Market Efficiency or Not? The Behaviour of China s Stock Prices in Response to the Announcement of Bonus Issues

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1 Discussion Paper No Marke Efficiency or No? The Behaviour of China s Sock Prices in Response o he Announcemen of Bonus Issues Michelle L. Barnes and Shiguang Ma May 2001 Adelaide Universiy SA 5005, AUSTRALIA

2 CENTRE FOR INTERNATIONAL ECONOMIC STUDIES The Cenre was esablished in 1989 by he Economics Deparmen of he Adelaide Universiy o srenghen eaching and research in he field of inernaional economics and closely relaed disciplines. Is specific objecives are: o promoe individual and group research by scholars wihin and ouside he Adelaide Universiy o srenghen undergraduae and pos-graduae educaion in his field o provide shorer raining programs in Ausralia and elsewhere o conduc seminars, workshops and conferences for academics and for he wider communiy o publish and promoe research resuls o provide specialised consuling services o improve public undersanding of inernaional economic issues, especially among policy makers and shapers Boh heoreical and empirical, policy-oriened sudies are emphasised, wih a paricular focus on developmens wihin, or of relevance o, he Asia-Pacific region. The Cenre s Execuive Direcor is Professor Kym Anderson ( and Depuy Direcor, Dr Randy Sringer ( Furher deails and a lis of publicaions are available from: Execuive Assisan CIES School of Economics Adelaide Universiy SA 5005 AUSTRALIA Telephone: (+61 8) Facsimile: (+61 8) Mos publicaions can be downloaded from our Home page a hp://www.adelaide.edu.au/cies/ ISSN series, elecronic publicaion

3 CIES DISCUSSION PAPER 0120 Marke Efficiency or No? The Behaviour of China s Sock Prices in Response o he Announcemen of Bonus Issues Michelle L. Barnes* and Shiguang Ma Universiy of Adelaide School of Economics Adelaide, SA 5005 Ausralia and *UC Berkeley Haas School of Business Berkeley, CA USA May 2001 Copyrigh 2001 Michelle L. Barnes and Shiguang Ma Barnes is he corresponding auhor. Ma would like o hank paricipans from he 1999 PhD Conference in Economics and Business, Perh, Ausralia, All errors are he auhors own. This work was compleed while Barnes was a visiing scholar a UC Berkeley.

4 ABSTRACT Marke Efficiency or No? The Behaviour of China s Sock Prices in Response o he Announcemen of Bonus Issues Michelle L. Barnes and Shiguang Ma Absrac: Even sudy analysis is applied o invesigae sock price reacion o he announcemen of bonus issues for he emerging sock markes of China. Resuls show ha he issues wih a high bonus raio (number of bonus shares in he issue/number of exising shares) usually arac posiive reurns and he issues wih a low bonus raio are rewarded wih negaive reurns. The A-shares and B-shares prices exhibi some similariies in heir reacions o bonus issues approvals. The hypohesis of semi-srong form marke efficiency is rejeced only parly for China s sock markes. Key Words: Efficien Marke Hypohesis (EMH); Semi-srong Form Efficiency; Even Sudy; Announcemens of Proposal or Approval; Under-reacion and Overreacion. JEL Classificaion: G14; G18; O16. Conac auhor(s): Michele Barnes C/- UC Berkeley Haas School of Business Berkeley, CA USA

5 Marke Efficiency or No? The Behaviour of China s Sock Prices in Response o he Announcemen of Bonus Issues Michelle L. Barnes and Shiguang Ma 1. Inroducion China s Sock Marke (CSM) is a new emerging marke wih wo sock exchanges. The Shanghai Sock Exchange was esablished in December 1990, and he Shenzhen Sock Exchange was esablished in April A-shares and B-shares rade on boh of hese exchanges. A-shares are accessible by Chinese residens wih Chinese currency, while B-shares are limied o foreign invesors wih U.S. Dollars on he Shanghai marke and Hong Kong Yuan on he Shenzhen marke. CSM has developed rapidly for he pas en years. By July 2000, here were 1004 lised companies wih marke capializaion of 4000 billion Renmin Bi (RMB). 1 According o he Efficien Marke Hypohesis (EMH, Fama (1970)), if he sock prices reflec he announcemen of public informaion insananeously and unbiasedly, he marke should be classified as semi-srong form efficien marke. Fama, Fisher, Jensen and Roll (FFJR) (1969) examined 940 sock splis on he NYSE beween 1927 and In heir sudies, reurns are higher immediaely following he announcemen of he splis. There is no evidence ha abnormal reurns are available due o price over- or under-reacion o he announcemen. Brown (1970) esed he impac of he announcemen of annual profis on share prices for a sample of 118 Ausralian companies in he period from 1959 o In a subsequen sudy, Brown (1972) examined he impac of he release of half-yearly repors on share prices. Boh his sudies sugges ha he marke anicipaes he new informaion, and ha he share prices reac rapidly o he unanicipaed componen of he informaion. Scholes (1972) esed wheher he magniude of price decline is a funcion of he volume of he shares sold in he secondary disribuion, or is relaed o selling pressure from new shareholders aemping o earn abnormal reurn afer hey purchase he shares in he secondary disribuion. He found ha he price decline corresponds o block selling of insiders. Therefore, he marke inefficienly reflecs he announcemen of he secondary disribuion. Brown e al (1977) conduced a combined sudy on announcemens of profis and announcemens of dividends, as hey are usually released simulaneously. Six subgroups of he shares were consruced, in erms of combinaion of profi and dividend increase or 1

