Can Online Annual General Meetings Increase Shareholders Participation in Corporate Governance? Evidence from China *

Transcription

1 Can Online Annual General Meetings Increase Shareholders Participation in Corporate Governance? Evidence from China * Huasheng Gao Nanyang Business School Nanyang Technological University S3-B1A-06, 50 Nanyang Avenue, Singapore hsgao@ntu.edu.sg Jun Huang School of Accountancy Shanghai University of Finance and Economics No.777 Guoding Road, Shanghai huangjun@mail.shufe.edu.cn This version: November, 2015 Abstract: We find that annual shareholder meetings conducted online can greatly increase the participation of shareholders, especially retail shareholders. This finding is more evident when the cost of physically attending such a meeting is higher and when the firm s ownership is more dispersed. We further document significant positive stock returns when firms initiate online annual meetings. We also find that retail shareholders indeed actively voice their concerns by voting against the proposals that potentially hurt their interests. Overall, we provide evidence that online shareholder meetings provide shareholders a cost-effective way to participate in governance issues. Keywords: Online annual general meetings; Shareholder participation; Corporate governance * We are grateful for the helpful comments from Bin Ke, Heng Yue, Hong Zou, and the seminar participants at the 2014 International Young Scholar Corporate Finance and Governance Symposium and the 2015 China International Conference in Finance. Gao acknowledges the financial support from Singapore Ministry of Education Academic Research Fund Tier 2 (Official Number: MOE2015-T ). All errors are our own.

2 1. Introduction From a governance perspective, annual general meetings (AGMs) often serve as an opportunity for shareholders to receive updates on company developments, to ask questions of management and directors, to consider corporate proposals, and to review the company s performance. It is generally believed that shareholder participation is a key component of a successful annual meeting and overall governance mechanism (Easterbrook and Fischel (1983), and Pound (1991)). However, shareholder participation in annual meetings is extremely low among public firms due to a diffused ownership structure and the inconvenience of attending meetings physically. In the U.S., for example, 70% of shares held by retail shareholders were not voted in annual meetings. 1 The number of debates regarding the practice of online AGMs to enhance shareholder participation has surged nearly as quickly as the practice s popularity among firms. One view suggests that online AGMs make the annual meetings more accessible, transparent, and efficient to meet the corporate governance needs of shareholders. In contrast to traditional AGMs, which typically require shareholders to be physically at the meeting site, online AGMs allow shareholders to attend and vote through an internet platform. Thus, when the cost of physically attending an AGM is high, an online AGM may facilitate shareholder participation. Critics of online AGM, on the other hand, assert that it is of limited value because (1) online participation is a poor substitute for looking the management in the eye; (2) large shareholders will probably attend the physical meeting anyway, and retail shareholders may still lack incentive to attend the online meeting due to their small stake in the firm; and (3) even if retail 1 See Broadridge and PwC 2013 Proxy Voting Trends (June 4, 2013), available at Voting-Trends.html. 2

3 investors do actively participate in the online meetings, too much intervene of (unsophisticated) retail investors may be value-destroying (Jensen (1993), and Lipton and Rosenblum (1991)). In this paper, we examine whether online AGMs can increase shareholder participation in annual meetings based on data from China. Unlike most U.S. firms that are still debating whether or not to adopt online AGMs, Chinese public firms started to adopt online AGMs as early as 2005, and by 2012 about 25% of Chinese public firms were using online AGMs. 2 The relatively rich history and wide adoption of online AGM data in China allow us to better examine the effect of online AGM on shareholder participation in annual meetings, and shed new insight on the on-going practice of adopting online AGMs in U.S. public firms. We find that shareholder participation, especially retail investor participation, is greatly enhanced after a firm adopts online AGMs. This effect is more pronounced when the cost of physically attending AGMs is higher, suggesting that the cost of physically attending the meeting is an important factor leading to low participation of shareholders who would otherwise like to attend. Further, the impact of online AGMs on shareholder participation in AGMs is greater for firms with dispersed ownership, because retail shareholders have more influence in such firms decisions. We take a multifaceted approach to account for the potential endogeneity problem of this study. First, we use the firm fixed effect to control for time-invariant firm-specific factors. Second, we use propensity score matching to control for the observable difference between firms using online AGMs and firms that do not. Third, we apply an instrumental variable approach 2 In 2009, INTEL became the first U.S. company to enable all its shareholders to attend, ask questions, and cast their votes live on the web in its AGM. Since then, more companies have followed suit, although the total number of firms using online AGMs is still very small in the U.S. (Lublin (2011)). 3

4 using the province-level availability of the internet as the instrument. Our results are robust to these alternative specifications. Lastly, we examine the valuation effects of online AGMs. On one hand, online AGMs can increase shareholder value, because an effective participation of shareholders in AGMs facilitates the communication between managers and shareholders and increases the function of corporate governance. Moreover, considering that the financial cost of convening a physical meeting with a large number of shareholders can be nontrivial, online AGMs provide a low-cost and geographically unlimited means for more shareholders to participate in such meetings. On the other hand, shareholders, especially retail shareholders, usually lack specific information about the firm, and their opinions may depart from superior choices that managers with better information might make on their own (Porter (1992)). Managers facing frequent shareholder intervention might be less likely to take initiative (Aghion and Tirole (1997), and Burkart et al. (1997)), which in turn decreases shareholder value. Supporting the first view, we find a positive abnormal return at the firm s announcement of initiating online shareholder meetings. We also find that retail shareholders indeed actively voice their concerns by voting against the proposals that potentially hurt their interests while benefiting controlling shareholders. Our paper makes at least four major contributions to the literature. First of all, to the best of our knowledge, our paper is the first to examine the effects of online AGMs on shareholder participation in corporate governance practice. Our paper provides evidence that allowing shareholders to attend online AGMs indeed increases their participation in corporate governance issues and increases firm value. 4

