Master Programme in Economics Master Essay I

Corporate Governance and Stock Returns in China A Long-Horizon Event Study

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! August 2012 Author: Susannah Gardiner Course: NEKN03 Supervisor: Hans Bystrm

Abstract
This study investigates the relationship between the adoption of good corporate governance practices and the subsequent stock performance of Chinas publicly listed firms. Using the Shanghai Stock Exchange Corporate Governance Index (SSE CGI) that was launched in January 2008, a portfolio of CGI firms is benchmarked against a portfolio of matched conventional firms, their sector indices and market index for the four-year period following the launch. The results indicate that CGI firms were able to significantly outperform their respective sector indices as well as the Shanghai Composite Index, but were unable to significantly outperform their control firms matched on size and market-to-book ratios. Additionally, wealth relative cross-sectional regressions compliment these results, showing no significant support for the hypothesis that the acquisition of CG status is linked to subsequent superior performance. These results provide evidence that Chinese investors are not yet willing to pay a premium for CGI stocks.

Keywords: Corporate governance, stock performance, Shanghai Stock Exchange, China.

Table of Contents
1. Introduction................................................................................................................... 1 2. Corporate Governance An Overview... 3 2.1 Agency Theory..........................................................................................................3 2.2 Literature Review..4 2.3 Corporate Governance Mechanisms and Models..........5 3. Corporate Governance in China......................7 3.1 The Persistence of State Ownership A Governance Dilemma...8 3.2 The Non-tradable Share Reform (2005)..10 3.3 The Corporate Governance Practices of Chinas Listed Firms...11 4. The Governance-Performance Relationship.....................................13 4.1 Empirical Research..13 4.2 Governance, Firm Valuation and Performance in the Context of China....14 4.3 Corporate Governance and Stock Returns .............................................................16 4.4 SSE Corporate Governance Index...17 5. Hypotheses Development.18 6. Long Run Abnormal Returns (LRARs)....................................................................19 6.1 Data.19 6.2 Method.........20 6.3 Results 23 7. Wealth Relative Cross-Sectional Regressions...27 7.1 Data.27 7.2 Method....29 7.3 Results.33 8. Discussion of Results36 9. Summary and Conclusion...37 10. References...40 11. Appendix A: SSE CGI Appraisal Measures!"..........50 12. Appendix B: LRARs Matching Procedure ....................51

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1. Introduction
As a consequence of major events such as the 1997 Asian financial crisis, the Enron scandal and the more recent global financial crisis, greater international focus has been placed on governance reform in general, and in particular the corporate governance practices of public firms. In the Asia-Pacific region, the corporate governance issues are more complex and considered less market-orientated, with many Asian companies being family owned, directly and indirectly state-owned, or dominated by majority shareholders. However countries such as China have been showing their commitment to moving towards an International Model of corporate governance. Furthermore the question of a governance-performance relationship has also gathered more attention in recent years. Empirical evidence regarding this relationship is however inconclusive, with most prior research focusing on developed markets (Gompers, Ishii & Metrick (GIM), 2003; Bebchuk, Cohen, Ferrell (BCF), 2008, Bhagat & Bolton, 2008). However, the body of emerging market research has started to grow with some cross-sectional evidence linking good corporate governance to good performance (Black, Jang and Kim, 2006; Black, Love and Rachinsky, 2006; Connelly Limpaphayom, and Nagarajan, 2008). A contentious issue that has arisen from the study of the governance-performance relationship, is the possibility of endogeneity i.e. that governance structures may change in response to a favorable valuation of the firm, rather than the firm being valued favorably because of good governance practices. In a Chinese setting Cheung et al. (2008) develop their own corporate governance index (CGI) to measure the quality of corporate governance practices of the 100 largest Chinese firms in 2004. They conclude that there is no statistically significant relationship between the quality of corporate governance and the market valuation of the firms in the sample. On the other hand, Wang and Xus (2005) study is one of few that examine the validity of Fama and Frenchs (1992) risk factors in explaining expected returns. They find that a firms floating ratio (a proxy for expected corporate governance) improves their model by 10 %. This study will contribute to the governanceperformance research of emerging markets by focusing on the stock performance of Chinas CGI firms. The Shanghai Stock

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Exchange Corporate Governance Index (SSE CGI) has outperformed the Shanghai Composite by 7% over the last four years, giving annualized adjusted holding period returns of 1.71% to its investors. However this is insufficient support for the notion that CG has contributed to significantly superior relative stock returns. Thus this study will use the methodology of long run abnormal returns (LRARs) and cross-sectional regressions to investigate the existence of the governance-stock performance link. This is done by constructing a Corporate Governance portfolio using the constituents of the SSE CGI and comparing it to a portfolio of conventional firms, matched on size and marketto-book ratios. In addition to this, cross-sectional regression analysis is undertaken to assess the impact (if at all), of acquiring corporate governance status, on subsequent stock performance. In this way, this study also contributes to research on expected returns in emerging markets. The rest of the paper is organized as follows: section 2 will start with a concise overview of the theory, literature and models related to corporate governance. This is followed by an overview of Chinas institutional environment as it relates to corporate governance, discussing recent reforms and the CG practices of Chinese firms. Section 4 focuses on the governance-performance relationship and prior related research both international and within a Chinese context, ending with a summary of the SSE Corporate Governance Index. After the hypotheses development in Section 5; sections 6 and 7 will describe the data, methodology and results of the Long Run Abnormal Returns (LRARs) and the Wealth Relative Cross-sectional Regressions respectively. Finally, this is followed by a discussion of overall results and conclusions.

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2. Corporate Governance An Overview

The most basic definition of corporate governance refers to the process whereby shareholders attempt to ensure that the managers of the firms in which they invest, provide a sufficient return. Measures are put in place to solve the agency problem, which occurs when managers (agents) have incentive to act in their own best interests rather than those of the shareholders (principals). Thus the essence of the agency problem is the separation of finance and management (or ownership and control). 2.1 Agency Theory Agency theory developed from the important notion of the separation of ownership and stewardship, which has its origins as far back as Adam Smiths The Wealth of Nations (1776) in which he wrote about his belief that negligence and profusion were a direct consequence of this separation. However, it was the seminal work of Berle & Means (1932) that uncovered the issue of what has become known as the agency problem, providing evidence that managers of a firm will pursue their own interests over the interests of shareholders. Agency theory makes use of the following axioms: organizations are profit seeking, people are self-interested, and information is asymmetric. Jensen and Mecklings (1976) Nexus of Contracts View of the Firm takes a broader perspective on corporate governance, acknowledging that governance mechanisms are influenced not just by principal and agent problems but the interests of many stakeholders including employees, suppliers and customers, as well as the surrounding institutional environment. A broader perspective on corporate governance that accounts for the influence of institutional factors on organizational practices can thus be found in Institutional Theory (See for example North (1990), DiMaggio and Powell (1991). A broader institutional perspective becomes important when analysing the governance situation in a country such as China, where there are many tiers of principals (ultimately connected to the state), leading to principal-principal problems (Wang, 2011).

! 2.2 Literature Review

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The topic of corporate governance practices has received considerable attention from scholars in recent years. The diversity that exists across borders, especially the disparity between developed and emerging countries, has also piqued interest and debate around the diffusion of cross-border governance practices and whether there is a worldwide convergence towards the Anglo-American model (Guillen, 2000; Aguilera & Jackson, 2003). More recently, additional conflicts of interest have been identified. La Porta, Lopez de Silanes, Shleifer and Vishny (LLSV, 1998) posit that: ..the central agency problem in large corporations around the world is the restriction of the expropriation of minority shareholders by controlling shareholders. An example of the expropriation of minority shareholders is the transfer of resources out of firms for the benefit of controlling shareholders, known as tunnelling (Johnson, La Porta et al., 2000). Events such as the Asian financial crisis have revealed tunnelling as a serious agency problem in emerging markets. Denis and McConnell (2003) define corporate governance as the set of mechanisms that ensure that self-interested controllers of a company, be they managers or shareholders, make decisions that will maximize the value of the company for its owners. A more general conceptual framework is provided by Becht et al. (2004) who define corporate governance as a set of mechanisms that are used to overcome the collective action problem, as well as ensure the interests of all parties are concerned with the same collective action problem. Most literature on the topic deals with two main systems of corporate governance: the shareholder model and the stakeholder model (otherwise known as the outsider and insider model respectively). The shareholder model is synonymous with the Anglo-American model or international model and views the maximization of shareholder value as the main objective of corporate governance. The stakeholder model, on the other hand, considers the interests of all stakeholders including creditors, suppliers, customers, employees, and society (Mitchell, Agel & Wood, 1997). This model is used in Asian and Continental European countries e.g. Germany and Japan. While the Anglo-American model is based on an independent board, dispersed

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ownership, transparent disclosure, established legal institutions and an active takeover market, the latter displays characteristics such as an insider board, concentrated ownership, lack of transparency and disclosure, a weak legal system, and powerful families and banks as sources of finance (Bai et al., 2004). Furthermore, some scholars argue that there is a global trend of convergence towards the Anglo-American model (Bradley et al.,1999; Hansmann & Kraakman, 2001). Indeed there is increasing international promotion of the adoption of the Anglo-American model as a way for emerging economies to gain access to international capital. 2.3 Corporate Governance Mechanisms and Models The mechanisms of corporate governance fall into one of two groups: internal or external to the firm. Figure 1 depicts the Simple Balance Sheet Model of corporate governance. Internally, management makes decisions on behalf of shareholders e.g. what assets to invest in and how to finance those investments. The board of directors (BOD) must

advise, compensate and monitor management (Jensen, 1993). External governance arises from the firms need to raise capital. The separation that exists between the capital providers and those who manage the capital creates this demand for corporate governance structures. Internal governance covers ownership structure and control, characteristics

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and composition of the board of directors, anti-takeover measures 1 , executive compensation, transparency and disclosure; while external governance refers to the takeover market, production market, labour market and the state regulatory system.2 Figure 2 depicts the more comprehensive perspective of the firm: Jensen and Mecklings (1976) Nexus of Contracts View of the Firm, where governance mechanisms are influenced by the interests of many stakeholders, not only those of principal and agent.

Building on this framework, four corporate governance paradigms exist in the world today: 1) the Anglo-American model characterized by outside supervisory and a one tier board system, 2) the German/Japan model, characterized by inside supervisory and a two tier board system, 3) the South East Asian model, characterized by family control and 4) the former Soviet Union model, characterized by internal control 3 . Approaches to corporate governance have been shaped by the historical and institutional settings of the countries in question. This has inevitably led to unique views on what corporate governance should be. Many of the Anglo-American corporate governance practices and structures reflect a preoccupation with the reduction of agency costs (Tam, 1999). It took !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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E.g. poison pills (or shareholder rights plans) are used to avoid hostile takeovers. For a thorough explanation of these governance topics and related research see Gillan (2006). 3 For a detailed comparison of these paradigms see Davis (2002), Tam (1999). !

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the corporate scandals and crises that emerged in these countries during the 1980s for alternative views such as the German/Japan model to garner attention. No single discipline, no one paradigm, can make claim to the subject of corporate governance, whether that be financial economics, jurisprudence, organisation theory or the restUntil we develop an integrative theory the subject is best served by the pluralism of paradigms and a proper intellectual scepticism respect for all: but belief in none Tricker (1994a).

3. Corporate Governance in China

The concept of corporate governance has not been well developed or understood in our country. This may be partly due to our transitional stage from a planned economy to a market economy, and partly due to the entanglement of ownership rights with management responsibilities * Laura Cha, former Vice Chairman of the CRSC China Securities Regulatory Commission

Known as gongsi zhili, corporate governance in China is being recognized as a pivotal issue in the progression of Chinas development and growth. Now one of the largest emerging economies, the country is still in the process of transition towards a marketbased economic system, and is thus experiencing fundamental institutional change in many areas, one of them being corporate governance. It is a believed that the adoption of an appropriate corporate governance model will increase international investment, curb corporate scandals and improve investor sentiment. Another important reason for this change is Chinas accession into the World Trade Organization (WTO) in 2001. In doing so, it agreed to harmonize with international corporate governance practices.