6 decrease. The resuls show ha reurns on he shares reflec he conen of he wo sources of informaion precisely. As a consequence, semi-srong form efficiency can be inferred from he Brown e al sudies. Rendleman e al (1987) esed he behaviour of sock prices during he weeks surrounding an earnings announcemen. They disinguished beween expeced earnings and unexpeced earnings, and mainained he proposiion ha only unexpeced earnings announcemens pass on new informaion o invesors. The unexpeced earnings were caegorised ino en groups, from high value (posiive) o low value (negaive). They found ha pos-announcemen drifs of reurns show ha sock prices overreac o he announcemens, which is inconsisen wih he semi-srong form efficien marke hypohesis. Foser e al (1984) and Bernard and Thomas (1990) presened similar resuls, which show ha he sock prices fail o fully reflec he implicaion of curren earnings. Previously announced earnings predic he fuure abnormal reurns. However, who knows wheher or no he Chinese sock prices of he new emerging markes reflec he public informaion efficienly? Sudies on he semi-srong form of marke efficiency for China have been limied o Chinese publicaions unil now. This paper provides an iniial invesigaion of he CSM sock price behaviour in reacion o he announcemen of bonus issues. 2 The analysis demonsraes he differen responsiveness of China s shares raders o he announcemens of bonus issues proposals and approvals respecively, as well as he A-shares holders and he B-shares holders aiude owards receiving informaion abou bonus issues approvals. Furhermore, he empirical resuls show ha eiher he A-shares or B-shares prices reac o he announcemens depending upon he specific issue schemes. Boh efficiency and inefficiency evidence are found in he saisics esed on differen porfolios. Secion 2 illusraes he bonus issues and he relevan informaion conen of hese acions; Secion 3 describes he mehodology employed in his paper and he daa; Secion 4 discusses he resuls of he ess on he announcemen of bonus proposals for A-shares; Secion 5 discusses he resuls of he ess on he announcemen of bonus approvals for A- shares; Secion 6 discusses he resuls of he ess on he announcemen of bonus approvals for B-shares; and Secion 7 concludes his paper. 1 In July 2000, 1 US$ was equal o abou 8.3 RMB.s 2 The auhors have relaed papers on he announcemens of zero-dividend issues, cash-dividend issues and righs issues respecively. 2

7 2. Bonus Issues and Informaional Conen A bonus issue is a free issue of shares, wihou a subscripion price, made o exising shareholders in proporion o heir curren invesmen. A company can disribue bonus shares by using reained profis (sock dividends) or accumulaed capial reserves. In China, he majoriy of companies prefer o issue he bonus from accumulaed capial reserves, or from a combinaion of boh capial reserves and reained profis. Tha a bonus issue does no aler shareholder wealh was primarily pu forward by Miller and Modigliani (1961). For example, a company plans o finance a bonus issue from reained profis. The company is jus required a simple book enry o allocae reained profis ino paidup capial in he shareholders funds secion of he company balance shee. Alernaively, a company ha decides o realise a bonus issue by using accumulaed capial reserves needs only o adjus he accumulaed capial reserves ino paid-up capial. The company does no receive any cash and is financial posiion remains he same. The modificaion riggered by he bonus issue is ha he number of ousanding shares is adjused by he bonus issue raio, herefore, he price of he shares declines according o he same bonus issue raio. The oal marke value of he shares or he values of he shares ha are held by each invesor should remain unchanged. Sloan (1987) provided Ausralian evidence ha bonus issues do no affec shareholders wealh. However, in pracice here may be an increase in share price following he announcemen of a bonus issue. Such an increase can occur because he announcemen of a bonus issue may have beneficial informaional conen (Peerson 1971). Shareholders are aware ha, afer he bonus issue, companies usually raise dividends per share above he exen necessary o mainain he same oal dividend payou. This, in urn, indicaes he confidence of managemen in he company s fuure. Consequenly, he share price may increase in response o his informaion. Also, managemen may believe ha reducing he marke price per share o a reasonable level can faciliae ransacions and his may increase he demand for he company s shares. If his were rue, he marke value of he company s equiies would increase. An alernaive way o reduce marke price per share is a sock spli, which represens a reducion in he par value. The essenial difference beween a bonus issue and a sock spli is ha a sock spli need no be accompanied by a book enry o relocae he reained profis or accumulaed reserves ino paid-up capial in he shareholders funds secion of he company balance shee. 3