5 Second, in line with the seminal work of Shleifer and Vishny (1986), the incentive for a shareholder to take an active role in corporate governance depends on her ownership and costs of monitoring. The shareholder is more likely to monitor management if she is a large shareholder and/or her cost of monitoring is low. Empirical research on shareholder monitoring mainly focuses on the effect of large shareholding on enhancing the shareholders incentive to monitor (see, for example, Chen et al. (2007), Denis and Serrano (1996), and Hartzell and Starks (2003)). However, the role of the costs of monitoring is relatively less examined. Our research provides evidence that even retail shareholders can actively participate in corporate governance issues if their participation cost is reduced. Third, our paper broadly relates to the literature on shareholder activism. Existing literature shows that shareholder activism is more likely to occur for larger firms, for firms with more institutional ownership, and for firms with poorer performance (Karpoff et al. (1996), and Strickland et al. (1996)). Moreover, although the important role of shareholder activism has been widely touted, its effect on firm performance is still under debate. As pointed out by Gillan and Starks (2007), there is no conclusive evidence that shareholder activism has a significant impact on firm performance. We document that online AGMs can significantly increase retail shareholders participation in corporate governance issues, which has a positive effect on countering the expropriation of controlling shareholders and increasing firm value. Finally, our study contributes to understanding the role of information technology in corporate governance. Our results suggest that facilitating shareholders participation in governance issues through information technology can strengthen the corporate governance of publicly traded firms. 5

6 The remainder of the paper is organized as follows. Section 2 introduces the institutional background of online AGMs in China. Section 3 describes the sample, measurement of variables, and descriptive statistics of the study. In section 4, we present our main results. Section 5 presents the additional analysis on the consequences of online AGMs, and section 6 concludes the paper. 2. Background of Online AGM in China According to The Rules of Listed Companies issued by the China Securities Regulatory Commission (CSRC) in 1997, AGMs should be held within six months after the end of the fiscal year. The venues for AGMs are chosen by the companies, and they usually hold the AGMs in their headquarters. For on-site AGMs, shareholders have to register before the AGMs and then physically travel to the meeting locations to exercise their voting rights. The AGMs are usually held on a weekday, which creates additional inconvenience for shareholders to attend the meetings. All expenses associated with attending the meetings (such as airfare and accommodations) are borne by shareholders themselves. It is also worth noting that proxy vote is not popular in China due to weak support of the law and the ownership concentration of Chinese public companies (Li (2008)), which further prevents shareholders from voicing their opinions in annual meetings. To protect shareholder interest and strengthen corporate governance, the CSRC published The Guidelines on Online Voting at the Shareholders Meeting of Listed Companies on November 29, The guidelines encourage listed companies to facilitate shareholder voting rights through online voting at shareholder meetings in addition to traditional on-site voting. On 6

7 February 17, 2005, Celebrities Real Estate Development Group Ltd. became the first public Chinese company to adopt online voting in annual general meetings. According to the guidelines, all shareholders listed on the AGMs registration dates have the right to vote online if the company initiates online voting in the AGMs, but they can only choose one of the following voting methods: on-site voting, online voting, or other voting methods stipulated by the company. The registration date is usually one week before the AGM. Further, if a company offers online voting access, it also has to specify the time to vote online, voting procedures, and proposals to be voted in the notice of AGMs. A shareholder can issue a proposal 10 days before the AGM if she holds more than 3% of firm ownership. For each proposal, the listed company should jointly calculate the ballots of on-site and online voting. Companies can also set up an online Q&A system, and online shareholders can ask questions to management during the AGMs. 3. Sample and Descriptive Statistics Our sample includes all firms listed on the Shanghai and Shenzhen stock exchanges from 2005 to The sample period begins in 2005, the first year when firms began to allow shareholders to participate in AGMs online. As demonstrated in Table 1, the number of firms adopting online AGMs has been increasing steadily since By the end of 2012, 564 firms adopted online AGMs, accounting for 25% of all Chinese listed companies. Our final sample consists of 1,215 firm-year observations (968 unique firms) with online AGMs and 11,710 firmyear observations (1,404 unique firms) without online AGMs from 2005 to We obtain our AGM information from the WIND database and financial information from the China Stock Market Accounting Research (CSMAR) database. We construct two variables to 7