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Current corporate governance practice in China is best described as a control-based model, as opposed to the market-orientated model used in the UK and the US (This is a different distinction to the shareholder vs. stakeholder model discussed earlier). The control-based model has developed from the administration governance approach, which is the responsibility of the Chinese regulatory authorities (Pistor & Xu, 2005). Under administrative governance the economy is heavily regulated, making it difficult to separate business and politics. As a result, politicians or politically connected businessmen are able to hijack governance systems and seek rent for themselves (Clarke, 2003). Therefore the quality of Chinas public governance is vital in shaping the overall quality of its corporate governance (Chen et al., 2004). 3.1 The Persistence of State Ownership A Governance Dilemma Prior to Chinas opening up in 1978, the business landscape was dominated by state owned enterprises (SOEs), now referred to as traditional SOEs (TSOEs). Corporatization4 of these SOEs started in the mid 1990s. This strategy was meant to address criticisms of state control and bureaucratic interference. With the modern enterprise system came the rapid development of the stock market. In 2006 there were a total of 1,500 publicly listed companies on the Shanghai and Shenzhen Stock Exchanges. The Shanghai Stock Exchange is now ranked 5th in the world with a market capitalization of US $2.3 trillion as of December 20115. But due to state policies, the government still owns a large proportion of shares in these listed companies (Qiang, 2003). It was reported that around 84 % of listed firms were controlled by the state, with 8.5 % owned directly and 72.5 % owned indirectly via pyramid shareholding schemes (Liu and Sun, 2005). Using CCERDATA6 Yang et al. (2011) calculated that the government ultimately owned more than 50 % of listed company shares at the end of 2009. The states majority ownership in many listed firms gives them control over resources and the allocation of retained earnings (Keister, 2004). Furthermore, in China, ownership is concentrated rather than dispersed !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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Corporatization refers to the transformation of state assets or agencies into state-owned corporations in order to introduce corporate management techniques to their administration. 5 www.world-exchanges.org 6 Database of the China Center for Economic Research at Peking University

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in 1999 it was reported that the five largest shareholders were holding 58% of shares (Xu & Wang, 1999). Corporatization may have allowed non-state investors to contribute to the enterprise, but as minority shareholders they are unable to share control. The state maintains the same level of control it had before, but now over a larger pool of assets (Clarke 2003). As Clarke (2003) points out, under this model, there is neither a market for corporate control nor a market for managerial talent. Now a dilemma exists - while on the one hand there is growing recognition of the benefits of a more market orientated model (such as increasing investor confidence, investor protection, minimizing corporate scandals, and attracting investment), there is persisting state policy of maintaining full or controlling ownership in key sectors. Thus policymakers who are meant to design policies based on the Anglo-American model find themselves having to adjust the rules to allow for continuing state ownership. Instead of the state-sector enterprises being made more efficient by being forced to follow the rules of the private sector, potential private sector enterprises are hamstrung by having to follow rules that make sense only in a heavily state-invested economy (Clarke, 2003). Table 1 outlines the legal and regulatory milestones that have affected corporate governance in China, the most recent being the non-tradable share (NTS) reform of 2005. China has taken a top-down legalistic approach to corporate governance, attempting to transplant structures from the market based Anglo-American system (Tam, 2000).

Table 1. Legal and Regulatory Milestones affecting Corporate Governance in China

1994 Company Law - establishes a modern enterprise system and specifies the rights of shareholders, boards and management

1998

Securities Law - addresses capital market and trading activities

1999

Contract Law - assigns rights and securities to all parties China Securities Regulatory Commission (CSRC) issues 'code of corporate governance' for listed companies in China' addressing shareholder rights, board structure and disclosure requirements CSRC launches a state share reform, aimed at converting nontradable shares (NTS) into tradable shares (TS) Table adapted from Wang (2011)

2002

2005

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According to Jiang (2000), the Company law is actually part of the problem because it is designed to address the issues within the state sector, particularly the reform of TSOEs. As mentioned above, this is a major obstacle to a more market orientated governance model. Critics have also argued that it is about more than getting the rules right - it also requires an institutional environment that fosters and nurtures non-state enterprises (Roe, 2002). China has underperformed in both the legal infrastructure and law enforcement, with weak enforcement of investor rights and contractual rights disputes (Pistor & Xu, 2005). 3.2 The Non-tradable Share Reform (2005) Since the establishment of the stock market in the 1990s, listed firms had a split-share structure with approximately one-third freely traded public stocks (tradable shares) and two-thirds non-tradable state owned shares (Huang et al., 2008). Tradable shares consist of A-shares, B-shares, H-shares and N-shares7, while the two classes of non-tradable shares are state-owned shares and legal person shares. The holders of NTS have the same rights as holders of tradable shares (TS) but they cannot sell the stocks. Typically, NTS are owned by state financial institutions, which are ultimately owned by central or local governments. As a consequence, the Chinese stock market was illiquid and volatile. Xu and Wang (1999) point out that the negligible fraction of shares owned by individual investors allows them to play the role of free riders and short-term speculators. They also provide evidence that the proportion of shares held by individuals was negatively associated with firm value. For these reasons, non-tradable shares have long been considered a major obstacle to Chinas financial market development. In April 2005, the China Securities Regulatory Commission (CSRC) launched a state share reform, aimed at converting the NTS into TS. Subsequently, the Chinese stock market improved dramatically and according to a 2006 report, 90 percent of Chinese firms had complied with the orders to reform their share structure (Huang et al., 2008). !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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For further explanation of these share types see Yang et al. (2011).

! 3.3 The Corporate Governance Practices of Chinas Listed Firms

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Broadly speaking there are two types of mechanisms used to resolve conflicts among stakeholders, especially principal- agent conflicts and those between controlling and minority shareholders. The first type consists of various internal mechanisms e.g. the ownership structure, executive compensation, the board of directors and financial disclosure. The second are external mechanisms e.g. an effective takeover market, legal infrastructure, and product market competition. The following is a brief summary of the more important mechanisms employed internationally and where Chinese firms currently stand in their ability to effectively implement them. Internal governance Ownership structure is crucial to a firms value maximization. Concentrated equity ownership gives the largest shareholders discretionary power to use the firms resources for personal gain at the expense of other shareholder e.g. tunnelling. Before the start of non-tradable share reform, about two thirds of shares on issue were non-tradable. Post reform, to date, more than 99 % of listed firm have compensated tradable shareholders, and the non-tradable shares are gradually becoming tradable (Yang, 2011). Supervisory boards are important mechanisms through which shareholders can exert influence on the behaviour of managers in order to ensure that the company is run in their best interests (Hemalin & Weisbach, 2003). Unlike North America, China has adopted a two-tier board structure, which involves the addition of a board of supervisors to monitor the board of directors and report back at the general shareholders meeting. However, the board of supervisors is not given the right to vote on executive decisions, elect directors, managers or financial officers. Chen et al. (2009) find that the supervisory board does not contribute significantly to firm efficiency. Independent directors are mandatory in China. According to the Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies issued in 2001 by the CSRC, all listed firms are required to have at least two independent directors.

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CEO duality means that the positions of CEO and chairperson of the board cannot be held by the same person. Research shows that this improves monitoring and control of the CEO. In China, according to the Company Law, a chairman of the board must be democratically elected, and the appointment of the CEO must be approved by more than 50 % of board members, but nowhere does it explicitly restrict CEO duality. CEO compensation relates to the incentive-related pay of executives, which is used to align the interests of top managers and shareholders. Before Chinas economic reforms in 1978 the pay differential between general managers and unskilled workers was fairly small, with the main objective of a general manager being to satisfy the interests of the state. It was found that firms with substantial government ownership still have lower CEO compensation than privatized firms (Firth et al. 2007) Transparency and disclosure: The full disclosure of accurate and timely information regarding the firms operations and financial status is important for shareholders to be able to monitor the firm and make investment decisions affecting the firm. According to Bushman and Smith (2001), local accounting firms audit most listed companies in China but no reliable information exists to determine which accounting firms are more reputable. Companies that issue H shares, which are traded on the Hong Kong Stock Exchange, or B shares which are open mainly to foreign investors in domestic stock exchanges, are require to maintain international accounting standards. External governance Active take-over market: This market allows managers to gain control of sufficient shares in a short period of time to remove inefficient managers. Hostile takeovers occur quite frequently in the US and the UK, but much less so in Germany, France and Japan. In Chinas case, prior to the non-tradable shares reform to it was almost impossible for firms to gain control of another listed firm through buying tradable shares. Moreover, a company could not acquire another without state approval. However the share reform of 2005 is expected to bring about a more active takeover market (Yang, 2011). Legal Infrastructure ensures that investors receive a fair return on their investment. The Chinese stock market has been heavily criticized for the lack of effective law

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enforcement (Zou et al. 2008). It is argued that the interests of minority shareholders cannot be adequately protected because of a lack of independent judiciary, and the dual role of the state as both a regulator and a market participant.

4. The Governance- Performance Relationship

4.1 Empirical Research In recent years, various studies have investigated the relationship between different aspects of corporate governance and the performance of the firm. While some have found more evidence based on accounting performance (Bhagat & Bolton, 2008) and firm valuation, others have discovered a correlation between corporate governance measures and long run stock returns (Gompers, Ishii & Metrick (GIM), 2003; Bebchuk, Cohen, Ferrell (BCF), 2008). Previous research shows Tobins Q as a popular measure of firm valuation and performance. Tobins Q is the ratio of market value of a firms assets to the book value of its assets. It is a measure of good management because a high Tobins Q suggests that firms managers have produced a greater market value from the same assets. Using a 1980 cross-section of 371 Fortune 500 firms, Morck, Shleifer and Vishny (1987) find evidence of a significant non-monotonic relationship between management ownership and a firm value i.e. Tobins Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. Analysing 452 large U.S. industrial corporations between 1984 and 1991, Yermack (1996) finds a significant negative correlation between the proportion of independent directors and contemporaneous Tobins Q, but no significant correlation for other performance variables such as sales/assets, operating income/assets, and operating income/sales. Gompers et al. (2003) construct their own governance index as a proxy for the strength of shareholder rights in US firms. They find that an investment strategy that buys firms with stronger rights and sells those with weaker ones, will have earned abnormal returns of 8.5 % per year during the sample period in the 1990s. They also find that firms with stronger shareholder rights

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had higher firm value, higher profits and higher sales growth. Bebchuk et al. (2008) investigate 24 provisions followed by the Investor Responsibility Research Center (IRRC) 8. They then develop their own entrenchment index based on 6 of the provisions: staggered boards, limits to shareholder by-law amendments, poison pills, golden parachutes and supermajority requirements for charter amendments. They find that increases in the index level are associated with significant reductions in firm valuation and negative abnormal returns during the years 1990 -2003. Core, Holthausen & Larcker (1999) focus on CEO compensation as a component of corporate governance. They attempt to measure the predicted "excess" compensation of CEOs as a function of board structure and ownership structure variables. The predicted excess compensation measure is then used as an independent variable (along with control variables such as standard deviation of stock returns, market value, market-to-book and year and industry factors) to explain stock returns over subsequent one, three, and five-year periods. They find the predicted excess compensation variable to be significant and negative. Thus when CEO compensation is determined to be excessive, the impact on stock returns is negative. Bhagat & Bolton (2008) find that stock ownership of board members and CEO-Chair separation are significantly positively correlated with better present and future operating performance. They also contradict the claims made by GIM and BCF, that governance measures are correlated with future stock market performance. They give warning that inferences made about the link between market performance and governance should take into account its endogenous nature. They go on to say that stock market based performance measures are susceptible to investor anticipation. Thus if investors anticipate the corporate governance effect on performance, long-term stock returns will not be significantly correlated with governance, even if a significant correlation does indeed exist. 4.2 Governance, Firm Valuation and Performance in the Context of China Earlier research on Chinese firms focuses on the relationship between state ownership and firm performance. Xu and Wang (1999) report that Chinese firms accounting !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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Investor Responsibility Research Center (IRRC) (1990, 1993, 1995, 1998, 2000, 2002).

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performance is negatively related to the level of state ownership, while Sun and Tong (2003) find that share issue privatization (a reduction in state ownership) is associated with improved earnings ability and worker productivity. Furthermore, Tian (2002) finds that government ownerships impact on stock market valuation is non-linear i.e. it worsens a firms performance when government ownership is small, but improves a firms performance when government ownership gets significantly larger. Other research has attempted to gauge whether the Chinese market actually values corporate governance. Cheung et al (2008) develop a corporate governance index (CGI) to measure the overall quality of corporate governance and disclosure practices of the 100 largest Chinese listed firms in 2004. The results show that some Chinese companies have been making progress in corporate governance but no statistically significant relationship exists between the quality of corporate governance practices and market value among the firms in the sample. From this they conclude that the benefits of good corporate governance had not been fully incorporated into the market valuation of these companies. Bai et al. & Zhang (2004) find that issuing shares to foreign investors helps to improve firms valuation, partly due to the monitoring effect of the relatively more sophisticated foreign investors, and partly due to more transparent financial disclosure required for cross-border listings. They also find that when the largest shareholder is the state, the firms tend to have lower market valuation. Chen, Fan and Wong (2004) report that almost 28 percent of the CEOs in their sample are ex- or current government bureaucrats. They also find that the 3-year post-IPO average stock returns of these politically connected firms under-perform the market by almost 30 percent. Despite strong theoretical support for the positive relationship between governance mechanisms and performance, researchers have been unable to provide consistent evidence regarding such a relation. Finding a causal link between governance and corporate performance is made inherently difficulty by the possibility of endogeneity i.e. that governance structures may change in response to a favorable valuation of the firm, rather than the firm being valued favorably because of good governance practices.

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Another perspective is that firm performance and corporate governance are simultaneously determined by unobservable firm-specific factors, and that governance changes are determined by past, present and/or expected characteristics of the firm (Hermalin & Weisbach, 2003). 4.3 Corporate governance and stock returns Previous research has shown that corporate governance structures have the ability to affect the market valuation and performance of the firm. It is therefore natural to expect that they would also affect a firms stock returns. There is however, minimal evidence to support this line of reasoning, especially in developing capital markets. According to the Capital Asset Pricing model (CAPM) (Sharpe, 1964; Lintner, 1965; and Black, 1972), differences in the expected returns of individual stocks are solely determined by the magnitude of the systematic risk measure known as beta (!). But in a seminal paper by Fama and French (1992a), it was found that the variables size (measured by market capitalization) and book-to-market are better at explaining an individual stocks expected return, rather than the ! measure. Wang and Xus (2005) research is one of few that actually examines the validity of these factors as well as the governance- stock return relationship in a cross-section, within Chinas capital market. Studying data from 1996 to 2002, they find that size and not book-to-market helps to explain cross-sectional stock returns in China. They argue that due to the speculative nature of the Chinese capital markets and low quality of the accounting information, book-to-market does not reflect fundamentals in Chinas stock market. Instead they find evidence to suggest that a firms floating ratio9is a significant predictor of a firms future cash flow, increasing their asset pricing models fitness level from 81 to 90 percent. The floating ratio is considered a good proxy for expected corporate governance in China. As mentioned before, Bhagat and Bolton (2008) argue that investor anticipation can prevent long-term stock returns from being significantly correlated with governance, even if a significant correlation does exist. Other reasons for insignificance include the possibility that stock returns are not !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ,!!The floating ratio is the ratio of a firms publicly traded shades to total number of shares i.e. the number
of outstanding shares in the hands of public investors as opposed to company officers, directors, or controlling-interest investors.!