8 According o Chinese regulaions, shareholders mus pay ax for a cash dividend bu no for a sock dividend, i.e. hey need no pay ax on he bonus, which makes he bonus more favourable. However, his may no mean ha he Chinese shareholders welcome all bonus issues. In fac, heir preference is for a high raio bonus raher han a low raio bonus. 3 The low raio bonus may no convey he same informaional conen as he high raio bonus. a. Mehodology and Daa i. Even Sudy and he Models The sandard mehodology used o evaluae he reacion of share prices o public announcemens is an even sudy, which was employed as early as 1933 by Dolley. Over he pas half cenury, even sudies have been employed in much research and heir sophisicaion has been grealy improved by papers such as FFJR (1969) and Brown and Warner (1980, 1985). To consruc an even sudy, he even, even window, esimaion window, invesigaion widow and esimaion model should be deermined. The even is wha he invesigaors would like o sudy, and i conveys informaion ha poenially influences he sock prices. The evens defined for his sudy are he announcemens of bonus proposals or bonus approvals. An even window is he period in which an even occurs. Sricly speaking, an even window should be a period when he occurrence of he even is publicly announced. In he case ha he even is announced afer rading hours and hen impacs on he nex day s prices, or ha here is a ime difference in he announcemens in differen news media, he even window is expanded o hree days. Thus, he even window in his sudy is combined wih he day of he announcemen and he days preceding and succeeding he announcemen day, which are numerically expressed as 1, 0, +1. The period of daa used in he esimaion of parameers is known as an esimaion window. The esimaion window in his sudy is defined from he day 150 o he day 21 before he announcemen daa 0. In an even sudy, boh he abnormal reurns occurring during he ime of he even window and he abnormal reurns occurring in he periods around he even window mus o be invesigaed. The abnormal reurns occurring in an inerval before he even window can show us wheher he marke has anicipaed he informaion (or implied inside informaion) conained in he even, while he abnormal reurns in an inerval afer he even window can ell us wheher he marke over- or under-reacs o he 3 Bonus Raio = Number of bonus shares in he issue/number of exising shares applicable for he bonus issue. 4

9 announcemen of he even. The invesigaion window in his sudy is an exension of he even window, from day 20 hrough day +20. The seleced examinaion models for his sudy are he marke-adjused model and he marke model. The marke-adjused model is r i, rm, + ε i, =, where r i, is he reurn of sock i a day, r m, is he marke reurn a ime, as calculaed from a marke porfolio or a marke index, 4 and ε i, is he abnormal reurn of sock i a day. Thus, he marke-adjused model assumes ha he normal reurns are equal across all socks a ime, bu no necessarily consan for a given securiy a differen imes. The abnormal reurn on any sock i is deermined by he difference beween is reurn and ha on he marke porfolio simulaneously, ε i, = r i, rm, The marke model is. r i, = α i + βirm, + εi,, where α i is he inercep erm, and β i measures he marginal effec of he marke reurn on he reurn of sock i. Here, he parameers of he marke model are esimaed from a regression of he reurns on a sock and he marke porfolio in he esimaion window, day 150 hrough day 21. The abnormal reurn (residual) on any sock i in he even window (or invesigaion window) is measured by he difference beween is acual reurn and he prediced reurn. Hence: ε = + ˆ, i, r i, αˆ i βirm, where ˆ i, β i are he esimaes of α i, β i α ˆ. The -saisic for abnormal reurns on an even dae, in his case, = 1, 0, +1, is ˆ ( ε ) * = ε s, 4 Since here is no an index across boh he Shanghai and Shenzhen markes and here is segmenaion of he A-shares and B-shares markes, he SSE-A, SZS-A, SSE-B and SZS-B will be employed as marke indices when we es Shanghai A-shares, Shenzhen A-shares, Shanghai B-shares and Shenzhen B-shares respecively. 5

10 where ε is average abnormal reurn of socks involved in he es a day, and sˆ ( ε ) is he corresponding sandard deviaion. Mahemaically, we have: 1 N 21 2 ε = ε, and sˆ( ε ) = [ ( ε ε ) ] 129, N i= 1 i, = 150 where N is he number of socks involved in he es a day, ε is he average abnormal reurn of N socks from day 150 o day 21, such ha 1 21 ε = ε. 130 = 150 Masulis (1980), Brown and Warner (1985), and Corrado and Zivney (1992) have used hese saisics. The -saisic for abnormal reurns in an inerval is b 2 [ ˆ ( ε ] b, b ) = a = a 1/ 2 a = ε s. The firs and las days of he inerval are a and b, which are seleced as 10 o 0, 10 o +10, 0 o +10, and so forh in his sudy. ε and sˆ ( ε ) are he same as before. 5 In he case of a skewed disribuion of abnormal reurns, we apply a non-parameric rank es on he even dae. The -saisic (Corrado 1989) is k = 1 N N i= 1 l + 1 ki, 2 s ( k ), where k i, denoes he rank of an abnormal reurn and ε i, is an abnormal reurn ime series. l is he number of abnormal reurns in he ime series. In his paper, he ime series is consruced by 170 abnormal reurns in he esimaion window plus he even window and he invesigaion period. Therefore he expeced rank of an abnormal reurn should be ( l +1) / 2 = 85.5 in his rank es. Thus N s ( k ) = ( ki, 85.5). 171 = 150 i= 1 N All of he ess in he even sudies are conduced a he 5% or 1% significance level. 2 5 Campbell e al (1997) also formulaes his -saisic in marices. 6