8 capture shareholder participation in AGMs. The first is Shareholder, which is the number of shareholders voting in the AGMs, normalized by the total number of shareholders. The second is Ownership, which is the number of shares voting in the AGMs, normalized by total shares outstanding. Table 2 presents the descriptive statistics for firms with and without online AGMs. Variable definitions are provided in Appendix 1. The average (median) Shareholder in the AGMs is 0.30% (0.13%) for firms with online AMGs, while the corresponding figure is 0.04% (0.02%) for firms without online AGMs. Both a t-test and Wilcoxon test indicate that the difference in shareholder participation in AGMs across these two groups of firms is significant at the 1% level. We see the same pattern when using Ownership to measure shareholder participation in the AGMs. For firms with online AGMs, Ownership is 53.46% on average and 54.37% at the median. In contrast, in firms without online AGMs the average (median) Ownership is 48.32% (48.79%). These differences are significant at the 1% level. We further divide the shares participating in the AGMs into those owned by non-blockholders and blockholders. The blockholders are defined as shareholders who own more than 5% of firm shares. The statistics show that the difference of participating ownership between online and non-online AGMs is mostly driven by the part of non-blockholders. Thus, compared to blockholders, the effect of online AGMs on attracting shareholders to participate in the AGMs is much stronger for retail shareholders. This is not surprising given that blockholders are likely to attend AGMs physically, regardless of whether or not the firm holds online AGMs. Furthermore, relative to firms without online AGMs, those with online AGMs are generally larger and older, present better accounting performance but poorer stock returns, have lower risk, 8

9 and experience lower growth. Moreover, firms using online AGMs tend to have larger institutional ownership and insider ownership. 4. Empirical Results 4.1 Online AGMs and Shareholder Participation Our main hypothesis is that the availability of online AGMs can increase the participation of shareholders in AGMs. To test this hypothesis, we construct the following model: Shareholder participation t = α + α Online AGM + α Size + α ROA + α Stock return 0 t t + α Stock volatility + α MB + α Institution ownership t t 7 + α8insider ownership t + α9firm aget + Industry FE + Year FE + εt. 3 t 4 t t (1) The dependent variable is the measure of shareholder participation in the AGMs, including the number and ownership of shareholders attending the AGMs. The key independent variable is the Online AGM indicator, which takes the value of one if shareholders can attend the AGMs online, and zero otherwise. We also add a set of control variables, including firm size, performance, risk, growth opportunity, firm age, institution ownership, and insider ownership. Industry fixed effects and year fixed effects are included to control for industry and time variations. Following Petersen (2009), p-values are based on robust standard errors clustered at the firm level. Table 3 reports the regression results of model (1). In Column (1) of Panel A, the dependent variable is Shareholder in the AGMs (measured in percentage points). The coefficient on Online AGM is and significant at the 1% level, indicating that online AGMs increase the enthusiasm of shareholders attending the AGMs. The economic magnitude is also sizeable: the shareholder participation number in firms using online AGMs is percentage 9

10 points larger than that in firms not using online AGMs, relative to the sample average participation of 0.04 percentage points in the firms without online AGMs. In Column (2), we use Ownership as the dependent variable. The coefficient on Online AGM is and significant at the 1% level, implying that the participation of shareholders in AGMs is greatly increased when shareholders can attend AGMs online. Given that the effect of online AGMs on shareholder participation can be different between large shareholders and retail shareholders, we further divide the aggregate ownership attending the AGMs into ownerships by non-blockholders and blockholders, and employ them as the dependent variable in Columns (3) and (4), respectively. We find that the coefficient on Online AGM is and significant at the 1% level in Column (3). This coefficient indicates that ownership participation by retail investors in firms using online AGMs is 3.8 percentage points higher than that in firms not using online AGMs. This difference is economically important considering that the average retail investor s ownership participation is 1.3 percentage points in firms not using online AGMs. In Column (4), the coefficient on Online AGM is not significantly different from zero, indicating that online AGMs do not increase the participation of blockholders in the AGMs. This finding is unsurprising, because blockholders would usually attend the physical AGMs due to their greater interest in the firms. In the remainder of the paper, we focus our analysis on nonblockholder ownership in the AGMs. The results of our control variables show that strong performance and high growth opportunity enhance the incentive of shareholders in attending AGMs. Further, shareholders 10

11 prefer to participate in AGMs held by firms with higher institutional ownership and insider ownership. Finally, younger firms have higher shareholder participation in the AGMs. To mitigate the concern that some time-invariant, unobservable firm characteristics drive our results, we run the firm fixed effect regression in Panel B. Controlling for firm fixed effects also allows us to examine the within-firm effects of online AGMs on shareholder participation in the annual meetings. Columns (1) and (2) show that the coefficients on Online AGM are significantly positive, regardless of whether we employ the number or ownership of shareholders attending the AGMs as the dependent variable. Furthermore, after we divide the aggregate ownership in the AGMs by non-blockholder and blockholder ownerships, the positive effect of online AGMs is only found for the non-blockholder ownership regression (Column (3)). Within the same firm, after the firm allows its shareholders to attend AGMs via an online platform, there is a significant increase in shareholder participation (especially the participation of retail shareholders) in the annual meeting. Overall, the results in Table 3 show that shareholders are more likely to participate in AGMs when the AGMs can be attended online. The boosted enthusiasm of attending the AGMs is particularly pronounced for retail shareholders. 4.2 The Effect of Costs of Attending On-site AGMs We expect that online AGMs are more beneficial to shareholders when they face higher costs of attending the on-site AGMs. To test this prediction, we construct an indicator variable Transportation center, taking the value of one if the firm s headquarter is located in a 11