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reflecting fundamentals, signaling an inefficient market 10 . Thus even if corporate governance has a positive affect on accounting performance, it may not be reflected in the share price, especially in developing stock markets where prices are heavily influenced by speculative trading. Furthermore fundamentals could take time to show positive change as a result of governance practices. Despite this, CG status could still have an effect on medium term stock performance due to the possibility of initial underreaction and long-run overreaction of investors in response to certain corporate events.11 4.4 The SSE Corporate Governance Index On January 1, 2008 Chinas leading stock exchange, the Shanghai Stock Exchange (SSE) launched the SSE Corporate Governance Index. As part of the on going attention to corporate governance reform in China, this index creates the opportunity for Chinese firms to voluntarily apply for CG status. According to the SSE12, the aim of the index is to encourage listed firms to improve their corporate governance practices, as well as promote rational investment by investors. This will also allow them to be easily recognized by the market and thus more likely to be supported e.g. through refinancing. Among 255 voluntary firms, 199 firms were chosen to be constituents of the index. The selection process involved self-evaluation, public assessment, and expert review by the Corporate Governance Sector Award Advisory Committee of Experts. The SSE CGI is also expected to encourage fund managers to develop CG- related products, the aim being to intensify the correlation between the market and corporate governance, encouraging shareholders to play active roles and strengthening the supervision function of investors over corporate governance. The CGI Appraisal Measures are based on the principles of the Corporation Law, the Securities Law, and the Rules for Listed Companies. Some important issues addressed by the evaluation include management incentive plans, board structure, the role of !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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See for example Fama (1970) Efficient Capital Markets: A review of theory and empirical work. by recent behavioral finance research, see for example Barberis, Schleifer and Vishny (1998): A model of investor sentiment. #$!!http://www.sse.com.cn/!
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controlling shareholders, the voting of minority shareholders, whether the independent directors have been nominated by controlling or minority shareholders and the disclosure and auditing procedures undertaken by the firm13. Although the laws, on which these appraisal measures were based, reflect North American governance principles, they also take into account the local institutional environment (Wang, 2011). For example, a twotier board system is not part of the international model of corporate governance but is considered an appropriate CG mechanism within China. The central government has also chosen a strategy of top-down legal reforms as opposed to privatization. In summary, it is impossible for China to wholly adopt the North American model of governance standards. Chosen constituents are therefore those firms who are achieving the best governance practices in the context of China.

5. Hypotheses Development
Despite a slowly transitioning institutional environment, international pressures have led to the development and launch of the SSE Corporate Governance Index in January 2008. Although the evaluation criteria are based on much criticized state laws and regulations it still claims to be a step towards a more market-orientated governance model. This paper seeks to evaluate the effect of being selected as an SSE CG constituent on a firms stock performance. If corporate governance is linked to firm performance, and this relationship is incorporated by the market, then a stocks valuation should reflect changes in corporate governance (GIM, 2003). In this case, changes in corporate governance are represented by an event a firms inclusion in the CGI index. After this event investors make an assumption about the quality of the constituents corporate governance practices. This can therefore be viewed as a long-run event study and an investigation into whether Chinese investors are willing to pay a premium for what is considered better corporate governance. A range of CG returns are measured and benchmarked against control firms matched by size and book-to-market ratios; their respective sector indices and the Shanghai Composite Index. Furthermore, wealth relative performance measures (using the Shanghai Composite as a benchmark) are calculated for a new sample comprised of !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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See Appendix A for SSE CG Index Appraisal Measures

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both CG and conventional firms. Using an independent dummy variable of CG status and appropriate control variables, a cross sectional regression analysis will attempt to measure the impact (if any) of CG status on subsequent relative performance. Hypothesis 1: SSE Corporate Governance constituents significantly outperform control firms matched on size and book-to-market ratios. Hypothesis 2: SSE Corporate Governance constituents significantly outperform their respective industry indices. Hypothesis 3: SSE Corporate Governance constituents significantly outperform the Shanghai Composite Index. Hypothesis 4: The acquisition of CG status is significantly positively correlated with subsequent medium to long run stock performance. All of the above hypotheses are tested over a period of four years after the CGI launch date, and are tested at the 5% significance level. To address each of the aforementioned hypotheses, the data, methodology and results of this study will be divided into two sections: 1) Long-run Abnormal Returns (LRARs) and 2) Wealth Relative Crosssectional Regressions.

6. Long-Run Abnormal Returns

6.1 Data The long-run returns analysis makes use of an initial sample of 276 firms from the SSE Corporate Governance Index (CGI). In order to create a sample appropriate for the chosen methodology, CG firms were excluded if they were not constituents at the time of the CGI launch (02 January, 2008) or were subsequently removed from the index in the four years following the launch. Stock prices and accounting data such as market-to-book

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ratios, P/E ratios and market capitalization were gathered from Datastream. Only those firms with information from 02 January 2004 onwards were retained. This ensured that the companies in the sample were reasonably well-established public firms and also allowed for the option of a prelaunch analysis. In addition to this, data from 229 potential control firms were collected. The matching process left a final sample of 32 CG firms with an average of 73 control firms per year 14 for the purpose of calculating control firmadjusted returns. Sector index returns are used to calculate sector-adjusted returns whilst the Shanghai Composite Index is used as a proxy for market returns. Table 2 shows the sector representation in the CG sample and the control sample.
Table 2. Sector Representation: Corporate Governance and Control Portfolios
Sector Industrial Materials Consumer Discretionary Healthcare Information Technology Transportation Energy Infrastructure Real Estate Telecommunications Utilities Natural Resource Total Corporate Governance Firms 8 6 5 5 4 3 1 1 1 1 1 1 37 21.62% 16.22% 13.51% 13.51% 10.81% 8.11% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% Control Firms 17 23 20 10 6 7 3 3 7 2 5 6 110 15.45% 20.91% 18.18% 9.09% 5.45% 6.36% 2.73% 2.73% 6.36% 1.82% 4.55% 5.45%

Total (N ) 25 29 25 15 10 10 4 4 8 3 6 7 146

6.2 Method Previous research that has made use of abnormal returns methodology has focused heavily on the post- event returns of Initial Public Offerings (IPOs) and testing the Efficient Market Hypothesis (EMH) (Ritter, 1991; Loughran and Ritter, 1995; Brav and Gompers, 1997). Returns have been measured as the total return on a rebalanced portfolio, the total return on a buy-and-hold portfolio, and as cumulative returns. To judge whether a stocks return was abnormal usually required that it be benchmarked against some asset- pricing model. In the last ten years researchers have veered away from the traditional asset-pricing model (Sharpe, 1964; Lintner, 1965; and Black, 1972), !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! #&!For matching procedure and full breakdown of the rebalanced control firm portfolio per year see
Appendix B.

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with empirical models such as Fama and Frenchs 3 and 4 factor regressions (1992a, 1993) becoming increasingly popular. Other methods include size-, book-to-market, and momentum-matched portfolios (Kothari &Warner, 2001); and characteristic matched control firms (Ritter, 1991). This study will measure average adjusted returns and buy-and-hold returns based on the methodology outlined in Ritter (1991), making use of size and book-to-market control firms. The performance period under review is January 2, 2008 to January 2, 2012. At the beginning of each year, the 37 CG constituents are matched against appropriate control firms according to size (market capitalization) and market-to-book ratio. These characteristics are based on the aforementioned risk factor controls for expected stock returns (Fama and French, 1992a). Control firms matched in sector, as well as size and market-to-book ratio would have been ideal but this proved to be a difficult task. Thus two equally weighted portfolios are created: a Corporate Governance portfolio and a Conventional portfolio. The conventional portfolio is rebalanced at the beginning of each year under review, providing each CG with four different benchmarks over the four - year period. If more than one control firm was found for each CG firm at the beginning of a given year, then an average return was calculated across the set of control firms. In addition to this, CG constituents are benchmarked against their respective sector returns and overall market returns (as measured by the Shanghai Composite Index). The aim is to gauge whether the CG portfolio significantly outperforms the three benchmarks. If this occurs, it will provide support for the notion that a firms inclusion in the CG index is associated with increased corporate value and thus support the investigation of Hypothesis 4. The following long run return methodology is used to assess the stock performance of the firms and their respective portfolios. Due to the lack of dividends information for the sample, all returns are calculated on price return only. 1.2.1) Monthly benchmark adjusted returns: the monthly return on a CG stock minus the monthly benchmark return for the corresponding trade period. !"!"! = !!! - !!"#

$$!

Benchmarks (bm) are (1) well established companies listed on the SSE matched by size (market capitalisation) and book-to-market ratios (2) sector indices and (3) Shanghai Composite Index. 1.2.2) Average benchmark adjusted returns across all CG firms, where the average benchmark adjusted return on a portfolio of n stocks for event month t is the equally weighted arithmetic average of benchmark -adjusted returns. A standard comparison of means test-statistic (t-stat) is used to test for abnormal returns. !"! ! !
! ! ! !! !"!"

1.2.3) Cumulative Adjusted Returns from event month q to event month s, calculated as the summation of average benchmark-adjusted returns.
!

!"#!!! !
! !!

!"!

1.2.4) Holding period returns: measures the return on a buy and hold strategy where a stock is purchased at first closing market price after index launch. !"#!" !
! ! ! ! !!

! !!" ! ! !

Misspecification issues Barber and Lyon (1997a) report misspecification (specifically skewness) when abnormal returns use a benchmark reference portfolio. Skewness imparts a severe downward bias to the t-statistics used to evaluate buy-and-hold abnormal returns, thus making it harder to detect positive abnormal returns when they are truly present. To address this skewness bias they provide simulation evidence that a control firm approach can deal with the bias in the t-statistics. Fama (1998) also recommends a CAR approach to address this bias.

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Furthermore Kothari and Warner (1997) find that tests for long-horizon abnormal returns tend to be misspecified and warn that conclusions should be interpreted with caution, suggesting nonparametric and bootstrap tests to reduce misspecification. On the other hand, according to Blume and Stambaugh (1984) the rebalancing of portfolios (used in the control firm approach) can cause an upward bias in the measured returns of small firms, thus if the benchmark portfolio is rebalanced this can impart a downward bias in measured abnormal returns (since the portfolio of focal stocks is not rebalanced and the benchmark is subtracted). The recommended solution to the rebalancing bias is to use the buy-and-hold approach. For these reasons, buy-and-hold returns and the cumulative adjusted returns are calculated in an attempt to provide two different perspectives, dealing with the rebalancing bias caused by rebalanced portfolios on one hand, and the skewness bias inherent in buy-and-hold returns on the other hand. Finally, regarding bad model problems, Lyon, Barber and Tsai (1999) show that size and book-to market matched portfolios work well when the sample of focal firms is random, but not when the focal firms are uniformly large, from the same set of three or less industries, or have large pre-event price momentum15. 6.3 Results (LRARs) Table 3 reports adjusted returns (AR), cumulative adjusted returns (CAR), and adjusted holding period returns ("HPR) for the 48 months after the CGI launch. These are all averaged results, but will not be labeled as such in the following discussion or results. Matching firm ARs are made up of 17 negative and 31 positive monthly returns, however only 3 of the 48 monthly returns are significantly positive. The matching- firm CARs are negative up until month 9, implying that the CG portfolio was underperforming the conventional portfolio. From month 9 to 48, the CARs become positive, but significant superior performance is not achieved. Figure 3 illustrates how CG cumulative raw returns are negative until month 22. That matching firm adjusted returns are able to remain positive from month 10 to 22 is due to matched firms performing even more poorly than the CG firms. As 2008 marked the beginning of a global financial crisis, an average !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! #'!Price momentum is not used in this study, but more information can be found in Carhart (1997)!

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negative performance from both CG and conventional firms over this period is unsurprising. After month 22, CG cumulative raw returns become positive, taking a dip around month 27, but gaining positive momentum again after month 30. Matching- firm CARs reach a minimum of -4.94% in month 5 and a maximum of 8.10% in month 47, reflecting minor discrepancies between CG and conventional raw returns over the 48 month period. CARs of sector-adjusted and market adjusted returns show sustained significant over-performance of the CG portfolio from month 11 onwards (this coincides with the beginning of an upward trend in CG raw returns) with 48 month sector and market CARs of 52.35 % and 72.06 % respectively. Moving attention towards to the holding period returns, a slightly different story unfolds. This is expected considering the holding period matching- firm portfolios are not rebalanced. Otherwise known as buyand-hold returns, holding period returns show the return that is actually realized by the investor. Matching firm -adjusted HPRs exhibit a consistent and gradual increase over the 48- month period, with only two negative holding periods, experienced at the end of month 2 and 5. However, these adjusted HPRs are only significantly positive in 6 out of 48 holding periods, two of them being in the final 2 months. It is also interesting to note that CG HPR raw returns at month 48 are -25.41 %, compared with CAR raw returns of 6.75%. This difference is owed to the way the returns are calculated, with holding period returns being compounded, rather than just summed over 48 months. When comparing sector and market matched CAR and HPR we see parallel patterns of sustained significant superior returns of the CG portfolio, with 48 month adjusted HPRs of 23.84 % and 32.87% respectively. Absolute raw HPRs of the CG portfolio are however still negative. The matching-firm benchmarked returns and Shanghai Composite are the most important finding here CAR not showing significant cumulative over-performance, and HPR only showing significance at the very end of the period. These results do not show preliminary support for the significance of CG status as an explanatory factor in post CGI launch relative performance, but this second stage of analysis is performed nonetheless.

