individuals were allowed to invest in once foreigner-only shares,
the period after QFIIs were allowed to participate with once domestic-only shares, a nd
the period between these institutional changes. All 86 firms, 42 from SHSE and 44
from SZSE, which issue dual-class shares by the end of the sample period, are
examined. Full lists of companies included are available in the Appe ndices D and E.
Most of our datasets are obtained from the Datastream of Thomson Financial, including trading data and companies’ financial data; earnings and sales forecasts data
are from I/B/E/S; ownership structure data is from the Beijing Tianxiang Investment
Consultant. Datastream does not have separate information on tradable shares and
nontradable shares; the da ta type “the number of shares in issue” covers both state
shares, legal person shares and employee shares, which are classified as nontradable shares and ordinary tradable shares. Although the Datastream does contain data of
“percentage of free float number of shares” and “total strategic holdings”, the data
provided is not consistent with ones I computed based on individual firms’ financial
Investment Consultant. Because the firms do not release their financial repor ts on a
finer frequency, analyses will be conducted on annual basis. The definition of explanatory variables is provided in the following Table 4.1.
Table 4. 1: Description of Explanatory Variables
Factors Variables Abbr. Definitions Expected
Signs Financial Leverage Debt-to-equity ratio DTE Annual ratio of total debt to common
equity +
Profitability Earnings per share EPS Earnings per share for the fiscal year - Return on equity ROE Net income divided by average total
equity -
Future Prospects Forecast earnings growth
FEG Difference between current and forecast one year forward EPS relative to the current EPS
- Forecast sales growth FSG Difference between current and forecast
one year forward sales relative to the current sales
- Dividend Policy Dividend payout ratio DIV Dividends per share relative to earnings
per share -
Corporate Governance
Floating ratio FR Number of free-floating A-shares relative to the number of all outstanding A-shares - Firm Size Market capitalization LMCAP1 Natural logarithm of market capitalization
calculated based on free float A-shares - LMCAP2 Natural logarithm of market capitalization
calculated based on total outstanding A- shares
- Liquidity Relative liquidity LIQ Relative turnover rate, which is calculated
as the ratio of trading volume to the number of shares traded on the market, of the A-shares to B-shares
The following Table 4.2 presents descriptive statistics of the dependent variable and
explanatory variables:
Table 4. 2: Summary Statistics of Dependent and Explanatory Variables
PRE DTE EPS ROE FEG FSG DIV FR LMCAP1 LMCAP2 LIQ
Panel A: SHSE Mean 2.928 85.41 0.063 2.531 0.136 0.121 20.66 0.176 6.344 7.678 2.204 Median 1.624 60.09 0.094 4.850 0.010 0.030 0.000 0.118 6.454 7.761 1.326 Maximum 19.58 571.2 1.600 76.33 17.33 2.246 100.0 0.682 8.884 10.25 30.15 Minimum -0.513 -212.8 -1.490 -88.51 -17.36 -0.750 0.000 0.033 3.022 4.344 0.059 Std. Dev. 2.970 87.47 0.256 16.97 3.057 0.475 28.57 0.123 1.077 0.998 3.371 Skew ness 1.766 2.341 -1.410 -2.543 -0.417 1.696 0.995 1.235 -0.347 -0.471 4.645 Kurtosis 7.060 11.54 15.29 13.82 17.50 7.605 2.576 4.062 2.792 3.549 29.36 Jarque-Bera 509.1 1629 2789 2252 2241 216.7 71.61 129.5 9.230 20.86 13995 Probability 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0099*** 0.0000*** 0.0000*** Panel B: SZSE Mean 1.845 60.34 0.120 5.434 0.310 0.028 25.85 0.279 6.538 7.598 6.337 Median 1.240 42.91 0.130 8.060 0.051 0.059 13.77 0.234 6.626 7.702 2.724 Maximum 8.775 513.9 1.192 131.2 9.333 1.323 100.0 0.826 8.975 10.13 90.35 Minimum -0.493 -249.3 -1.593 -147.2 -5.857 -1.000 0.000 0.056 2.537 3.566 0.027 Std. Dev. 1.672 74.14 0.302 21.15 1.908 0.460 29.08 0.152 0.934 0.915 10.34 Skew ness 1.492 1.841 -1.418 -1.570 2.220 -0.393 0.657 1.377 -0.655 -0.781 4.001 Kurtosis 5.075 11.50 10.34 18.14 11.34 3.723 2.086 4.421 4.115 5.281 23.67 Jarque-Bera 207.6 1287 978.5 3197 870.1 7.510 38.64 156.5 46.46 120.0 8004 Probability 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0233** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000***
Panel C: SHSE vs. SZSE t test
t-stat 7.488 5.818 -4.584 -3.326 -0.908 2.478 -3.695 -17.38 -3.702 1.653 -25.42
p-value 0.0000*** 0.0000*** 0.0000*** 0.0010*** 0.3647 0.0143** 0.0002*** 0.0000*** 0.0002*** 0.0990* 0.0000***
Notes: ‘*’ indicates significant at the 10% level; ‘**’ indicates significant at the 5% level; and ‘***’ indicates significant at the 1% level.