11 ii. Daily Sock Reurn Daa and Porfolio Consrucion Previous lieraure exhibis he use of boh monhly and daily sock reurn daa employed in even sudies. For example, FFJR (1969), and Brown and Warner (1980) used monhly sock reurn daa, whereas, Scholes (1972), Corrado (1989), and Frankfurer and Schneider (1995) used daily sock reurn daa. Theoreically, daily daa and monhly daa may differ in poenially imporan respecs: daily reurns depar more from normaliy han monhly reurns (Fama 1976), he esimaion of parameers from daily reurns is complicaed due o nonsynchronous rading (Scholes and Williams 1977), and daily reurns have smaller sandard deviaion han do he monhly reurns (Brown and Warner 1985). However, Brown and Warner (1985) showed in heir simulaion ha he non-normaliy of daily reurns has no obvious impac on even sudy mehodologies. They provided evidence ha he mean abnormal reurns in a cross-secion of securiies converge o normaliy as he number of securiies in he sample increases. Their sudy argued ha sandard parameric ess are well-specified using daily abnormal reurns compued using eiher he marke model or he marke-adjused model, and, as expeced, he power of each es is greaer wih daily reurns han wih monhly reurns. In addiion, he use of daily reurns is poenially effecive in ha i permis he researcher o ake advanage of precise informaion abou he specific day of he monh on which an even akes place. Using daily daa in his sudy is mos appropriae due o he special characerisics of CSM. CSM have been open for only nine years and he majoriy of companies were lised afer Thus, he sample size for monhly observaions of a sock and he numbers of socks wih sufficien observaions are boh oo small o saisfy he requiremens of he saisical ess. Furher, an assumed esimaion window of 36 monhly observaions covers hree years in which he same even, such as he announcemen of a dividend issue, may happen a leas hree imes. Alhough 36 observaions is sufficien for generaing abnormal reurns for a sudy on dividend issues, in he presen applicaion his esimaion would be biased because of he influences of oher economically significan evens which can occur during his esimaion window. All of he sock prices in his sudy have been adjused for changes in currency of denominaion, sock splis, dividend issues, bonus and righs issues before he reurns were calculaed. The bonus issues analysed in his sudy are limied o he period from 1994 o 1998 for he following reasons. Firsly, because neiher he Shanghai nor he Shenzhen sock marke were regularly operaed in he iniial period before 1993, he bonus issues of he wo markes 7

12 had no been deermined by formal regulaion. Secondly, he legislaion negoiaed by each marke had no been unified prior o 1993, so ha he same even on he wo markes may have had differen characerisics. Thirdly, he professional financial newspapers, which are auhorised by he China Securiy Regulaion Commission for publishing informaion abou sock markes, were firs issued around he end of The official annual yearbooks of he sock exchanges, which conain he records of relevan evens, were regularly published only afer Therefore, consisen references o evens which occurred prior o 1993 canno be obained. In China, he bonus (and oher imporan) issues are scheduled and he relaed informaion is released as follows. The manager pus forward he suggesion of a proposal o he Board of Direcors. If i is acceped, following he negoiaion beween he direcors in he Board of Direcors, a scheme of he proposal is filed and will be announced in wo days. Abou hree monhs laer, he proposal is voed on by he coming Conference of he Represenaives of Shareholders. In general, he scheme of he proposal can be approved by he represenaives of he shareholders, and will be announced in wo days immediaely afer he voe. The announcemens are usually published on he noice board of he sock exchange via he ransacion sysem, and in auhorised financial newspapers. The consrucion of he porfolios used in his sudy akes ino consideraion he following aspecs: Sock prices may reac o he announcemens of proposals and approvals in differen ways and share raders may have differen preferences for he differen bonus issues schemes. For he laer, we classified he small-bonus porfolio as ha which includes issues wih bonus raios less han or equal o 2 for 10; he middle-bonus porfolio includes he issues wih bonus raios larger han 2 for 10, bu less han or equal o 4 for 10; and he large-bonus porfolio consiss of issues wih he bonus raios larger han 4 for 10. Therefore, welve porfolios are examined. b. Tess on he Announcemen of Bonus Proposals for A-shares A oal of 196 bonus proposals of A-shares are consruced ino hree porfolios. The small-bonus porfolio includes 103 proposals. The middle-bonus porfolio includes 37 proposals. The large-bonus porfolio includes 56 proposals. This sudy considers he differen effecs of he announcemen of bonus proposals for each classificaion of shares. 8

13 i. A-shares Reurn Behaviour Around he Announcemen of Bonus Proposals The resuls of he ess on he announcemen of bonus proposals are summarised in Table-1. Table-1, Panel (a) presens he Cumulaive Abnormal Reurns (CARs) of each porfolio around he announcemen dae of he bonus proposals. Figure-1(1) graphs he CARs measured by he marke adjused model and Figure-1(2) graphs he CARs measured by he marke model. From hese figures i can be seen ha he CARs of all bonus proposals ( Overall porfolio) a dae +20 are posiive and he relevan lines are above he zero reurn axis. Therefore, on average, he bonus proposals raise posiive CARs around he announcemen dae. Tha he announcemen of bonus proposals, on average, has a posiive effec on China s sock prices coincides wih he evidence of Ball e al (1977) for Ausralian sock prices. However, his is difficul o make sense of since he CARs of an Overall porfolio are an aggregae of differen ypes (sizes) of bonus issues. For deeper comprehension, he analysis should be decomposed ino he small-bonus, middle-bonus and large-bonus porfolios individually. 9