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Table 3. Average Adjusted Returns and !Holding Period Returns of a Chinese Corporate Governance Portfolio: 2008-2012
Matching firm -Adjusted (Size and M2B) CG (N) 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 37 Matched (N) !" !" !" !" !" !" !" !" !" !" !" !" #$ #$ #$ #$ #$ #$ #$ #$ #$ #$ #$ #$ !% !% !% !% !% !% !% !% !% !% !% !% &' &' &' &' &' &' &' &' &' &' &' &' Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 AR t (%) 0.47 -1.74 1.18 -1.67 -3.16 3.02 0.80 0.22 3.77* 0.62 -0.94 1.50 0.00 2.41 0.42 -3.20 3.30 -3.01 2.57 -4.85 0.74 -1.67 -0.83 0.47 1.02 -1.26 0.26 0.52 -2.14 2.52 -2.72 2.67 1.27 -0.08 1.92 1.14 2.00 -3.78 1.73 -0.20 -4.84 2.75* 0.81 -0.61 1.57 0.52 2.60* -0.95 CAR1,t (%) 0.47 -1.28 -0.10 -1.78 -4.94 -1.92 -1.12 -0.90 2.87 3.49 2.55 4.05 4.05 6.47 6.88 3.69 6.99 3.98 6.55 1.70 2.44 0.76 -0.06 0.40 1.42 0.17 0.43 0.95 -1.19 1.33 -1.39 1.29 2.56 2.47 4.40 5.53 7.53 3.76 5.49 5.29 0.44 3.20 4.01 3.40 4.97 5.50 8.10 7.15 ! HPR T (%) 0.57 -0.64 1.02 0.71 -1.53 1.10 2.10 1.36 3.09 2.56 2.17 3.12 2.46 2.19 3.75 3.85 5.59 5.98 7.23 7.55* 9.23* 10.49* 9.84 8.54 12.45 12.13 13.93 14.98* 13.97 11.64 10.03 13.39 14.92 17.72 22.21 22.50 18.68 18.19 16.06 13.90 11.51 14.13 17.59 16.28 13.98 17.55 19.01* 15.20* AR t (%) 2.06 3.75* 1.69 -1.49 -1.16 -1.26 5.16* -1.93 -3.49 -1.39 6.87* 5.79* 4.23* 4.69* 3.54* -0.27 3.64* -3.08 -0.58 0.82 2.69* 2.99* 1.56 0.25 6.44* 1.49 1.54 -0.74 -1.02 -0.43 1.48 5.74* 0.29 -1.13 3.64* -0.71 -0.11 1.85* 0.32 -1.19 -2.39 0.67 1.33 0.79 -0.21 1.96* 2.72* -5.07 Sector- Adjusted CAR1,t (%) 2.06 5.81* 7.5* 6.01 4.85 3.59 8.75* 6.82* 3.33 1.94 8.81* 14.6* 18.83* 23.52* 27.07* 26.80* 30.44* 27.36* 26.78* 27.61* 30.30* 33.29* 34.85 35.10* 41.53* 43.03* 44.56* 43.82* 42.81* 42.38* 43.86* 49.60* 49.89* 48.75* 52.39* 51.68* 51.57* 53.43* 53.74* 52.55* 50.17* 50.84* 52.17* 52.96* 52.75* 54.71* 57.42* 52.35* ! HPR T (%) 2.16 5.64* 6.34* 5.71* 4.52 2.53 5.24* 2.61 1.18 0.16 1.57 3.54* 5.01* 7.38* 10.33* 10.59* 12.71* 11.51* 12.93* 11.09* 13.45* 16.60* 19.27* 20.08* 25.57* 27.39* 29.32* 27.81* 25.56* 22.15* 25.05* 32.48* 33.99* 37.05* 41.84* 40.95* 36.67* 41.33* 40.53* 37.42* 31.43* 33.99* 36.56* 34.29* 28.65* 31.69* 32.06* 23.84* AR t (%) 6.46* 7.51* 0.45 -8.04 0.71 -3.65 6.70 -8.53 -0.99 -2.66 10.91* 9.39* 7.03* 6.06* 7.09* 0.87 1.06 -7.55 0.98 4.45* 1.76 4.25* 5.39* 0.05 9.74* 2.48 0.47 2.25 0.08 -2.71 3.60* 11.05 3.45* -0.96 5.80* -1.91 -3.08 4.76* -2.19 -2.91 -3.79 2.17* 3.50* 0.48 -2.99 0.52 2.49 -9.93 Market- Adjusted CAR1,t (%) 6.46* 13.97* 14.42* 6.37* 7.08* 3.43 10.13* 1.60 0.62 -2.04 8.87* 18.26* 25.29* 31.36* 38.44* 39.31* 40.37* 32.82* 33.80* 38.25* 40.01* 44.26* 49.65 49.65* 59.443* 61.92* 62.39* 64.64* 64.72* 62.01* 65.61* 76.66* 80.11* 79.14* 84.94* 83.04* 79.96* 84.72* 82.52* 79.61* 75.82* 78.00* 81.50* 81.97* 78.98* 79.50* 81.99* 72.06*

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! HPR T (%) 6.56* 13.37* 11.35* 6.18* 6.34* 2.42 6.03* -0.28 -0.58 -1.46 1.19 4.76* 7.12* 9.96* 14.47* 15.57* 16.37* 13.09* 15.05* 15.55* 17.78* 22.20* 27.72* 28.63* 36.32* 39.19* 40.54* 41.24* 39.32* 32.80* 37.77* 49.39* 53.49* 57.61* 65.02* 61.98* 54.41* 61.87* 58.64* 53.97* 46.21* 49.87* 54.35* 51.09* 41.85* 44.73* 44.82* 32.87*

Average benchmark-adjusted returns (!"! !, cumulative average adjusted returns (!"#!!! ) and adjusted holding period returns !!HPR).!!"! !
! ! ! ! !!!!!!" ! ! ! !!"# !,

where !!" is the price return on a CG firm i in event month t,

and !!"# is the corresponding price return on a benchmark firm (or averaged return on a set of benchmarks). !HPR=HPRit ! HPRbmt , where !"#!" !
! ! !!! !

! !!" ! ! !. A standard comparison of means test is used to

calculate test-statistics for all adjusted returns. (*) indicates a significant over-performance achieved by the CG firm, using a significance level of 5%. Benchmark average returns are based on a rebalanced matched portfolio, while benchmark holding period returns are calculated using the same matched firms over 48 months (76 firms). Market adjusted returns use the Shanghai Composite Index as a benchmark. Four year annualized returns are calculated as ((1+HPR) -1).
1/4

! !

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Figure 3. Cumulative Average Adjusted Returns for an Equally-Weighted Portfolio of 37 Corporate Governance Firms
B>>->>0$ D>->>0$ ,>->>0$

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12")32"4$56786*4&%9:;<'*&%;$+$ .=->,0$ 1%@&6(9:;<'*&%;$+$/=-C/0$

E>->>0$ =>->>0$

!"#$!%&'()*+$,-./0$

CAR

?"&@24)39A(7$:;<'*&%;+$.-B/0$ >->>0$ B$ =$ C$ E$ /$ ,$ .$ D$ F$ B>$ BB$ B=$ BC$ BE$ B/$ B,$ B.$ BD$ BF$ =>$ =B$ ==$ =C$ =E$ =/$ =,$ =.$ =D$ =F$ C>$ CB$ C=$ CC$ CE$ C/$ C,$ C.$ CD$ CF$ E>$ EB$ E=$ EC$ EE$ E/$ E,$ E.$ ED$ 9=>->>0$ 9E>->>0$ 9,>->>0$ 9D>->>0$ 9B>>->>0$

Figure 3. Cumulative average adjusted returns for an equally weighted portfolio of 37 Corporate Governance firms from 2008-2012, with yearly rebalancing. Four CAR series are plotted for 48 months after the launch of the CGI Index. 1) no adjustment (raw returns), 2) matching-firm adjusted, 3) sectoradjusted, and 4) Shanghai Composite- adjusted.

Figure 4. Adjusted Holding Period Returns for an Equally-Weighted Portfolio of 37 Corporate Governance Firms
?D/DD2$ ED/DD2$ 0D/DD2$ -D/DD2$ D/DD2$ 1$ -$ >$ 0$ .$ E$ @$ ?$ F$ 1D$ 11$ 1-$ 1>$ 10$ 1.$ 1E$ 1@$ 1?$ 1F$ -D$ -1$ --$ ->$ -0$ -.$ -E$ -@$ -?$ -F$ >D$ >1$ >-$ >>$ >0$ >.$ >E$ >@$ >?$ >F$ 0D$ 01$ 0-$ 0>$ 00$ 0.$ 0E$ 0@$ 0?$ ,-D/DD2$ !"#$!%&'()*+$,-./012$ ,0D/DD2$ ,ED/DD2$ ,?D/DD2$ ,1DD/DD2$ 3%B&8(,;<='*&%<$+$->/?02$ A"&B46)5,C(9$;<='*&%<+$1./-D2$ 34")54"6$789:8*6&%,;<='*&%<$+$ >-/?@2$

Figure 4. Holding period adjusted returns for an equally weighted portfolio of 37 Corporate Governance firms from 2008-2012 with no rebalancing. Four Holding Period Return series are plotted for 48 months after the launch of the CGI Index. 1) no adjustment (raw returns), 2) matching-firm adjusted, 3) sectoradjusted, and 4) Shanghai Composite-- adjusted.

HPR

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7. Wealth Relative Cross-Sectional Regressions

Hypothesis 4: The acquisition of CG status is significantly positively correlated with subsequent medium to long run stock performance. In an attempt to find sound statistical support for the final hypothesis, wealth relatives are calculated for a larger sample of 166 firms. These are used as dependent variables for cross-sectional regressions over a four-year period. The aim of this approach is to investigate whether the acquisition of CG status has indeed had a significant impact on the stock performance of these publicly listed firms. 7.1 Data The cross-sectional regressions make use of a sample of 166 firms consisting of both corporate governance and conventional firms. Table 4 provides a breakdown of CG vs. conventional firms, as well as sector representation, mean HPRs and wealth relatives. Prebetas are calculated from the 2007 stock returns for 6 months and 12 months prior to the launch. Market-to-book, P/E ratios, and market capitalizations on the launch date of 02 January 2008 were gathered from Datastream. Tables 4, 5 and 6 show descriptive statistics and mean performance categorized by sector. The mean size of the conventionals are less than half the mean size of the CG firms. Also CG firms and conventional firms had mean wealth relatives that exceed 1 for all of the holding periods under review.

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Table 4. Descriptive Statistics for Cross-Sectional Regression Variables of Corporate Governance Firms
Variable Size (RMB, Thousands) P/E ratio Market-to-book ratio Prebeta 6 months Prebeta 12 months 1 Yr HPR 2 Yr HPR 3 Yr HPR 4 Yr HPR 1 YR Wealth Relative 2 YR Wealth Relative 3 YR Wealth Relative 4 YR Wealth Relative Obs 53 53 53 53 53 53 53 53 53 53 53 53 53 Mean 21,992.44 58.10 5.84 0.87 0.97 -61.87% -21.45% -6.81% -37.02% 1.10 1.26 1.75 1.28 Std Dev 18,149.58 28.88 2.59 0.07 0.07 16.75% 26.37% 62.71% 41.03% 0.49 0.42 1.18 0.60 Min 2,122.82 23.80 2.56 0.77 0.84 -84.63% -66.93% -67.88% -81.88% 0.45 0.53 0.60 0.51 Max 81,685.75 153.30 14.42 1.05 1.16 -3.92% 44.13% 285.22% 130.87% 2.78 2.32 7.23 3.78

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Table 5. Descriptive Statistics for Cross-Sectional Regression Variables of Conventional Firms

Variable Size (RMB, Thousands) P/E ratio Market-to-book ratio Prebeta 6 months Prebeta 12 months 1 Yr HPR 2 Yr HPR 3 Yr HPR 4 Yr HPR 1 YR Wealth Relative 2 YR Wealth Relative 3 YR Wealth Relative 4 YR Wealth Relative Obs 103 100 103 103 103 103 103 103 103 103 103 103 103 Mean 7,688.76 77.09 5.26 0.8459261 0.95 -59.55% -7.24% 5.37% -30.61% 1.17 1.49 1.98 1.50 Std Dev 9,867.69 50.52 2.28 0.061215 0.06 13.47% 36.04% 51.00% 35.20% 0.39 0.58 0.96 0.61 Min 1,701.54 19.20 1.79 0.7488602 0.81 -82.15% -59.15% -68.51% -77.85% 0.52 0.66 0.59 0.66 Max 82,984.69 221.90 13.47 1.059329 1.11 -17.44% 121.23% 199.06% 126.17% 2.39 3.56 5.62 3.56

Tables 4 and 5: Descriptive statistics for wealth relative cross-sectional regression variables for CG and Conventional firms. Market-to-book is calculated as the total market capitalization divided by the companies book value (the value of assets less liabilities. P/E is the valuation ratio of the market value per share (share price) divided by the earnings per share (EPS). Size is represented by market capitalization (a stocks price multiplied by shares outstanding) measured in RMB (thousands). Holding period returns measure the return on a buy and hold strategy where a stock is purchased at first closing market price after index launch: !"#!" !
! ! !!! !