12 transportation center, and zero otherwise. 3 Considering that it is usually more convenient for shareholders to attend on-site AGMs when firms are located in transportation centers, we expect that the positive association between online AGMs and shareholder participation is weaker for firms located in a place that is easy to reach physically. To examine this implication, we add the variable of Transportation center and its interaction with Online AGM in model (1). Table 4 reports the interaction regression results. In Column (1), the dependent variable is Shareholder. The coefficient on Transportation center is positive and significant, indicating that shareholders are more likely to attend AGMs when firms are located in transportation centers. Further, the interaction term Online AGM Transportation center attracts a negative and significant coefficient, indicating that the effects of online AGMs on shareholder participation in AGMs are weaker when firms are located in transportation centers. We find similar results when examining non-blockholder participation in AGMs in Column (2). In Columns (3) and (4), we examine the within-firm effects by incorporating firm-fixed effects in the regression. Because no firms relocate their headquarters in our sample, there is no withinfirm variation in Transportation center. Thus, the coefficient on Transportation center itself is not reported. Nevertheless, we still find a negative and significant coefficient on the interaction Online AGM Transportation center. 3 According to The Notice on the Transportation System Plan during the Twelfth Five-Year Plan issued by China state council in 2012, the cities of Beijing, Tianjin, Harbin, Changchun, Shenyang, Dalian, Shijiazhuang, Qinhuangdao, Tangshan, Qingdao, Jinan, Shanghai, Nanjing, Lianyungang, Xuzhou, Hefei, Hangzhou, Ningbo, Fuzhou, Xiamen, Guangzhou, Shenzhen, Zhanjiang, Haikou, Taiyuan, Datong, Zhengzhou, Wuhan, Changsha, Nanchang, Chongqing, Chengdu, Kunming, Guiyang, Nanning, Xi an, Lanzhou, Ürümqi, Hohhot, Yinchuan, Xining and Lasa are regarded as China transportation centers ( 12

13 Overall, these results suggest that the positive effect of online AGMs on shareholder participation in AGMs is more evident when shareholders face higher costs of attending the AGMs on-site. 4.3 The Effect of Ownership Concentration If the firm is controlled by large shareholders, then retail shareholders will have little influence on corporate decisions even if they actively participate in online AGMs. In contrast, retail shareholders are more likely to make a difference if the firm is dispersedly held. For this reason, we expect the effect of online AGMs on shareholder participation to be stronger for firms with a more dispersed ownership structure. To examine this implication, we include the variable Ownership of controlling shareholders and its interaction with Online AGM in model (1). "Controlling shareholders" refers to the largest shareholder in a firm. Table 5 reports the interaction regression results. In Column (1), the dependent variable is Shareholder. The coefficient on the interaction term Online AGM Ownership of controlling shareholders attracts a negative and significant coefficient, indicating that the effects of online AGMs on shareholder participation in AGMs are weaker when a larger proportion of the firm s shares are held in the hands of controlling shareholders. We find similar results when examining non-blockholder participation in AGMs in Column (2). In Columns (3) and (4), we examine the within-firm effects by incorporating firm fixed effects in the regression, and we continue to find a negative and significant coefficient on the interaction Online AGM Ownership of controlling shareholders. In summary, these results suggest that the positive relation between online AGMs and shareholder participation is more evident when the firm is more dispersedly held. 13

14 4.4 Propensity Score Matching As a further analysis, we employ a matching technique to examine the differences of shareholder participation in AGMs between firms using and not using online AGMs. The matching procedure controls for selection based on observable firm characteristics. Our data are well suited to the matching approach, given that we have a much larger control group (firms not using online AGM) compared with the treatment group (firms using online AGM), which increases the likelihood of finding close matches. We first estimate the propensity scores using a probit model in which the dependent variable is the indicator Online AGM, taking the value of one if the firm adopts an online AGM and zero otherwise. The independent variables compose the full set of firm characteristics as shown in Table 3. The probit model results are presented in Column (1) of Table 6 Panel A. We find that the specification captures some variation in the choice variable, as indicated by the significant coefficients on firm size, ROA, stock volatility, institution ownership, executive ownership, and firm age. We then use the predicted probabilities (propensity scores) from Column (1) and perform a nearest-neighbor matching procedure to match each firm-year observation with online AGMs to the firm-year observation without online AGMs. Since the validity of propensity score matching depends on finding close matched firms, we conduct a diagnostic test. Specifically, we re-run the probit model restricted to the matched sample of treatment group firms and control group firms. The probit estimates are presented in Column (2) of Table 6 Panel A. We find that no independent variables are statistically significant. The diagnostic test suggests that the propensity score matching has removed meaningful 14

15 observable differences between treatment group firms and control group firms (other than the difference in online AGMs). Based on the matched sample, we then compare shareholder participation in AGMs between firms adopting online AGMs and their matched peers without online AGMs. The results are presented in Panel B of Table 6. As shown in Column (1), the average percentage of shareholders attending AGMs is 0.3% higher in firms with online AGMs than in firms without. Further, the average attending non-blockholder ownership of AGMs is about 3.7% higher in online AGMs than that without online AGMs. The comparison of median values of shareholder participation presents the same patterns. As a robust analysis, we employ two other matching techniques: the Gaussian kernel and local linear regression. The comparison results are presented in Columns (2) and (3) of Panel B, respectively. Similarly, firms using online AGMs have higher shareholder and nonblockholder ownership than firms not using online AGMs. Overall, these results further support that the availability of online AGMs greatly increases the enthusiasm of shareholders to attend AGMs, particularly for retail shareholders. 4.5 Instrumental Variable Approach To further address the possible endogeneity in the analysis, we implement the two-stage least squares (2SLS) regression in this subsection. In the first step, we estimate the propensity of a firm to adopt online voting in AGMs. The instrumental variable is Internet availability, defined as the number of internet users normalized by total population in a province. Considering that the regional availability of internet influences the local firms possibility of implementing online voting in AGMs, the instrument is likely to satisfy the relevance condition. Further, there are no 15