Panel A and Panel B list the summary statistics for firms listed on the SHSE and
SZSE respectively. Panel C lists t-statistics and correspo nding p- values for hypot hesis
Shanghai and Shenzhen exchanges. Except for variables FEG and LMCAP2, the null
hypothesis can be rejected at the 5% significance level, and LMCAP2 is also significant at the 10% level. Thus, separate examinations will be conducted for the
firms listed o n the two e xchanges.
The average price premium in the Shenzhen market appears more modest: investors
of the Shanghai A-shares pay almost four times the price that B-shares investors pay,
for stocks with identical fundamental backups; while for the Shenzhen- listed shares, the A-shares are in general nearly three times more expensive. The Shanghai- listed
firms are suggested to be significantly more financial risky than the Shenzhen- listed
firms. Since the founding of new China, Shanghai has been the most economically
developed city in China, and many of the largest stated-owned companies, e.g., the
Shanghai Baoshan Iron and Steel Compa ny, the Shanghai Petrochemical Company, were set up there. These large-scale state-owned enterprises became partially
privatized and publicly listed after the SHSE established following the economics
reform and Opening Up. The historical background for firms listed in the SZSE is
very different. When the SZSE established in 1991, Shenzhen had only been
designated as a special economic zone (SEZ) for about ten years. There were no large- scale state-owned enterprises, and foreign- funded enterprises were small in size. Even
toda y, firms listed on the SHSE tend to be larger tha n those choos ing the SZSE,
which is evidenced by LMCAP2, the market capitalization calculated based on
number of total outstanding shares. Since bank loans are the main source of capital for
Chinese firms, and large state-owned companies normally face lower barriers and conditions and have bountiful mortgages to get bank loa ns, and it is no wonder that
the Shanghai- listed firms have significant higher financial leverage than the
Shenzhen- listed firms. The Shenzhen- listed firms have significantly better profitability, measured by either EPS or ROE, than firms listed in Shangha i: the mean
values of which of the Shenzhen- listed firms are abo ut twice of which of the
Shanghai- listed firms. While the Shenzhen- listed firms have higher forecast earnings
growth in the near future, the Shanghai- listed firms, though not significant, are
expected grow faster in annual sales. Comparing the Shanghai- listed firms, the Shenzhen- listed firms on average pay more proportion of their earnings back to
investors; and a zero median value of the variable DIV indicates more than half of the
Shanghai- listed firms do not provide dividends to investors. Since the Shanghai- listed
firms are mainly previous state-ow ned enterprises, they in general have higher
por tions of outstanding shares kept by the government and ot her institutions, and so they tend to have lower FR ratios. Affected by the lower FR ratio, firm size, measured
by the number of tradable shares, of the Shanghai- listed firms is significantly lower
tha n that of the Shenzhen firms, although when measuring by the number of all
outstanding s hares, t he Shanghai- listed firms are larger.