! !!" ! ! !! !"#!!"!

! ! !!! !

! ! !"#!" !!

! ! !!! !

! !"#!"# ! . A ratio

greater than one represents a superior return to that of the benchmark, while a ratio less than one represents an underperformance of the CG firm.

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Table 6. Mean Performance Categorized by Sector
Average 4-year Holding Period Returns (%) Industry Consumer Discretionary Industrials Information Technology Energy Materials Healthcare Real Estate Transportation Infrastructure Utilities Natural Resources Total CG -26.58 -27.63 -44.81 -50.65 -52.52 56.18 -58.30 -72.61 -44.76 -61.37 -30.33 -37.58 Conventional -37.02 -32.67 -26.23 -7.69 -36.88 12.24 -27.28 -52.16 -38.89 -30.13 -61.48 -30.74 Average 4 -year Wealth Relatives CG 1.54 1.63 1.16 1.06 1.02 2.05 1.29 0.77 1.32 0.92 1.25 1.27 Conventional 1.61 1.49 1.68 1.59 1.45 1.90 1.36 1.17 1.37 1.42 1.13 1.47 CG 5 9 7 3 7 4 2 4 1 6 5 53 Observations ( N ) Conventional 9 21 10 4 26 9 5 7 4 5 3 103 Total 14 30 17 7 33 13 7 11 5 11 8 156

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Table 6. Mean Performance Categorized by Sector: Holding period returns measure the return on a buy and hold strategy where a stock is purchased at first closing market price after index launch and wealth relatives are measured as the ratio of holding period returns of all sample firms to market returns (using a proxy of the Shanghai Composite Index). !"#!" !
! ! !!! !

! !!" ! ! !! !"#!!"!

! ! !!! !

! ! !"#!" !!

! ! !!! !

!"#!"# ! . For wealth relatives, a ratio greater than one represents a superior return to that of the benchmark, while a ratio less than one represents an underperformance of the CG firm.

7.2 Method Cross-sectional regressions are used to assess the impact of CG status on the performance of firms in the post-launch period. The dependent variables are wealth relatives for one to four -year holding periods, using the Shanghai Composite, a proxy for the market, as a benchmark. In their seminal paper of 1992, Fama and French find that size and book-tomarket equity combined, are able to explain cross-sectional variation in average stock returns associated with market !, size, leverage, book-to-market and E/P ratios. In the Chinese context Wang and Xu (2005) find that size, and not book-to-market are powerful explanatory variables of cross-sectional returns for the period 1996-2002. They argue that this makes perfect sense in the Chinese investment environment where fundamentals were reported with less accuracy and thus were paid less attention by investors. Modelling cross-sectional regressions allows for the measuring of the persistence of the influence of Famas (1992) risk variables, and when (if at all) a CG effect emerges within the four- year post launch period

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7.2.1 Variables Based on these previous findings the following variables were chosen for wealth relative cross-sectional regressions: Dependent Variables: Wealth relatives (WR) for the one to four year periods post CGI launch, measured as the ratio of holding period returns of all sample firms to Shanghai Composite Index holding period returns. It is defined as the ratio of the end-of-period wealth from holding the CG portfolio to the end-of-period wealth from holding the benchmark portfolio. A ratio greater than one represents a superior return to that of the benchmark, while a ratio less than one represents an underperformance of the CG firm. !"!
! ! ! ! !!

! ! !"#!" !!

! ! ! ! !!

! !"#!"# !

Main Independent Variable: CG Status is measured as a dummy variable (where 1= CGI constituent and 0= Conventional firm), taken on 02 January 2008. Control Variables LnSize: Size is represented by market capitalization (a stocks price multiplied by shares outstanding) measured in RMB (thousands). The size effect was first discovered by Banz (1981). For the purpose of normal distribution the natural log of market equity is used, but skewness is still present. Ln(Market-to-Book Equity): Contrary to previous research, this study will make use of the inverse of book-to-market equity. This does not affect the conclusions that are drawn from the regressions, only the direction of the relationships found. Market-to-book is calculated as: the total market capitalization divided by the companies book value (the value of assets less liabilities. This measure is synonymous with the Tobins Q measure mentioned in section 4. It is generally used by analysts to judge whether a company is

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under or overvalued by the market. A low market/book ratio is usually considered a good investment opportunity. Ln(Price/Earnings ratio): Similar to the market-to-book ratio, the inverse of the E/P ratio will be used: the P/E ratio. This is the valuation ratio of the market value per share (share price) divided by the earnings per share (EPS). A high P/E ratio means that investors are paying more for each unit of net income i.e. the stock is expensive (this is usually evaluated against a benchmark such as the industry P/E). Fama and French (1992a, 1993) find that book-to-market equity and size are sufficient to explain the relationship between E/P and expected returns. However Wang and Xu (2005) find E/P to be an insignificant predictor of expected returns in the context of the Chinese stock market. Beta (!): According to the CAPM Model (Sharpe, 1964; Lintner, 1965; and Black, 1972), expected returns are a positive linear function of their market !s. Although Fama and French (1992) find that size and book-to-market capture this effect, pre-!s from 2007, 6 and 12 months prior to the CGI launch date will be tested. For the purpose of this study, ! is calculated as: ! = [COVARIANCE (ra, rp) / VARIANCE (rp)], where ra = the rate of return of the asset and rp = the rate of return of the market. Sector dummies: Lastly, sector dummy variables will be used to control for a sector effect on returns. The 12 sectors tested are Consumer Discretionary, Industrials, Information Technology, Energy, Materials, Healthcare, Real Estate, Transport, Infrastructure, Utilities, Telecommunications and Natural Resources. Thus the cross-sectional regression equation estimated for all four wealth relatives is: !"!!"! =!CG-status+!LnSize1+!LnBook-to-Market1 +!P/E +!Industry+!Prebeta1 +c Despite the logging of variables for normal distribution, skewness was still found to exist in the LnSize and LnP/E variables. Table 7 shows a pairwise correlation matrix of all variables except for sector dummies.

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Table 7. Pairwise Correlation Matrix of Cross-sectional Regression Variables
CG status CG status LnSize LnP/E ratio LnM2B Prebeta 12 Prebeta 6 LnWR (1) LnWR (2) LnWR (3) LnWR (4)
1 0.5379** -0.1899* 0.1249 0.1211 0.1958* -0.1151 -0.2037* -0.1701* -0.2059** 1 -0.2601** 0.2761** 0.1593* 0.3335** -0.2707** -0.4646** -0.5018** -0.4732** 1 0.2930** 0.0825 0.0885 -0.0515 -0.0201 0.1292 0.0241 1 0.2080** 0.2841** -0.3762** -0.3240** -0.1628* -0.2333** 1 0.6829** -0.2793** -0.1086 -0.1490 -0.1191 1 -0.2982** -0.2193** -0.2397** -0.1191* 1 0.5980** 0.4332** 0.5484** 1 0.7929** 0.8928** 1 0.8135** 1

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LnSize

LnP/E

LnM2B

Prebeta 12

Prebeta 6

LnWR (1)

LnWR (2)

LnWR (3)

LnWR (4)

Table 7. Pairwise correlation matrix of cross-sectional regression variables, excluding sector dummies. Significance levels: ** p <0.01, * p < 0.05. ! = [COVARIANCE (ra, rp) / VARIANCE (rp)], where ra = the rate of return of the asset and rp = the rate of return of the market, calculated using data from 2007. Market-to-book is calculated as the total market capitalization divided by the companies book value (the value of assets less liabilities. P/E is the valuation ratio of the market value per share (share price) divided by the earnings per share (EPS). Size is represented by market capitalization (a stocks price multiplied by shares outstanding) measured in RMB (thousands). Wealth relatives measured as !"!
! ! !!! ! ! ! !!! !

! ! !"#!" !!

! !"#!"# !, the ratio of holding period returns of all sample firms to Shanghai Composite Index

holding period returns.

All of the four wealth relatives are significantly negatively correlated with size, marketto-book ratios and prebeta6. Furthermore there exists a high correlation between these three variables, which pre-empts the exclusion of one or more of them from the crosssectional regression models. Prebeta12 only has a significant correlation with WR(1) whilst prebeta6 has a significant negative correlation with all of the four wealth relatives. P/E ratio is significantly positively correlated with market-to-book and size but has no correlation with the wealth relatives, hence it is also likely to be excluded as an explanatory variable. CGstatus is significantly positively correlated with size, indicating that CG constituents are more likely to be large cap firm. This is expected, since the larger firms are complying with international regulations on foreign stock exchanges anyway. CGs negative correlation with P/E ratio also indicates that undervalued firms are more likely to have CG status. Using a significance level of 5%, CGstatus is found to be significantly negatively correlated with three of the four wealth relatives (at 1% significance for WR(4)). CG thus has a negative relationship with relative performance

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when measured against the market. This implies that conventional firms are better at outperforming the market (this is also evidenced by the mean wealth relatives in tables 4 and 5). The problem of persistent skewness in the size variable pre-empts a general model misspecification. Figure 5 shows a scatter plot depicting the skewness present in the size variable.

Figure 5. Scatter Plot of 4-Year Wealth Relatives Vs. Market Capitalization

("!!# '"$!# '"!!# &"$!# &"!!# %"$!# %"!!# !"$!# !"!!# !# %!)!!!# &!)!!!# '!)!!!# (!)!!!# $!)!!!# *!)!!!# +!)!!!# ,!)!!!# -!)!!!#

4-Year Wealth Relatives

Market Capitalization (RMB Thousands)

Figure 5. Scatter Plot of 4 -year wealth relatives against market capitalization. Wealth relatives are measured as !"! !
! ! !!! !

! ! !"#!" !!

! ! !!! !

! !"#!"# !, the ratio of holding period returns of sample

firms to Shanghai Composite Index holding period returns.

7.3 Results: Cross-sectional Regressions Table 8 reports the cross-sectional regressions on the wealth relatives spanning one to four year periods. No heteroscedasticity was found to be present in any of the models, although the fourth and final regression did not pass the omitted variables test. As this is a cross-sectional analysis, the same initial P/E ratios, market-to-book ratios and size values are used for each regression.

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Table 8. Wealth Relative Cross-sectional Regressions: 2008-2012

Ln Wealth Relative
1 YR (I) 2 YRS (II) 3 YRS (III) 4 YRS (IV)

CG Status

-0.026 (0.052)

0.035 (0.062) -0.162*** (0.034) -

0.117 (0.084) -0.287*** (0.045)

0.048 (0.071) -0.217*** (0.038)

Ln Size Prebeta (12 months)

-1.077*** (0.383) -0.291*** (0.062) 0.274*** (0 .089) 0.158** (0.063) 1.537*** ( 0.360)

Ln Market-to-Book Healthcare Industrials Transport constant

-0.204*** (0.064) ! -0.181* (0.084) 2.065*** (0.286) 27.59% 25.67% 156 -0.305** (0.132) 3.038*** (0.394) 35.12% 33.40% 156 -0.214* (0.111) 2.982*** (0.342) 24.55% 23.06% 156 0 .45*** (0.123)

R-squared Adjusted R-squared Observations ***p<0.01,**p<0.05,* p<0.1,

25.50% 23.02% 156

Table 8. Wealth Relative Cross-Sectional Regressions where CGstatus is a dummy variable (1=CG, 0= Conventaional). Prebetas are calculated as ! = [COVARIANCE (ra, rp) / VARIANCE (rp)], where ra = the rate of return of the asset and rp = the rate of return of the market, calculated using data from 2007. Market-to-book is calculated as the total market capitalization divided by the companies book value (the value of assets less liabilities. P/E is the valuation ratio of the market value per share (share price) divided by the earnings per share (EPS). Size is represented by market capitalization (a stocks price multiplied by shares outstanding) measured in RMB (thousands). Wealth relatives are measured as !"!
! ! !!! ! ! ! !!! !

! ! !"#!" !!

! !"#!"# !, the ratio of holding period returns of all sample firms to Shanghai

Composite Index holding period returns. 11 sector dummies were tested for significance.

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The most important finding is that CGstatus has no significant effect on the ability of the sample firms to outperform the market. The negative correlation between CGstatus and the wealth relatives discovered from the correlation matrix, is adequately captured by the inclusion of the LnSize variable. Unfortunately the persistent skewness in the LnSize variable (present only in conventional firm sample) means that the relationship found between size and wealth relatives can not be interpreted with certainty. Even after log transformation this skewness bias is still present. Nonetheless the models can still provide evidence of what factors have contributed to the medium to long-run performance of the sample firms. Model I is the only model that includes both the prebeta (12) and market-to-book ratio, while excluding the size variable. Market-to-book is the same as Tobins Q, so a negative relationship with expected returns (low market-to-book leads to overperformance) is what is expected, since undervalued firms are associated with higher expected returns. A higher prebeta(12) is correlated with lower or negative relative returns. In this case, these two variables rendered the size variable useless as an explanatory variable. Together prebeta(12) and market-to-book accounted for 14% of the explanatory power of model I, with Healthcare and Industrial sectors accounting for the remaining 11% of relative over/underperformance. Throughout all holding periods, P/E was found to have an insignificant contribution to future performance. Unsurprisingly, both of the !s from 2007 were unable to explain WRs in the other three models. Size and market-to-book adequately capture the effect of prebeta(6) in model II with market-to-book dropping off after year two. The latter result is intuitive, considering the variation of a firms marketto-book ratio over time. The sector variable Transport was found to have a significant negative relationship (at the 10% level) with relative performance in the three and four year holding periods, accounting for 10% of the variation in WR(4). From these results, however, we do not find support for the final hypothesis. If anything we find a negative relationship that is captured by size.