16 obvious reasons to believe that the province-level availability of the internet has a direct effect on the propensity of shareholders in an individual firm to attend the AGMs, other than through the effect of online AGMs. Thus, the instrument is also likely to satisfy the exogeneity condition. The other control variables used in the first-stage regression include the full set of variables in Table 3. As shown in Column (1) of Table 7, we find that the coefficient on Internet availability is positive and significant at the 1% level. This means that firms in the regions with higher internet availability are more likely to adopt online AGMs. The F statistic on this instrumental variable is 107, suggesting that our instrumental variable is unlikely to be subject to the weak instrument concern (Staiger and Stock (1997)). In the second step, we obtain the predicted Online AGM indicator based on the first-step regression and employ it in the regression of shareholder participation in AGMs. Column (2) reports the second-stage results using the percentage of shareholders attending AGMs as the dependent variable. The coefficient on Online AGM is and significant at the 5% level. In Column (3), the dependent variable is Non-blockholder ownership and we also find a positive and significant coefficient on the Online AGM indicator. These analyses indicate that after controlling for self-selection bias, online AGMs are still associated with higher shareholder participation in AGMs. 5. Additional Investigation on the Consequences of Online AGMs 5.1 The Market Reaction to the Announcements of Initiating Online AGMs To shed light on the value implication of online AGMs, in this subsection we examine the market's reaction to a firm's announcement of adopting online AGMs. If online AGMs provide 16

17 retail shareholders more opportunities to communicate with management, to voice their concerns, and to protect their interests in the AGMs, we would expect a positive market reaction when a firm initiates the online AGM. On the other hand, if online AGMs lead to (inefficient) interventions of unsophisticated retail investors, or if the participation of retail investors in the AGM is simply economically unimportant, we would expect a negative or zero market reaction when a firm initiates the online AGM. Following the standard methodology for event studies, we calculate the cumulative abnormal returns (CAR) around the announcement date when the firm initiates its online AGM. We use the China market index, which is a market capitalization weighted average of the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index, as the market portfolio and estimate the parameters of the market model using stock returns over the 200-trading-day period from trading days -210 to -10 relative to the event date (day 0 is the announcement date of initiating online AGMs). The difference between the firm s daily return and the predicted daily return based on the market model is the firm s daily abnormal return. We calculate the cumulative abnormal returns (CAR) over the event window [ 1, +1], [ 3, +3] and [ 5, +5]. As reported in Table 8, the average CAR [ 1, +1], CAR [ 3, +3], and CAR [ 5, +5] are 0.86%, 1.68%, and 2.70%, respectively, all of which are significant at the 1% level. This indicates that online AGMs are positively received by the stock market. We also compute the dollar value of abnormal return by multiplying CAR with the firm s market capitalization in the previous fiscal year end. Based on CAR [ 3, +3], for example, the average dollar value of abnormal return is close to 5 million U.S. dollars. 17

18 Overall, Table 8 provides evidence that the stock market reacts positively when a firm initiates online AGMs. In other words, the easy access of shareholders to attend AGMs via an online platform increases shareholder value. 5.2 Do Shareholders Voice Their Opinions in the Online AGMs? So far, we have shown that online AGMs increase retail investors participation in AGMs. A natural question is: do retail shareholders vote differently from blockholders who will attend the on-site meetings anyway? If retail shareholders always vote in the same way as blockholders, then retail shareholders participation makes no difference. In this subsection, we examine this question by focusing on the proposals of related party transactions, which are usually referred to as asset sales, goods trading, equity sales, cash lending, and loan guarantee between companies and their controlling shareholders. We focus on related party transactions, because it is widely documented that controlling shareholders exploit retail shareholders via these related party transactions (see, for example, Cheung et al. (2006), and Jiang et al. (2010)). Thus, if retail shareholders participate in online AGMs to actively engage in corporate decisions, we expect the voting outcome online to be different from the outcome on-site. Table 9 is based on a small sample of firms that have the proposals of related party transactions and reveal voting outcomes separately online and on-site (50 cases). As detailed in Appendix 2, most of these proposals are about some business transactions between the firm and its controlling shareholder, such as the firm acquiring a subsidiary of its controlling shareholder, purchasing goods and service from its controlling shareholder or vouching for its controlling shareholder. 18