14 Table-1. Resuls of he Tess on he Announcemen of Bonus Proposals for A-shares in China's Sock Marke (a). Cumulaive Abnormal Reurns (CARs) Marke Adj used Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Noes: 1. Small: he sample of 103 proposals wih bonus raios less han or equal o 2 for Middle: he sample of 37 proposals wih bonus raios larger han 2 for 10, bu less han or equal o 4 for Large: he sample of 56 proposals wih bonus raios larger han 4 for Overall: he sample of all 196 bonus proposals. 5. Dae 0: he dae of he announcemen. 6. Dae -1 o -20: he daes before he announcemen. 7. Dae +1 o +20: he daes afer he announcemen. 10

15 (b). Parameric and Nonparameric -es Saisics on he Abnormal Reurns for he Specific Even Dae Parameric -es Saisics Marke Adj used Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Nonparameric (rank) -es Saisics Marke Adj used Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Noes: 1. Dae 0: even dae, he dae of he announcemen. 2. Dae -1: alernaive even dae, he announcemen may occur one day in advance of ha on record. 3. Dae +1: alernaive even dae, he announcemen may occur one day laer han ha on record. 4. If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan abnormal reurn is saisically nonzero a he 5% or 1% significance level, respecively. D (c). Parameric -es Saisics on he Cumulaive Abnormal Reurns (CARs) in Inervals around he Even Marke Adjused Model Marke Model Inervals Small Middle Large Overall Small Middle Large Overall 11 Days Around Even Day -5 o o o Days Around Even Days -10 o o o Days Around Even Day -20 o o o Noice: If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan CARs of he inervals are saisically non-zero a he 5% or 1% significance level, respecively. From his disaggregaion ino hree porfolios we learn ha he shareholders discriminae agains he small-bonus socks by responding o he small-bonus proposals wih negaive reurns. The CARs of small-bonus socks are negaive a he sar of he invesigaion period and drop markedly afer he announcemen dae. A he dae of +20, he CARs of small-bonus socks decline below -7.0%. Conversely, he shareholders respond favourably o he middlebonus and large-bonus proposals, resuling in posiive reurns. The CARs of middle-bonus and large-bonus socks begin posiively and grow rapidly unil he announcemen dae, and 11

16 hen remain relaively sable hereafer. A he end of he invesigaion period, he CARs of middle-bonus and large-bonus socks are above 7.0% and 11.0% respecively. The CARs are more explicily a he levels in line wih he bonus raios following he announcemen dae. Figure-1. Cumulaive Abnormal Reurns (CARs) for Bonus Proposals of A-shares in China's Sock Marke (1). Marke Adjused Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle Large Overall Dae (2). Marke Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle Large Overall Dae 12

17 Boh he parameric and non-parameric -es saisics in Table-1, Panel (b) sugges ha he share raders reac o he announcemen of bonus proposals a he even daes boh significanly and in suiable direcions. The -values of small-bonus socks are below or a even daes 0 and +1, which illusraes ha he small-bonus proposals represen unfavourable informaion a convenional levels of significance. Meanwhile, he -values of middle-bonus and large-bonus socks are larger han or a he even dae 0 or a alernaive even dae 1. This implies ha he middle-bonus and large-bonus proposals are considered o be favourable informaion a convenional significance levels. Table-1, Panel (c) shows significanly negaive CARs in he inervals of daes 5 o +5, 10 o +10 and 20 o +20 around he announcemen dae 0 for he small-bonus socks, bu significanly posiive CARs for he middle-bonus and large-bonus socks. Moreover, he significanly negaive CARs are generaed mainly in he inervals of daes +1 o +5, +1 o +10 and +1 o +20 afer he announcemen dae for he small-bonus socks. Meanwhile, he significanly posiive CARs are generaed mainly in he inervals of 5 o 1, 10 o 1 and 20 o 1 before he announcemen dae for he middle-bonus and large-bonus socks. The CARs in inervals are presened graphically in Figure-1, Panels (1) and (2). ii. Assessmen of Marke Efficiency for A-shares on he Announcemen of Bonus Proposals The -values a he even dae 0 are below or -2.58, illusraing ha he sock prices reac o he small-bonus proposals a he 5% or 1% significance level. Hoverer, he -values on he CARs in he inervals of daes +1 o +5, +1 o +10 and +1 o +20 afer he announcemen are below -2.58, which indicaes ha he small-bonus proposed sock prices under-reac o he announcemen a he even dae. This under-reacion is correced a leas in he 20 days afer he announcemen. Thus, here exiss a sraegy permiing abnormally high reurns for he small-bonus sock invesors. Suppose ha he small-bonus shareholders sell heir shares a he announcemen dae and buy he same shares afer 20 days. This sraegy will provide a gain of 6%. 6 Thus, he hypohesis of informaional efficiency for he smallbonus sock is refued. 6 (( )-( ))*100%=6.05%, abnormal reurns are measured by he marke adjused model; (( )-( ))*100%=5.91%, abnormal reurns are measured by he marke model. 13