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8. Discussion of Results
Two complimentary analyses were performed on a sample of CG and conventional publicly listed firms from the Shanghai Stock Exchange. The LRAR (Long Run Abnormal Returns) measured the long run performance of CG firms against three different benchmarks, using two different returns methodologies. Despite the overwhelming evidence of significant sector and market-benchmarked over-performance by the CG firms (HPRs of 23.84% and 32.87% respectively), it was the adjusted matching-firm returns that were most pertinent in this study. They provided evidence that a CG portfolio was indeed able to outperform a Conventional portfolio using measurements of cumulative adjusted returns (CARs) and holding period returns (HPRs) by 7.15% and 15.20% respectively. However they also show this over-performance to be insignificant from a CAR perspective, and only significant by the final two months of the HPRs. As mentioned previously, HPRs represent the experience of the investor (Barber Lyon Tsai, 1999), but CARs allow for rebalancing of the matching firm portfolio. The graphed matching-firm CARs depict a negligible discrepancy between CG and conventional returns over the four-year period. Judging from the preliminary results alone, there was already a lack of support for the final hypothesis of CG status being significantly positively correlated with subsequent medium to long run relative performance. The second stage of analysis involved the cross-sectional regressions, using marketadjusted one to four-year wealth relatives as dependent variables. Well-known Fama (1992) risk factors are used as control variables along with a dummy variable of CGstatus. The estimation results from models II to IV, are somewhat consistent with Wang and Xus (2005) research that showed size, not market-to-book to be influential predictors of expected returns. However model I shows the ability of market-to-book and ! to capture the size effect on first year wealth relatives. This leads one to believe that panel data regressions might have showed similar results for each 12 month period i.e. using panel data, perhaps a size effect wouldnt have been as prevalent in models II to IV providng a more consistent findings related to the factors affecting expected returns.

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But the cross-sectional regressions served a different purpose, allowing one to gauge how long it takes (if at all) for the acquisition of CG status to become a significant explanatory variable of future relative performance. As suspected, the results lead to the rejection of the fourth and final hypothesis at the 5% significance level, and if anything, the relationship between CGstatus and WRs is a negative one. The conclusions from this regression study are however interpreted with caution, considering the bad modelling caused by the persistent skewness in the size variable, even after implementing log transformation. They are however consistent with the suspicions that arose after the preliminary analysis of LRARs, thus the combined results of the LRARs and the WR Cross-sectional Regressions provides sufficient statistical support for the rejection of the final hypothesis.

9. Summary and Conclusion

For the purpose of attracting international investment, improving investor confidence and curbing corporate scandals, China is showing increasing commitment to achieving an international standard of corporate governance. Corporate governance has been implemented through a top down legalistic approach, attempting to transplant structures from the market based Anglo-American System. This was followed by the code of corporate governance for listed companies in China, which addressed the shareholder rights, board structure and disclosure requirements. In 2005, the CSRC launched the state share reform, which was aimed at converting non-tradable shares into tradable shares and allowed individuals to hold a larger proportion of shares in listed companies. This has made a large contribution to the transformation of Chinas capital markets, weakening the governmental stranglehold on listed firms. On January 2, 2008 the Corporate Governance Index was launched by the SSE, with the aim of encouraging listed firms to improve their corporate governance practices, and promote rational investment by investors. Past theoretical and empirical research provides evidence of an association (if not a causal link) between corporate governance

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practices and performance. There is however limited evidence of abnormal stock returns as a result of corporate governance improvements (GIM, 2003; BCF, 2008). This study aimed to investigate 1) whether SSE CG constituents achieved positive matching-firm, sector and market-adjusted returns in the four years after the CGI launch. and 2) whether a significant relationship exists between the adoption of better corporate governance standards and the subsequent relative stock performance of Chinas publicly listed companies. The results of this study have shown solid support for rejection of Hypothesis 4: The acquisition of CG status is significantly correlated with subsequent medium to long run stock performance. This was in line with the findings of LRARs, which showed that CG firms were not able to significantly outperform their matched control firms. Thus, four years after the launch of the CGI, acquiring CG status has not had a significant influence on subsequent abnormal returns. Although the higher corporate value could be given on the belief of more western, market orientated corporate governance; there is very little evidence is to support this. It could be the case that their pledge of better corporate governance will only show a significant effect in the longer term. These findings not only make a contribution to corporate governance research, but also Chinese expected returns research. Chinas stock market is showing signs of more efficiency, with Fama (1992) risk factors (found to influence expected returns in developed markets), showing signs of predicting expected returns. Although Chinas stock market has always been considered more speculative in nature (Cheung, 2008), perhaps things are starting to change. Limitations of this study are that it reviews a single period of four years, only after the launch of the CGI, using a relatively small subsample of approximately 150 firms (of which only 37 were CG firms), compared to the population of approximately 900 listed firms on the exchange. These issues combined make it difficult to extrapolate and apply findings to the entire population and future time periods. Furthermore, comparing CG pre and post-launch benchmark adjusted performance would have been a good way to assess whether there was a significant

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difference in the CG firms adjusted performance. Comparing the pre and post periods had the potential to provide proof of a causal effect and insight into the issue of endogeneity, Another issue, which arose in the cross-sectional regressions, was the fact that the size variable remained skewed despite the use of log transformation -perhaps a larger sample could have prevented this. Extensions of this research could involve panel regressions for the returns of each year, in order to assess the impact and consistency of risk factors and actual corporate governance indicators with regards to short run abnormal returns. With time, it would also be possible to analyse multiple periods using different event points at which companies enter the CGI. In conclusion, if Chinas listed companies are hoping that a merit badge of corporate governance will immediately improve their relative corporate performance they may be overly optimistic. The results of this paper show that CG firms have not significantly outperformed matching firms in the post-launch period, and neither is CG status associated with superior relative over-performance of the market. This provides evidence that Chinese investors are not yet willing to pay a premium for CGI stocks.

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11. Appendix A - SSE CGI Appraisal Measures

The following are questions relating to the SSE Corporate Governance Appraisal Measures taken from Wang (2011). 1. Any guaranty, litigation, arbitration or other important matters that affect the companys continuing operations? 2. Do foreign companies guarantee comply with the Company Law, Securities Law as wells as the relevant provisions of SEC and the Stock Exchange? 3. Any violation of procedures and involvement of unfair related-party transactions during the past three years? 4. Are the procedures for the change of ownership of the controlling shareholder or the actual controller of the assets invested in the listed company complete? 5. Any competition in the same industry between the company and those partially controlled or wholly controlled by its controlling shareholder or the actual controller? 6. Heavy reliance on the controlling shareholder or the actual controller for the companys business and profits? 7. Any rejection of the allocation plan publicly announced through board of directors by the majority shareholders? 8. Any discrimination in the corporate charter of anti-takeover regulations? 9. Adoption of cumulative voting system on the general meeting of shareholders? 10. Any active seeking of internet to facilitate voting from small and medium shareholders in addition to the required use of internet to vote on the general meeting of shareholders by regulative bodies? 11. Existence of non-procedural recommendation or appointment of chairman and general manger? 12. Any long-term incentive plan or institutional arrangements for the directors and the management? 13. Any job-related crimes and illegal actions from the companys current or retired directors, supervisors, and senior managers in the past three years?

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14. Whether independent directors are nominated by the controlling shareholders or other affiliated shareholders? 15. Number of independent directors and representatives of non-controlling shareholders holding more than 50%? 16. Any independent opinion voiced by independent directors in the past three years? 17. Over one third of voting on the general meeting of shareholders by communication in the past one year? 18. Existence of issued reservations, negative comments, or incapability of making comments on the companys financial and accounting reports from CPA? 19. Any regular report of internal self-assessment and internal auditing to the public in the annual report? 20. Any disclosure of corporate social responsibility taken by the company in the annual report or in a separate report? More information on SSE CGI Appraisal Mesaures can be found in Chinese at: http://www.sei.gov.cn

12. Appendix B LRARs Matching Procedure

The following tables list all Corporate Governance firms (grey) and their corresponding matching control firms (white) based on size and market-to-book ratios. In the case where there was more than one matching firm available, an average return was calculated across the set of firms. At the beginning of each year the matching process was redone, thus providing a rebalanced portfolio of control firms over the four year period. This portfolio is used when calculating cumulative average adjusted returns (CARs). Holding period returns are calculated using the matching process from Year 1 over the entire four year period.

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YEAR 1 Company Name JIANGXI CHANGYUN CO.,LTD. Y.U.D Yangtze River Investment Industry Co.,Ltd. HENAN TALOPH PHARMACEUTICAL STOCK CO.,LTD SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL CO.,LTD. YABAO PHARMACEUTICAL GROUP CO., LTD. TONGLING JINGDA SPECIAL MAGNET WIRE CO.,LTD. Wuhan Yangtze Communication Industry Group Co.,Ltd QingHai HuaDing Industrial C0.,Ltd. Y.U.D Yangtze River Investment Industry Co.,Ltd. Shanghai Material Trading Co., Ltd. CHINA NATIONAL SOFTWARE & SERVICE COMPANY LIMITED NanZhi Co.,ltd.,Fujian Changchun FAWAY Automobile Components Co., Ltd NINGXIA BUILDING MATERIALS GROUP Co.,Ltd anhui!xinke!new!materials!co.,ltd. HENAN HUANGHE WHIRLWIND CO.,LTD. Wuhan Yangtze Communication Industry Group Co.,Ltd Deluxe Family Co., Ltd. FUJIAN LONGXI BEARING "GROUP#CO.,LTD. LONGJIAN ROAD & BRIDGE CO.,LTD. JIANGXI LIANCHUANG OPTOELECTRONIC SCIENCE AND TECHNOLOGY CO.,LTD CHANGLIN COMPANY LIMITED XINJIANG YOUHAO (GROUP) CO.,LTD Kaile Technology Co.,ltd.Hubei XINJIANG QINGSONG BUILDING MATERIALS AND CHEMICALS (GROUP) CO., LTD. AEOLUS TYRE CO.,LTD. GUIZHOU GUIHANG AOTOMOTIVE COMPONENTS CO., LTD KEDA INDUSTRIAL CO.,LTD. Industry Travel and Leisure Industrial Transportation Pharmaceuticals and Biotech Real Estate and Investment Services Pharmaceuticals and Biotech Electronic and Electrical Equipment Technology Hardware & Equipment Industrial Engineering Industrial Transportation Industrial Metals and Mining Software & Computer Services Forestry & Paper Automobiles and Parts Construction& Materials Industrial Metals and Mining Mining Technology Hardware & Equipment Construction& Materials Industrial Engineering Construction and Materials Electronic and Electrical Equipment Industrial Engineering General Retailers Chemicals Construction and Materials Automobiles and Parts Automobiles and Parts Industrial Engineering Size (RMB Thousands) 2,122.82 2,018.02 2,209.07 2,266.43 2,352.32 2,355.84 2,605.68 2,473.89 2,018.02 2,606.38 2,995.54 2,591.37 2,542.50 2,995.36 2,687.97 2,406.64 2,605.68 2,388.10 3,162.00 3,381.89 3,611.66 3,986.84 3,466.89 3,748.88 3,760.24 3,883.65 3,931.08 4,114.98 4,269.56 4,642.89 4,796.88 4,973.92 4,854.30 4,491.25 4,655.80 4,642.89 4,901.49 4,027.48 4,363.61 5,006.40 5,278.50 5,983.00 5,387.20 5,744.27 6,255.11 6,222.54 6,448.77 6,343.30 5,827.68 6,694.31 6,222.54 6,818.43 6,866.15 7,720.29 M2B 4.32 4.75 4.08 4.1 2.95 3.1 2.71 4.95 4.75 4.83 4.72 1.19 1.91 1.79 2.56 2.31 2.71 2.34 4.17 4.64 4.31 3.62 4.16 2.75 2.75 2.77 3.01 3.91 4.22 3.86 10.77 9.73 4.55 4.83 4.4 3.86 6.81 6.82 7.16 5.26 5.54 7.05 7.42 3.63 3.17 3.76 12.12 10.05 10.52 3.83 3.76 4.15 4.98 3.14

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WOLONG ELECTRIC GROUP CO.$LTD. Electronic and Electrical Equipment Changchun Gas Co.,Ltd Guangxi Wuzhou Zhongheng Group CO.,LTD. SINO-PLATINUM METALS CO.,LTD GUIZHOU REDSTAR DEVELOPING COMPANY LIMITED SHANGHAI HAIBO CO.,LTD. GANSU QILIANSHAN CEMENT GROUP CO.,LTD. Changchun Gas Co.,Ltd Hangzhou Silan Microelectronics Co.,Ltd. WUXI TAIJI INDUSTRY COMPANY LIMITED. METRO LAND CO.LTD JIANGSU KANION PHARMACEUTICAL CO.,LTD Xiamen Faratronic Co.,LTD. CHANGYUAN GROUP LTD. ZHANGZHOU PIENTZEHUANG PHARMACEUTICAL CO.,LTD. SHANGHAI JIAO YUN CO., LTD. NINGBO MARINE COMPANY LIMITED. HUAXIN CEMENT CO., LTD. Shanghai Baosight Software Co., Ltd. HUNDSUN TECHNOLOGIES INC. Sichuan MinJiang Hydropower co.,Ltd. FANGDA SPECIAL STEEL TECHNOLOGY CO., LTD HUAXIN CEMENT CO., LTD. Jiangsu Changjiang Electronics Technology Co., Ltd. XIAMEN KING LONG MOTOR GROUP CO.,TLD. Fiberhome Telecommunication Technologies Co.,Ltd Chemicals Pharmaceuticals and Biotech Mining Chemicals Travel and Leisure Construction and Materials Chemicals Technology Hardware & Equipment Chemicals Real Estate and Investment Services Pharmaceuticals and Biotech Electronic and Electrical Equipment Electronic and Electrical Equipment Pharmaceuticals and Biotech Automobiles and Parts Industrial Transportation Construction and Materials Software & Computer Services Software & Computer Services Electricity Automobiles and Parts Construction and Materials Technology Hardware & Equipment Automobiles and Parts Technology Hardware & Equipment