19 We find a remarkably different voting pattern. For on-site voting, the average agreement rate is 99%; in contrast, for online voting the corresponding figure is 65.2%. The difference is significant at the 1% level. The comparison of the median value of agreement rate leads to the same inference. The lower agreement rate of online voting is understandable, given that related party transactions are likely to benefit controlling shareholders at the expense of retail shareholders. Overall, this table provides evidence that retail shareholders indeed take advantage of the easy access to annual meetings via an online platform to voice their concerns and protect their interests. 6. Conclusions There is increasing debate about the potential benefits of allowing shareholders to participate in AGMs via an internet-based platform. On one hand, advocates of online AGMs believe that it is a highly efficient way to enable shareholders to actively participate in shareholder meetings without incurring the expense and inconvenience of travelling to physical meeting sites, and, thus, it enhances shareholder participation in annual meetings. On the other hand, online AGMs could make little difference because large shareholders are likely to attend the physical meetings anyway and thus be not affected. Moreover, retail shareholders may still lack the incentive to even attend the online meetings due to their small stake in the firm; even if retail investors do actively participate in an online meeting, too much intervention by unsophisticated and inexperienced retail investors may hurt managerial initiatives and thus be value-destroying. In this paper, we empirically examine whether allowing shareholders to attend annual meetings online can enhance participation in such meetings. We find that online AGMs can 19

20 greatly increase the participation of shareholders, especially retail shareholders. This result is more pronounced when the cost of attending the physical meeting is larger, when the firm is more dispersedly held, and is robust to accounting for endogeneity concerns. Further, we examine the real effects of holding online AGMs. We document significant positive stock returns when firms initiate online AGMs. We provide evidence that retail shareholders indeed voice their (different) opinions via online AGMs. Overall, our findings indicate that online AGMs are a cost-effective way for shareholders to participate in corporate governance. Our study has important implications for policy-makers who aim to enhance shareholder participation in the governance issue. 20

21 Reference Aghion, P., and J. Tirole, 1997, Formal and Real Authority in Organizations, Journal of Political Economy 105, Burkart, M., D. Gromb, and F. Panunzi, 1997, Large Shareholders, Monitoring, and the Value of the Firm, Quarterly Journal of Economics 112, Chen, X., J. Harford, and K. Li, 2007, Monitoring: Which Institutions Matter? Journal of Financial Economics, 86, Cheung, Y., R. Rau, and A. Stouraitis, 2006, Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong, Journal of Financial Economics 82, Denis, D., and J. Serrano, 1996, Active Investors and Management Turnover Following Unsuccessful Control Contests, Journal of Financial Economics 40, Easterbrook, F., and D. Fischel, 1983, Voting in Corporate Law, Journal of Law and Economics 26, Gillan, S., and L. Starks, 2007, The Evolution of Shareholder Activism in the United States, Journal of Applied Corporate Finance 19, Hartzell, J., and L. Starks, 2003, Institutional Investors and Executive Compensation, Journal of Finance 58, Jensen, M., 1993, The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems, Journal of Finance 68, Jiang, G., C. Lee, and H. Yue, 2010, Tunneling through Inter-corporate Loans: The China Experience, Journal of Financial Economics 98, Karpoff, J., P. Malatesta, and R. Walkling, 1996, Corporate Governance and Shareholder Initiatives: Empirical Evidence, Journal of Financial Economics 42, Li, W., 2008, Corporate Governance in China: Research and Evaluation, New York: Wiley. Lipton, M. and S. Rosenblum, 1991, A New System of Corporate Governance: The Quinquennial Election of Directors, University of Chicago Law Review 58, Lublin, J., 2011, Online Annual Meetings Begin to Click, Wall Street Journal, November 14. Petersen, M., 2009, Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches, Review of Financial Studies 22,

22 Porter, M., 1992, Capital Choices: Changing the Way America Invests in Industry, Journal of Applied Corporate Finance 5, Pound, J., 1991, Proxy Voting and the SEC: Investor Protection versus Market Efficiency, Journal of Financial Economics 29, Shleifer, A., and R. Vishny, 1986, Large Shareholders and Corporate Control, Journal of Political Economy 94, Staiger, D, and J. Stock, 1997, Instrumental Variables Regression with Weak Instruments, Econometrica 65, Strickland, D., K. Wiles, and M. Zenner, 1996, A Requiem for the USA: Is Small Shareholder Monitoring Effctive? Journal of Financial Economics 40,

23 Appendix 1. Variable Definition Variable Shareholder Ownership Non-blockholder ownership Blockholder ownership Online AGM Size ROA Stock return Stock volatility MB Institution ownership Insider ownership Firm age Transportation center Ownership of controlling shareholders Internet availability CAR Definition The number of shareholders voting in AGMs divided by the total number of shareholders. The number of shares owned by shareholders voting in AGMs divided by the total number of shares outstanding. The number of shares owned by non-blockholders voting in AGMs divided by the total number of shares outstanding. Non-blockholders are the shareholders who own less than 5% firm ownership. The number of shares owned by blockholders voting in AGMs divided by the total number of shares outstanding. Blockholders are the shareholders who own more than 5% firm ownership. An indicatory variable, taking the value of one if the firm adopts online voting in an AGM, and zero otherwise. The natural logarithm of total assets. Net income divided by total assets. The 12-month cumulative stock return during the fiscal year. The standard deviation of monthly stock returns for 36 months before the end of fiscal year. The market-to-book ratio. The percentage of shares owned by institutional shareholders. The percentage of shares owned by executive managers. The number of years since the firm s incorporation. An indicatory variable, taking the value of one if the firm locates in one of China s transportation centers, and zero otherwise. The percentage of shares owned by controlling shareholders. Controlling shareholders refer to the ones holding the largest percentage of shares in the firms. The number of internet users divided by total population in the province. The cumulative abnormal returns around the announcement date of AGMs. 23