18 In conras o he small-bonus socks, he large-bonus socks have posiive -values greaer han a he alernaive even dae 1 and for he inervals of daes 5 o 1, 10 o 1 and 20 o 1 before he announcemen dae, insead of afer he announcemen dae. This implies ha despie some shareholders anicipaing he informaion or obaining inside informaion before he announcemens, he sock prices sill reac o he large-bonus proposals significanly a he 1% significance level. The informaion conained in he large-bonus proposals is fully incorporaed ino he sock prices unil he even dae 0. If we ignore he possibiliy ha inside informaion is being used, we mus conclude ha he sock prices reflec he large-bonus proposals efficienly. The case of middle-bonus socks is no as canonical as he cases of small and large-bonus socks. I behaves mos like ha of large-bonus socks. The -values a he even dae 0 and on he CARs in inervals before he announcemen dae are larger han or +2.58, which illusraes a significan price reacion o he middle-bonus proposals a he announcemen dae and he possible anicipaion or use of inside informaion. Furhermore, he negaive -values in each inerval afer he announcemen dae are comparaively smaller in absolue value (jus one is below -1.96), suggesing ha here is a sligh overreacion. In oher words, he socks are overpriced wih respec o he middle-bonus proposals prior o and a he even dae and hen are correced hereafer. This resuls in he CARs moving in opposie direcions before and afer he announcemen dae. Neverheless, i is fair o conclude ha he sock prices are reasonably efficien in reflecing he informaion of middle-bonus proposals. c. Tess on he Announcemen of Bonus Approvals for A-shares Using he same crieria as was used previously in grouping bonus proposals, we consruc hree bonus approval porfolios: he small-bonus porfolio of 172 bonus approvals, he middle-bonus porfolio of 89 bonus approvals and he large-bonus porfolio of 94 bonus approvals. The oal of 355 bonus approvals includes he 196 cases analyzed above. We will seek o undersand from his sudy he effecs of he bonus approvals on he announced sock prices, and hen, o find ou he differen influences ha he bonus proposals and he bonus approvals have on sock prices. 14

19 i. A-shares Reurn Behaviour Around he Announcemen of Bonus Approvals The resuls of he ess on he announcemen of bonus approvals are summarized in Table-2. Table-2, Panel (a) and Figure-2 repor he CARs around he announcemen of bonus approvals for each porfolio. Firsly, he large-bonus approved socks perform beer han he small-bonus approved socks, which is consisen wih he performances of large-bonus proposed socks. This indicaes ha he invesors are more ineresed in he announcemen of large-bonus proposals and approvals han small-bonus proposals and approvals. Nex, here are peaks of CARs a he alernaive even dae +2 of each porfolio; his indicaes a delayed overreacion o he announcemen of bonus approvals. These peaks are no eviden in he CARs relaed o he bonus proposals. 15

20 Table-2. Resuls of he Tess on he Announcemen of Bonus Approvals for A-shares in China's Sock Marke (a). Cumulaive Abnormal Reurns (CARs) Marke Adjused Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Noes: 1. Small: he sample of 172 approvals wih bonus raios less han or equal o 2 for Middle: he sample of 89 approvals wih bonus raios larger han 2 for 10, bu less han or equal o 4 for Large: he sample of 94 approvals wih bonus raios larger han 4 for Overall: he sample of all 355 bonus approvals. 5. Dae 0: he dae of he announcemen. 6. Dae -1 o -20: he daes before he announcemen. 7. Dae +1 o +20: he daes afer he announcemen. 16

21 (b). Parameric and Nonparameric -es Saisics on he Abnormal Reurns for he Specific Even Dae Parameric -es Saisics Marke Adj used Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Nonparameric (rank) -es Saisics Marke Adj used Model Marke Model Dae Small Middle Large Overall Small Middle Large Overall Noes: 1. Dae 0: even dae, he dae of he announcemen. 2. Dae -1: alernaive even dae, he announcemen may occur one day in advance of ha on record. 3. Dae +1: alernaive even dae, he announcemen may occur one day laer han ha on record. 4. If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan abnormal reurn is saisically nonzero a he 5% or 1% significance level, respecively. (c). Parameric -es Saisics on he Cumulaive Abnormal Reurns (CARs) in Inervals around he Even Dae Marke Adjused Model Marke Model Inervals Small Middle Large Overall Small Middle Large Overall 11 Days Around Even Day -5 o o o Days Around Even Days -10 o o o Days Around Even Day -20 o o o Noice: If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan CARs of he inervals are saisically non-zero a he 5% or 1% significance level, respecively. Having compared Table-2, Panel (a) wih Table-1, Panel (a), and Figure-2 wih Figure-1, we find ha he CARs relaed o he small-bonus approvals are above hose relaing o he small-bonus proposals, whereas, he CARs relaed o he large-bonus approvals is below hose relaing o he large-bonus proposals. The narrow range of CARs beween porfolios of bonus approvals shows ha he influence of bonus approvals is weaker han ha of bonus proposals. Since he main informaional conen of bonus approvals has already been disclosed in he announcemen of bonus proposals, he bonus approvals convey less informaion han he 17