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SHANDONG BOHUI PAPER INDUSTRIAL CO.,LTD. EASTERN COMMUNICATIONS CO.,LTD. ZHEJIANG HISUN PHARMACEUTICAL CO.,LTD XINJIANG TIANYE CO.,LTD. Henan Pinggao Electric Co.,Ltd. TANGSHAN SANYOU CHEMICAL INDUSTRIES CO.,LTD.. Shandong Jinjiang Science & Technology Co.,Ltd Guangzhou Pharmaceutical Company Limited Forestry & Paper Technology Hardware & Equipment Pharmaceuticals and Biotech Chemicals Electronic and Electrical Equipment Chemicals Construction& Materials Pharmaceuticals and Biotech 7,395.19 7,676.68 8,437.47 8,596.39 8,632.71 10,963.66 10,465.13 10,584.80 10,592.61 11,068.89 10,592.61 11,209.34 11,238.01 11,141.82 10,584.80 11,537.53 11,141.82 11,610.46 11,988.83 11,664.94 11,141.82 11,209.34 12,049.69 12,426.57 12,927.03 12,426.57 13,449.33 13,753.81 13,884.50 13,481.13 13,753.81 13,884.50 13,573.16 13,740.69 15,045.52 14,941.47 16,232.69 17,285.41 16,322.18 16,917.98 16,570.95 17,285.41 43,743.19 44,805.77 25,472.49 24,064.52 15,628.17 14,941.47 22,236.04 24,064.52 2.98 4.27 5.58 5.37 5.83 4.41 4.64 4.48 6.67 6.73 6.67 5.86 3.74 5.87 4.48 3.05 5.87 8.86 10.95 5.96 5.87 5.86 3.01 4.24 3.79 4.24 4.79 6.32 4.92 4.67 6.32 4.92 8.08 7.15 7.62 4.79 6.37 6.22 4.36 4.23 5.8 6.22 5.02 4.75 4.36 2.98 7.61 4.79 4.94 2.98

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YUNNAN YUNWEI COMPANY LIMITED Chemicals TOP ENERGY COMPANY LTD.SHANXI Oil & Gas Producers

YUNNAN YUNWEI COMPANY LIMITED Chemicals Tasly Pharmaceutica Group CO., LTD. BEIQI FOTON MOTOR CO.,LTD. GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD Guangzhou Pharmaceutical Company Limited SHANGHAI CONSTRUCTION GROUP CO.!LTD GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD CHINAKINWA HIGH TECHNOLOGY CO., LTD BEIJING CAPITAL TOURISM CO.!LTD CHINA CYTS TOURS HOLDING CO.,LTD. GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD Tasly Pharmaceutica Group CO., LTD. Anhui Jianghuai Automobile Co.,Ltd. 3763109 YUEYANG FOREST PAPER CO., LTD. Neusoft Corporation YUEYANG FOREST PAPER CO., LTD. FOUNDER TECHNOLOGY GROUP CORP. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. XinJiang Ba Yi Iron & Steel Co., Ltd BEIJING VANTONE REAL ESTATE CO.,LTD SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. XinJiang Ba Yi Iron & Steel Co., Ltd Zhengzhou Yutong Bus Co.,Ltd. Shanghai Xinhua Media CO.,LTD XIAMEN TUNGSTEN CORP. DASHANG CO.!LTD. XINING SPECIAL STEEL CO.,LTD Joincare Pharmaceutical Group Industry Co., Ltd Shandong Huatai Paper Co.,Ltd. GUANGXI GUIGUAN ELECTRIC POWER CO.,LTD. Beijing TongRenTang Co.,Ltd Joincare Pharmaceutical Group Industry Co., Ltd Huadian Power International Corporation Limited CHINA MERCHANTS ENERGY SHIPPING CO., LTD. Guangzhou Baiyun International Airport Co.,ltd. Xinyu Iron Steel Co.,Ltd SHENGYI TECHNOLOGY CO., LTD. DASHANG CO.!LTD. NANJING TANKER CORPORATION Xinyu Iron Steel Co.,Ltd Pharmaceuticals and Biotech Automobiles and Parts Industrial Metals and Mining Pharmaceuticals and Biotech Construction and Materials Industrial Metals and Mining Electronic and Electrical Equipment Travel and Leisure Travel and Leisure Industrial Metals and Mining Pharmaceuticals and Biotech Automobiles and Parts Forestry & Paper Software & Computer Services Forestry & Paper Technology Hardware & Equipment Real Estate and Investment Services Industrial Metals and Mining Real Estate and Investment Services Real Estate and Investment Services Industrial Metals and Mining Automobiles and Parts General Retailers Industrial Metals and Mining General Retailers Industrial Metals and Mining Pharmaceuticals and Biotech Forestry & Paper Electricity Pharmaceuticals and Biotech Pharmaceuticals and Biotech Electricity Industrial Transportation Industrial Transportation Industrial Metals and Mining Electronic and Electrical Equipment General Retailers Industrial Transportation Industrial Metals and Mining

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YEAR 2 Company Name QingHai HuaDing Industrial C0.,Ltd. SINO-PLATINUM METALS CO.,LTD WUHAN EAST LAKE HIGH TECHNOLOGY GROUPE CO.,LTD. Y.U.D Yangtze River Investment Industry Co.,Ltd. XINJIANG YOUHAO (GROUP) CO.,LTD JIANGXI CHANGYUN CO.,LTD. SHANGHAI PROSOLAR RESOURCE CO.,LTD HENAN TALOPH PHARMACEUTICAL STOCK CO.,LTD GUIZHOU REDSTAR DEVELOPING COMPANY LIMITED Wuhan Yangtze Communication Industry Group Co.,Ltd CHONGQING GANGJIU CO.,LTD. LINGYUN INDUSTRIAL CORPORATION LIMITED Guangxi Wuzhou Zhongheng Group CO.,LTD. KUNMING PHARMACEUTICAL CORP. HANGZHOU JIEBAI GROUP CO., LIMITED. Hangzhou Silan Microelectronics Co.,Ltd. SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL CO.,LTD. KUNMING PHARMACEUTICAL CORP. anhui!xinke!new!materials!co.,ltd. METRO LAND CO.LTD SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL CO.,LTD. SICHUAN MINGXING ELECTRIC POWER CO.,LTD ZHEJIANG HAIYUE CO.,LTD Kaile Technology Co.,ltd.Hubei METRO LAND CO.LTD SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL CO.,LTD. SICHUAN MINGXING ELECTRIC POWER CO.,LTD FUJIAN LONGXI BEARING "GROUP#CO.,LTD. ZHEJIANG HAIYUE CO.,LTD JIANGXI LIANCHUANG OPTOELECTRONIC SCIENCE AND TECHNOLOGY CO.,LTD CHINA NATIONAL SOFTWARE & SERVICE COMPANY LIMITED Jiangsu Jiangnan High Polymer Fiber CO.,Ltd BAIDA GROUP CO.,LTD FANGDA SPECIAL STEEL TECHNOLOGY CO., LTD LONG YUAN CONSTRUCTION GUOUP CO.,LTD Shanghai Jinfeng Investment Co.,Ltd. NanZhi Co.,ltd.,Fujian AEOLUS TYRE CO.,LTD. GUANGDONG RONGTAI INDUSTRY CO.,LTD SUNNY LOAN TOP CO.,LTD Shanxi Coal International Energy Group Co.,LTD GUANGXI WUZHOU COMMUNICATIONS CO.,LTD. YABAO PHARMACEUTICAL GROUP CO., LTD. INNER MONGOLIA LANTAI INDUSTRIAL CO.,LTD SHENJI GROUP KUNMING MACHINE TOOL COMPANY LIMITED KEDA INDUSTRIAL CO.,LTD. DOUBLE COIN HOLDINGS LTD. TIANJIN ZHONGXIN PHARMACEUTICAL GROUP CORPORATION LIMITED NINGBO MARINE COMPANY LIMITED. GUIZHOU GUIHANG AOTOMOTIVE COMPONENTS CO., LTD XINJIANG QINGSONG BUILDING MATERIALS AND CHEMICALS (GROUP) CO., LTD. GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD GANSU QILIANSHAN CEMENT GROUP CO.,LTD. Shanghai Baosight Software Co., Ltd. SHANGHAI YIMIN COMMERCIAL GROUP CO., LTD.

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Industry Industrial Engineering Mining Real Estate Investment and Services Industrial Transportation General Retailers Travel and Leisure Real Estate Investment and Services Pharmaceuticals and Biotechnology Chemicals Technology Hardware and Equipment Industrial Transportation Automobiles and parts Pharmaceuticals and Biotech Pharmaceuticals and Biotechnology General Retailers Technology Hardware & Equipment Real estate investment & Services Pharmaceuticals and Biotechnology Industrial Metals and Mining Real Estate Investment & Services Real estate investment & Services Electricity Oil and Gas Producers Chemicals Real Estate Investment & Services Real estate investment & Services Electricity Industrial Engineering Oil and Gas Producers Electronic and Electrical Equipment Software & Computer Services Chemicals General Retailers Automobiles and Parts Construction and Materials Real Estate Investment Services Forestry & Paper Automobiles and parts Chemicals General Retailers Mining Industrial Transportation Pharmaceuticals and Biotech Chemicals Industrial Engineering Industrial Engineering Automobiles & Parts Pharmaceuticals and Biotechnology Industrial Transportation Automobiles and parts Construction and Materials Industrial Metals & Mining Construction & Materials Software & Computer Services General Retailers

Size (RMB Thouands) 982.83 951.98 953.55 960.10 978.08 1,136.63 1,184.50 1,088.10 1,292.93 1,211.76 1,269.85 1,310.40 1,300.33 1,388.66 1,390.51 1,353.67 1,376.54 1,388.66 1,370.97 1,323.76 1,376.54 1,406.94 1,410.75 1,385.05 1,323.76 1,376.54 1,406.94 1,488.00 1,410.75 1,435.02 1,455.02 1,482.39 1,497.43 1,834.43 1,819.58 1,834.07 1,962.26 1,908.45 1,941.03 1,971.76 2,004.00 2,007.42 1,971.65 1,906.92 2,082.03 2,399.51 2,333.38 2,410.71 2,613.44 2,628.02 2,692.90 2,697.54 2,727.76 2,679.87 2,689.96

M2B 1.31 1.65 1.05 1.56 1.04 1.94 3.6 1.9 1.21 1.2 1.55 1.53 2.29 2.09 2.4 1.67 1.23 2.09 1.18 0.86 1.23 1.22 1.44 0.93 0.86 1.23 1.22 1.85 1.44 1.65 1.43 1.91 1.74 1.04 0.8 1.01 1.05 1.14 1.14 1.5 0.79 0.93 2.26 1.95 2.35 1.96 1.84 2.17 1.39 1.88 1.79 1.43 1.29 4.24 2.11