24 Appendix 2. List of Related Party Transaction Proposals Company Name and Stock Code Chinese Universe Publishing and Media Co., Ltd. ( 中 文 传 媒 ) COFCO Property (Group) Co., Ltd. ( 中 粮 地 产 ) Dongguan Development (Holdings) Co., Ltd. ( 东 莞 控 股 ) Fujian Sansteel Minguang Co., Ltd. ( 三 钢 闽 光 ) Fujian Yongan Forestry (Group) Joint-stock Co., Ltd. ( 永 安 林 业 ) Guangdong Taiantang Pharmaceutical Co., Ltd. ( 太 安 堂 ) Jiangshu Huachang Chemical Co., Ltd. ( 华 昌 化 工 ) Jiangsu Miracle Logistics System Engineering Co., Ltd. ( 天 奇 股 份 ) Lanpec Technologies Limited ( 蓝 科 高 新 ) Liuzhou Rion & Steel Co., Ltd. ( 柳 钢 股 份 ) Milord Real Estate Development Group Co., Ltd. ( 美 好 集 团 ) Sichuan Youli Investment Holding Co., Ltd. ( 友 利 控 股 ) Year Proposal Trade goods and service with the controlling shareholder Jiangxi Publishing Group Purchase 100% shares of Xiamen Pengyuan Real Estate Co., which is a subsidiary of the controlling shareholder COFCO Corporation Purchase 51% shares of Chengdu Tianquan Real Estate Co., which is a subsidiary of the controlling shareholder COFCO Corporation Deposit in the COFCO Finance Co. Ltd., which is a subsidiary of the controlling shareholder COFCO Corporation Purchase assets from Xinyuan Highway Co., which is a subsidiary of the controlling shareholder Dongguan Road Bridge Development and Construction Co. Trade goods and service with the controlling shareholder Fujian Metallurgical Holdings Co. and its subsidiaries Trade goods and service with the second largest shareholder Xiamen ITG Group Trade goods and service with the subsidiaries Operating lease, product purchase and sales with the subsidiaries of Fujian Huian Woods Co. and Fujian Huiyang Woods Co. Operating lease, product purchase and sales with the subsidiaries of Fujian Huian Woods Co. and Fujian Huiyang Woods Co. Lease houses to the subsidiaries of Shanghai Taiantang Medicine Co. and Guangdong Pibao Medicine Co. Trade goods and service with Jiangnan Boilers Co., which is a subsidiary of the controlling shareholder Huachang Group Co. Sell 51% shares of the subsidiary Wuxi Tianqi Real Estate Co. to Jiangsu South Tianqi Investment Co., which is a subsidiary of the controlling shareholder. Purchase service from Jiangsu South Miracle Invesment Co., which is a subsidiary of the controlling shareholder Provide service to China Machinary International Co., which is a subsidiary of the controlling shareholder China National Machinery Industry Corporation Sell goods to Liuzhou Pincheng Metal Materials Co., which is a subsidiary of the controlling shareholder Guangxi Liuzhou Iron and Steel Group 2009 Vouch for the controlling shareholder MingLiu Investment Co Vouch for the controlling shareholder MingLiu Investment Co Vouch for the controlling shareholder MingLiu Investment Co. Vouch for the controlling shareholder MingLiu Investment Co. Vouch for Zhonggong Construction Co., which is a subsidiary of the controlling 2012 shareholder MingLiu Investment Co. Transfer 100% shares of the subsidiary Zhongguo Construction Co. to the controlling shareholder Mingliu Investment Co. Purchase electricity, steam and desalted water from Thermo Electron Co., which 2012 is a subsidiary of the controlling shareholder Jiangsu Shuang Liang Technology Co. Sound Environmental 2012 Purchase 90% shares of Liaomeng Recycle Co., which is a subsidiary of the 24