22 bonus proposals do. This finding is consisen wih he sudies of cash dividend proposals and approvals. Figure-2. Cumulaive Abnormal Reurns (CARs) for Bonus Approvals of A-shares in China's Sock Marke (1). Marke Adjused Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle Large Overall Dae (2). Marke Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle Large Overall Dae The -values of he parameric and non-parameric ess on he even daes in Table-2, Panel (b) are all posiive and large. In paricular, he -values ha occurred a he even dae 0 across every porfolio are dramaically larger han Meanwhile, he majoriy of -values 18

23 a he alernaive even daes -1 and +1 are sill above or This is evidence ha announcemen of bonus approvals generaes significanly posiive reurns a he even daes. However, hose significanly posiive reurns occurring a he even daes are accompanied wih significan negaive reurns in he inervals before or afer he even daes. Table-2, Panel (c) repors -ess on he CARs in inervals around he announcemen of bonus approvals. The -values for he inerval of daes 20 o 1 before he even dae for he small-bonus porfolio are below -1.96, which suggess ha invesors are pessimisic in heir anicipaion of he small-bonus approvals. The -values for he inervals of daes +1 o +5 and +1 o +10 afer he even dae for he middle-bonus porfolio are below or -2.58, which indicaes ha invesmen in he middle-bonus socks gains significanly negaive reurns afer he announcemen dae of he approvals.??? For he large-bonus porfolio, he -values for each inerval before he even dae are above or +1.96, bu for he inervals of daes 10 o 1 afer even dae in he marke model secion hey are below ??? This evidence suggess ha he opimisic anicipaion of he large-bonus approvals are correced afer he announcemen of such approvals. ii. Assessmen of Marke Efficiency for A-shares on he Announcemen of Bonus Approvals The -values show ha he sock prices reflec he announcemen of bonus approvals in a saisically significan and posiive manner a he even dae. However, his canno be simply labeled an efficien phenomenon. Firsly, he small-bonus approval should no be good news and should no engender he reacion of a large posiive reurn. The significan posiive reurns a he even dae, accompanied wih significan negaive reurns in he inervals before and afer he even dae, show ha he sock prices respond o he small-bonus approvals in he wrong direcion a he announcemen dae. However, since he negaive reurns are saisically insignifican afer he announcemen dae, we place he reacion of A-shares prices o he announcemen of small-bonus approvals in he efficien caegory. Nex, he addiional informaional conen of a bonus approval over and beyond ha of he bonus proposal is no ha grea, since he informaional conen of he approval is similar o ha of he proposal, which has been disclosed previously. Therefore, he reacion of sock prices o he bonus approvals should be weaker han heir reacion o he bonus proposals. This is rue during he 41 day invesigaion period, bu no a he announcemen dae. The 19

24 unusually large posiive -values a he even dae and negaive -values for he inervals afer he even dae show ha he middle-bonus socks have a severe overreacion a he even dae. However, for he large-bonus socks, he overreacion a he even dae is relaively smaller. Only in he marke model secion is a -value significan in he inerval of daes +1 o +10 afer he announcemen a he 5% significance level. As a consequence, we conclude ha he reacion of A-shares prices o he middle-bonus approvals is inefficien and he reacion o he large-bonus approvals are ambiguous. d. Tess on he Announcemen of Bonus Approvals for B-shares The records of bonus proposals of B-shares are of an insufficien number for saisical analysis. Thus, even sudy ess are only conduced on he 56 bonus approvals of B-shares. Among he 56 bonus approvals of B-shares, hiry-four of hem fall ino he small-bonus porfolio and 22 fall ino he middle/large-bonus porfolio wih a bonus raio larger han 2 for 10. Table-3 summarizes he resuls of he ess on he announcemen of bonus approvals of B-shares. Table-3, Panel (a) and Figure-3, Panels (1) and (2) illusrae he CARs as measured by he marke-adjused and he marke models. From ha able and hose figures i is eviden ha he B-shares invesors have a similar assessmen o ha of he A-shares invesors on he informaion of bonus approvals. They prefer invesing in he middle/large-bonus socks o invesing in he small bonus socks. As a resul, he CARs of middle/large-bonus B-shares are mainly posiive and above he zero reurn axis, while he CARs of small-bonus B-shares are negaive and below he zero reurn axis. A comparison of Figure-3, Figure-1 and Figure-2 reveals ha he difference in he CAR lines beween he small-bonus and middle/large-bonus socks for he B-shares bonus approvals is more similar o he difference beween he small-bonus and large-bonus socks for he A-shares bonus approvals han for he A-shares proposals. Therefore, while we did no es he bonus proposals for he B-shares due o he small porfolio size, we may hypohesize ha he B-shares invesors may respond o he announcemen of bonus approvals more weakly han hey respond o he announcemen of bonus proposals. However, he CAR lines of he B-shares in Figure-3 are more volaile due o he small porfolio problem. Table-3, Panel (b) shows ha all parameric and non-parameric -values esed on he announcemen of small-bonus approvals for B-shares are less han 1.96 in absolue value, which suggess ha he small-bonus B-shares prices have no been significanly affeced by 20

25 he announcemen a he even dae. On he oher hand, he -values a he even dae 0 for he middle/large-bonus B-shares are larger han +1.96, which implies ha he middle-large-bonus B-shares reac significanly and posiively o he announcemen a he even dae a he 5% significance level. Table-3. Resuls of he Tess on he Announcemen of Bonus Approvals for B-shares in China's Sock Marke (a). Cumulaive Abnormal Reurns (CARs) Marke Adjused Model Marke Model Dae Small Middle-Large Overall Small Middle-Large Overall Noes: 1. Small: he sample of 34 approvals wih bonus raios less han or equal o 2 for Middle-large: he sample of 22 approvals wih bonus raios larger han 2 for Overall: he sample of all 66 bonus approvals, including he small and middle-large samples. 4. Dae 0: he dae of he announcemen. 5. Dae -1 o -20: he daes before he announcemen. 6. Dae +1 o +20: he daes afer he announcemen. 21

26 (b). Parameric and Nonparameric -es Saisics on he Abnormal Reurns for he Specific Even Dae Parameric -es Saisics Marke Adj used Model Marke Model Dae Small Middle-Large Overall Small Middle-Large Overall Nonparameric (rank) -es Saisics Marke Adj used Model Marke Model Dae Small Middle-Large Overall Small Middle-Large Overall Noes: 1. Dae 0: even dae, he dae of he announcemen. 2. Dae -1: alernaive even dae, he announcemen may occur one day in advance of ha on record. 3. Dae +1: alernaive even dae, he announcemen may occur one day laer han ha on record. 4. If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan abnormal reurn is saisically nonzero a he 5% or 1% significance level, respecively. (c). Parameric -es Saisics on he Cumulaive Abnormal Reurns (CARs) in Inervals around he Even Dae Marke Adjused Model Marke Model Inervals Small Middle-Large Overall Small Middle-Large Overall 11 Days Around Even Day -5 o o o Days Around Even Days -10 o o o Days Around Even Day -20 o o o Noice: If he -es saisic is larger in absolue value han 1.96 or 2.58, he relevan CARs of he inervals are saisically non-zero a he 5% or 1% significance level, respecively. Table-3, Panel (c) shows ha he -saisics for he CARs in any inervals are less han 1.96 in absolue value for he small-bonus approved B-shares. Thus, here are no significan variaions of reurns for he small-bonus approved B-shares a or around he even dae. By conras, he -saisics esed on he CARs in he inerval of daes 5 o 1 before he even dae for he middle/large-bonus approved B-shares are larger han +2.58, which shows ha significan posiive reurns are generaed in he five days before he even dae. Due o he 22

27 significan posiive reurns occurring a he even dae 0 and in he inerval of daes 5 o 1 before he announcemen, he CARs of in inerval of daes 5 o +5 around he even dae for he middle/large-bonus B-shares are significan a he 1% significance level wih -saisics above Figure 7-3. Cumulaive Abnormal Reurns (CARs) for Bonus Approvals of B-shares in China's Sock Marke (1). Marke Adjused Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle-Large Overall Dae (2). Marke Model Cumulaive Abnormal Reurns (CARs) CAR Small Middle-Large Overall Dae 23

28 For he small-bonus B-shares, we fail o find evidence of over- or under-reacion, or he applicaion of inside informaion. Thus, even hough he price reacion o he announcemen of small-bonus approvals a he even dae is saisically insignifican, we canno conclude ha he small-bonus B-shares prices are no efficien wih respec o he announcemen. Similarly, for he middle/large-bonus B-shares, we again fail o find evidence of over- and under-reacion. If we assume ha he significan cumulaive abnormal reurns of he 5 days before he even dae resuled from reasonable anicipaion, hen we should conclude ha he middle/large-bonus approved B-shares prices reflec he announcemen efficienly. e. Conclusion The even sudy mehodology was employed o invesigae he sock price behaviour in response o he bonus issues and hen o deermine wheher or no semi-srong form efficiency holds for he new emerging sock markes of China. Empirical sudies were conduced on he abnormal reurns riggered by he announcemens of bonus issues proposals and approvals for he A-shares and approvals for he B-shares respecively. In oal, eleven porfolios were consruced according o he size of he bonus raio for each issue. A parameric es was performed on he abnormal reurns no only on he even daes bu also on he inervals before, afer and surrounding he even dae. A non-parameric es was also employed o es abnormal reurns on he even daes. Empirical resuls show ha he direcion and magniude of he sock price reacion o he announcemen of bonus issues depend upon he specified bonus schemes. The A-shares prices usually reac o he announcemen of middle-bonus and large-bonus proposals wih significanly posiive reurns, paricularly wih significanly posiive CARs in he invesigaion period. In conras, he A-shares prices reac o he announcemen of smallbonus proposals wih negaive and significan reurns. However, when he bonus approvals are announced, excep for he significan posiive reurns on he even dae, he CARs of he middle-bonus A-shares become negaive. On he oher hand, he B-shares prices reac o he announcemen of small-bonus approvals wih negaive reurns and o he announcemen of middle/large-bonus approvals wih saisically significan and posiive reurns. The assessmen of semi-srong form efficiency for he new emerging sock markes in China are based mainly on he direcion and magniude of abnormal reurns generaed in he inervals afer he announcemen. Thus, he saisics show marke efficiency for five 24

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