25 Resources Co., Ltd. ( 桑 德 环 境 ) Suning Universal Co., Ltd. ( 苏 宁 环 球 ) Tianjin Binhai Energy & Development Co., Ltd. ( 滨 海 能 源 ) Tianjin FAW Xiali Automobile Co., Ltd. ( 一 汽 夏 利 ) Tianjin TEDA Co. Ltd. ( 泰 达 股 份 ) United Mechanical & Electrical Co., Ltd. ( 众 合 科 技 ) Weifu High-technology Co., Ltd. ( 威 孚 高 科 ) Zhejiang Dun an Artificial Environment Co., Ltd. ( 盾 安 环 境 ) Zhejiang Great Southeast Packaging Co., Ltd. ( 大 东 南 ) Zhejiang Haiyue Co., Ltd. ( 海 越 股 份 ) controlling shareholder Sound Group Purchases 30% shares of the subsidiary Yichang Three Gorges Water Service Co. Undertake the fiduciary management duty of Beijing Guozhong Bio-tech Co. and Hubei Dangerous Waste Recycle Co., which are subsidiaries of the controlling shareholder Sound Group Purchase goods from Nanjing Suning Door & Window Co., which is a subsidiary of the controlling shareholder Suning Universal Co. Purchase steam from Tianjin TEDA Tsinlien Heat & Power Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Purchase steam from Guohua Resource Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Rent assets from the controlling shareholder Tianjin TEDA Group Rent assets from Tianjin TEDA Tsinlien Heat & Power Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Purchase steam from Tianjin TEDA Tsinlien Heat & Power Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Purchase steam from Guohua Resource Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Rent assets from the controlling shareholder Tianjin TEDA Group Rent assets from Tianjin TEDA Tsinlien Heat & Power Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Rent assets from the controlling shareholder Tianjin TEDA Group Rent assets from Tianjin TEDA Tsinlien Heat & Power Co., which is a subsidiary of the controlling shareholder Tianjin TEDA Group Trade goods and service with the controlling shareholder China FAW Group and its subsidiaries Trade goods and service with the controlling shareholder China FAW Group and its subsidiaries 2011 Vouch for the controlling shareholder Tianjin TEDA Group Trade goods and service with the controlling shareholder Zheda Wangxin Co. and its subsidiary Insigma Technology Co. Mutually vouch with Insigma Technology Co., which is a subsidiary of the controlling shareholder Zheda Wangxin Co. Trade goods and service with the controlling shareholder Zheda Wangxin Co. and its subsidiary Insigma Technology Co. Purchase goods and service from RBCD Co., which is a joint venture of the controlling shareholder Weifu High-tech Co. and the foreign investor Bosch Co. Purchase goods and service from RBCD Co., which is a joint venture of the controlling shareholder Weifu High-tech Co. and the foreign investor Bosch Co. Purchase goods and service from RBCD Co., which is a joint venture of the controlling shareholder Weifu High-tech Co. and the foreign investor Bosch Co. Purchase goods and service from RBCD Co., which is a joint venture of the controlling shareholder Weifu High-tech Co. and the foreign investor Bosch Co. Trade goods and service with the controlling shareholder Jiangsu Dun an Industrial Group Purchase material and products from Zhejiang Great Southeast Import & Export Co. which is a subsidiary of the controlling shareholder Zhejiang Great Southeast Group Purchase material and rent houses from the subsidiary Zhuji Zhongyouhai Petrol Co. 25

26 Table 1. Online Voting in Annual General Meetings Over Time The sample consists of 1,215 firm-year observations with online AGMs and 11,710 firm-year observations without online AGMs from 2005 to All the firms are listed in the Shanghai and Shenzhen Stock Exchanges. Year # of Firms # of Firms with online AGMs Percentage of Firms with online AGMs , % , % , % , % , % , % , % , % In Total 12,925 1, % 26

27 Table 2. Summary Statistics The table compares the characteristics of firms with and without online AGMs. The sample consists of 1,215 firmyear observations with online AGMs and 11,710 firm-year observations without online AGMs from 2005 to Variable definitions are provided in Appendix 1. All continuous variables are winsorized at the top and bottom 0.5%. The last two columns present the t statistics (z statistics) for the tests of differences in mean (median) between firms with and without online AGMs. Superscripts ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively. Firms with online AGMs Firms without online AGMs Test of differences Mean Median Mean Median t-test Wilcoxon test (1) (2) (3) (4) (1) (3) (2) (4) Shareholder 0.30% 0.13% 0.04% 0.02% 46.2*** 41.9*** Ownership 53.46% 54.37% 48.32% 48.79% 10.5*** 10.5*** Non-blockholder ownership Blockholder ownership 5.44% 3.68% 1.31% 0.75% 17.3*** 18.3*** 48.01% 48.57% 47.04% 47.51% Size *** 11.6*** ROA 4.33% 3.93% 2.85% 3.22% 5.68*** 5.72*** Stock return 27.39% -0.47% 38.43% 1.78% -3.63*** Stock volatility 14.29% 13.20% 15.27% 14.44% -5.76*** -7.18*** MB *** -2.97*** Institution ownership 29.15% 23.01% 22.10% 13.94% 10.3*** 11.6*** Insider ownership 6.81% 0.00% 3.14% 0.00% 10.3*** 13.6*** Firm age ** 2.32** 27

28 Table 3. Online AGMs and Shareholder Participation The table reports the results of how online AGMs influence shareholder participation in the AGMs. Panels A and B present the OLS regression and the firm fixed effect regression, respectively. Online AGM is an indicator variable, taking the value of one if the firm adopts an online AGM and zero otherwise. Other variables are defined in Appendix 1. All continuous variables are winsorized at the top and bottom 0.5%. P-values based on robust standard errors clustered at the firm level are reported in parentheses. Superscripts ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively. Panel A OLS Regression (Between Firm Effect) Shareholder Ownership Non-blockholder ownership Blockholder ownership (1) (2) (3) (4) Online AGM 0.275*** 2.812*** 3.803*** (0.000) (0.000) (0.000) (0.109) Size ** 3.450*** *** (0.010) (0.000) (0.530) (0.000) ROA 0.099*** *** 7.678*** 8.591*** (0.000) (0.000) (0.000) (0.000) Stock return 0.010** ** 0.603*** *** (0.011) (0.018) (0.000) (0.000) Stock volatility *** *** *** (0.000) (0.000) (0.672) (0.000) MB 0.006*** 0.814*** *** (0.000) (0.000) (0.478) (0.000) Institution ownership 0.036*** 2.377** * (0.000) (0.044) (0.619) (0.089) Insider ownership 0.162*** *** 5.760*** *** (0.000) (0.000) (0.000) (0.000) Firm age *** *** (0.551) (0.000) (0.523) (0.000) Constant 0.090*** *** 3.118* *** (0.000) (0.000) (0.056) (0.000) Industry fixed effect Yes Yes Yes Yes Year fixed effect Yes Yes Yes Yes Observations 12,925 12,925 12,925 12,925 R-squared