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CHANGYUAN GROUP LTD. SHANGHAI YIMIN COMMERCIAL GROUP CO., LTD. XINJIANG QINGSONG BUILDING MATERIALS AND CHEMICALS (GROUP) CO., LTD. GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD GANSU QILIANSHAN CEMENT GROUP CO.,LTD. TOP ENERGY COMPANY LTD.SHANXI Shanghai Jin Jiang International Industrial Investment Co.,Ltd XIAMEN XGMA COMPANY LIMITED NINGXIA BUILDING MATERIALS GROUP Co.,Ltd XINING SPECIAL STEEL CO.,LTD XIAMEN XGMA COMPANY LIMITED YUEYANG FOREST PAPER CO., LTD. NINGXIA BUILDING MATERIALS GROUP Co.,Ltd TANGSHAN SANYOU CHEMICAL INDUSTRIES CO.,LTD.. XIAMEN XGMA COMPANY LIMITED YUEYANG FOREST PAPER CO., LTD. CHINA CYTS TOURS HOLDING CO.,LTD. XIAMEN XGMA COMPANY LIMITED YUEYANG FOREST PAPER CO., LTD. NINGXIA BUILDING MATERIALS GROUP Co.,Ltd CHINAKINWA HIGH TECHNOLOGY CO., LTD Xiamen International Airport CO.,LTD. SHANGHAI NEW WORLD CO.,LTD. Zhejiang Huahai Pharmaceutical Co.,LTD. Shandong Huatai Paper Co.,Ltd. HUAXIN CEMENT CO., LTD. YUEYANG FOREST PAPER CO., LTD. Anhui Jianghuai Automobile Co.,Ltd. 3763109 XinJiang Ba Yi Iron & Steel Co., Ltd Lingyuan Iron & Steel Co.,Ltd Fiberhome Telecommunication Technologies Co.,Ltd Electronic and Electrical Equipment General Retailers Construction and Materials Industrial Metals & Mining Construction & Materials Oil & Gas Producers Travel & Leisure Industrial Engineering Construction and Materials Industrial Metals and Mining Industrial Engineering Forestry and paper Construction and Materials Chemicals Industrial Engineering Forestry and paper Travel and Leisure Industrial Engineering Forestry and paper Construction and Materials Electronic and Electrical Equipment Industrial Transportation General Retailers Pharmaceuticals and Biotechnology Forestry & Paper Construction & Materials Forestry and paper Automobiles and Parts Industrial Metals & Mining Industrial Metals and Mining Technology Hardware & Equipment 2,717.02 2,689.96 2,692.90 2,697.54 2,727.76 3,055.29 3,128.38 3,195.68 3,344.59 3,076.06 3,195.68 3,254.48 3,344.59 3,089.76 3,195.68 3,254.48 3,177.42 3,195.68 3,254.48 3,344.59 3,340.28 3,570.74 3,626.86 3,638.59 3,346.73 3,548.47 3,254.48 3,763.11 3,816.91 3,561.73 4,333.70 4,467.58 4,995.32 4,355.13 4,578.63 4,995.32 4,407.92 4,467.58 4,995.32 4,431.01 4,578.63 4,995.32 4,553.45 4,219.38 4,557.92 4,578.63 4,995.32 4,679.02 4,578.63 4,995.32 5,264.88 5,259.90 5,275.18 6,217.15 6,394.58 6,411.37 6,394.58 6,502.45 6,394.58 6,712.24 7,029.59 8,107.50 7,995.38 11,076.67 13,382.78 17,534.00 20,757.66 1.75 2.11 1.79 1.43 1.29 1.85 2.27 1.67 1.62 1.26 1.67 1.08 1.62 1.16 1.67 1.08 1.48 1.67 1.08 1.62 2.54 2.68 2.04 3.05 0.55 0.97 1.08 0.87 1.32 1.15 1.35 0.88 1.6 1.46 1.93 1.6 1.08 0.88 1.6 1.99 1.93 1.6 4.25 5.06 1.59 1.93 1.6 2.16 1.93 1.6 2.28 1.91 1.76 1.43 1.86 2.11 1.86 1.6 1.86 2.81 2.55 1.31 2.02 2.77 3.42 1.38 1.77

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INNER MONGOLIA YILI ENERGY COMPANY LIMITED Pharmaceuticals and Biotechnology Joincare Pharmaceutical Group Industry Co., Ltd BEIJING VANTONE REAL ESTATE CO.,LTD SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. Joincare Pharmaceutical Group Industry Co., Ltd BEIQI FOTON MOTOR CO.,LTD. Pharmaceuticals and Biotechnology Real Estate and Investment Services Real Estate Investment Services Pharmaceuticals and Biotechnology Automobiles and Parts

INNER MONGOLIA YILI ENERGY COMPANY LIMITED Pharmaceuticals and Biotechnology Joincare Pharmaceutical Group Industry Co., Ltd SHENGYI TECHNOLOGY CO., LTD. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. Joincare Pharmaceutical Group Industry Co., Ltd JIANGSU KANION PHARMACEUTICAL CO.,LTD Huangshan Tourism Development Co.,Ltd. FOUNDER TECHNOLOGY GROUP CORP. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. Joincare Pharmaceutical Group Industry Co., Ltd Zhengzhou Yutong Bus Co.,Ltd. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. Joincare Pharmaceutical Group Industry Co., Ltd XIAMEN TUNGSTEN CORP. SHANDONG HUALU-HENGSHENG CHEMICAL CO.!LTD DASHANG CO.!LTD. NANJING TANKER CORPORATION Inner Mongolia Yili Industrial Beijing TongRenTang Co.,Ltd Inner Mongolia Yili Industrial SHANGHAI CONSTRUCTION GROUP CO.!LTD Inner Mongolia Yili Industrial ZHEJIANG HISUN PHARMACEUTICAL CO.,LTD Henan Pinggao Electric Co.,Ltd. Guangzhou Baiyun International Airport Co.,ltd. SHANGHAI TUNNEL ENGINEERING CO.,LTD. Neusoft Corporation Zhongjin Gold Huadian Power International Corporation Limited Wuhu Port Storage&Transportation Co.,LTD. Pharmaceuticals and Biotechnology Electronic and Electrical Equipment Real Estate Investment Services Pharmaceuticals and Biotechnology Pharmaceuticals and Biotech Travel and Leisure Technology Hardware & Equipment Real Estate Investment Services Pharmaceuticals and Biotechnology Automobiles and Parts Real Estate Investment Services Pharmaceuticals and Biotechnology Industrial Metals and Mining Chemicals General Retailers Industrial Transportation Food Producers Pharmaceuticals and Biotech Food Producers Construction and Materials Food Producers Pharmaceuticals and Biotech Electronic and Electrical Equipment Industrial Transportation Construction & Materials Software & Computer Services Mining Electricity Industrial Transportation

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Neusoft Corporation Zhongjin Gold Huadian Power International Corporation Limited Wuhu Port Storage&Transportation Co.,LTD. Software & Computer Services Mining Electricity Industrial Transportation 11,076.67 13,382.78 17,534.00 20,757.66 2.77 3.42 1.38 1.77

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YEAR 3 Company Name Industry QingHai HuaDing Industrial C0.,Ltd. Industrial Engineering Guangdong Guanhao High-tech Co., Ltd. Forestry and Paper JIANGXI CHANGYUN CO.,LTD. Travel and Leisure Henan Lingrui Pharmaceutical Co., Ltd Pharmaceuticals and Biotechnology Jiangsu Jiangnan High Polymer Fiber CO.,Ltd Chemicals FUJIAN LONGXI BEARING !GROUP"CO.,LTD. Industrial Engineering HENAN HUANGHE WHIRLWIND CO.,LTD. Mining TONGLING JINGDA SPECIAL MAGNET WIRE CO.,LTD. Electronic and Electrical Equipment SHAANXI AEROSPACE POWER HI-TECH CO.,LTD Industrial Engineering Wuhan Yangtze Communication Industry Group Co.,Ltd Technology Hardware and Equipment GUIZHOU REDSTAR DEVELOPING COMPANY Chemicals LIMITED SHAANXI AEROSPACE POWER HI-TECH CO.,LTD Industrial Engineering Wuhan Yangtze Communication Industry Group Co.,Ltd Technology Hardware and Equipment XINJIANG YOUHAO (GROUP) CO.,LTD General Retailers SICHUAN MINGXING ELECTRIC POWER CO.,LTD Electricity anhui#xinke#new#materials#co.,ltd. Industrial Metals and Mining CHANGLIN COMPANY LIMITED Industrial Engineering SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL Real estate CO.,LTD. investment & Services TDG HOLDING CO.,LTD. Electronic and Electrical Equipment Shanghai Material Trading Co., Ltd. Industrial Metals & Mining NanZhi Co.,ltd.,Fujian Forestry & Paper Shanghai Jinfeng Investment Co.,Ltd. Real Estate Investment Services Guodian Nanjing Automation Co.,LTD. Electronic and Electrical Equipment TDG HOLDING CO.,LTD. Electronic and Electrical Equipment Kaile Technology Co.,ltd.Hubei Chemicals XINJIANG TIANYE CO.,LTD. Chemicals LINGYUN INDUSTRIAL CORPORATION LIMITED Automobiles and parts Hangzhou Silan Microelectronics Co.,Ltd. Technology Hardware & Equipment GUIZHOU GUIHANG AOTOMOTIVE COMPONENTS CO.,Automobiles LTD and parts GUANGDONG RONGTAI INDUSTRY CO.,LTD Chemicals XIAMEN KING LONG MOTOR GROUP CO.,TLD. Automobiles & Parts NINGBO MARINE COMPANY LIMITED. Industrial Transportation Henan Yinge Industrial Investment Holding Co.,Ltd. Forestry and Paper WOLONG ELECTRIC GROUP CO.$LTD. Electronic and Electrical Equipment YABAO PHARMACEUTICAL GROUP CO., LTD. Pharmaceuticals and Biotech BEIJING CAPITAL TOURISM CO.$LTD Travel and Leisure ZHANGZHOU PIENTZEHUANG PHARMACEUTICAL CO.,LTD. Pharmaceuticals and Biotechnology Shanghai Baosight Software Co., Ltd. Software & Computer Services ZHANGZHOU PIENTZEHUANG PHARMACEUTICAL CO.,LTD. Pharmaceuticals and Biotechnology CHANGYUAN GROUP LTD. Electronic and Electrical Equipment Wuhu Port Storage&Transportation Co.,LTD. Industrial Transportation Henan Yinge Industrial Investment Holding Co.,Ltd. Forestry and Paper TOP ENERGY COMPANY LTD.SHANXI Oil & Gas Producers SHANGHAI FRIENDSHIP GROUP INCORPORATED COMPANY General Retailers Jiangsu Chengxing Phosph-Chemical Co.,Ltd Chemicals XINJIANG URBAN CONSTRUCTION!GROUP" CO.,LTD Construction & Materials Bright Oceans Inter-Telecom Corporation Technology Hardware and Equipment FANGDA SPECIAL STEEL TECHNOLOGY CO., LTD Automobiles and Parts SHANGHAI JIAO YUN CO., LTD. Automobiles & Parts JIANGSU YUEDA INVESTMENT COMPANY LIMITED Industrial Engineering Jiangsu Changjiang Electronics Technology Co., Ltd. Technology Hardware & Equipment CHINA CYTS TOURS HOLDING CO.,LTD. Travel and Leisure Wuhan Humanwell Healthcare (Group) Company Limited Pharmaceuticals and Biotechnology Guangzhou Pharmaceutical Company Limited Pharmaceuticals and Biotechnology GUANGDONG DONGYANGGUANG ALUMINUM CO.,LTD Industrial Metals & Mining JIANGSU KANION PHARMACEUTICAL CO.,LTD Pharmaceuticals and Biotech TIBET TIANLU CO., LTD. Construction and Materials SHANGHAI YIMIN COMMERCIAL GROUP CO., LTD. General Retailers Size (RMB Thouands) 1977.7 1,848.00 2,213.83 2,432.73 2,610.00 2,435.01 2,345.00 2,370.56 2,649.20 2,671.02 2,827.55 2,649.20 2,671.02 2,769.15 2,849.54 3,204.93 3,213.78 3,481.31 3,544.68 3,589.10 3,888.45 3,960.81 3,746.91 3,544.68 4,136.70 4,140.30 4,149.60 4,553.98 4,623.58 4,639.34 4,855.29 5,087.48 5,188.85 5,192.15 5,281.98 5,352.28 5,503.40 5,499.14 5,503.40 5,511.36 5,408.16 5,188.85 5,656.65 5,450.30 5,589.62 5,609.02 5,807.52 6,283.61 6,107.15 6,496.25 6,520.36 6,624.83 6,677.65 6,719.67 6,752.13 6,698.30 6,639.36 6,814.57 M2B 2.57 2.77 3.31 3.52 2.97 2.1 2.11 2.79 2.5 2.49 2.57 2.5 2.49 2.66 2.2 2.7 2.22 2.92 2.63 2.87 2.19 2.05 2.1 2.63 2.84 2.42 2.28 2.75 3.11 2.54 2.82 2.65 2.54 2.17 5.36 5.21 5.24 7.54 5.24 2.67 2.15 2.54 3.36 3.26 3.57 3.32 3.88 3.04 3.07 2.96 2.72 2.85 3.42 2.5 3.09 5.54 6.26 5.04

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Guangxi Wuzhou Zhongheng Group CO.,LTD. Pharmaceuticals and Biotech Shanghai QiangSheng Holding Co.,LTD. Travel & Leisure SHANGHAI YIMIN COMMERCIAL GROUP CO., LTD. General Retailers CHINAKINWA HIGH TECHNOLOGY CO., LTD Electronic and Electrical Equipment Jiangsu Zhongtian Technologies Co.,Ltd. Technology Hardware and Equipment XINING SPECIAL STEEL CO.,LTD Industrial Metals and Mining YUNNAN YUNWEI COMPANY LIMITED Chemicals NINGXIA BUILDING MATERIALS GROUP Co.,Ltd Construction and Materials TANGSHAN SANYOU CHEMICAL INDUSTRIES Chemicals CO.,LTD.. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT Real Estate Investment CO.LTD. Services GANSU QILIANSHAN CEMENT GROUP CO.,LTD. Construction & Materials FOUNDER TECHNOLOGY GROUP CORP. Technology Hardware & Equipment INNER MONGOLIA YILI ENERGY COMPANY LIMITED Pharmaceuticals and Biotechnology Shandong Huatai Paper Co.,Ltd. Forestry & Paper INNER MONGOLIA YILI ENERGY COMPANY LIMITED Pharmaceuticals and Biotechnology KEDA INDUSTRIAL CO.,LTD. Industrial Engineering Shanghai Xinhua Media CO.,LTD General Retailers SHENGYI TECHNOLOGY CO., LTD. Electronic and Electrical Equipment Shandong Jinjiang Science & Technology Co.,Ltd Construction & Materials BEIJING VANTONE REAL ESTATE CO.,LTD Real Estate and Investment Services Lingyuan Iron & Steel Co.,Ltd Industrial Metals and Mining Zhengzhou Yutong Bus Co.,Ltd. Automobiles and Parts Shanghai Xinhua Media CO.,LTD General Retailers Henan Pinggao Electric Co.,Ltd. Electronic and Electrical Equipment Beijing TongRenTang Co.,Ltd Pharmaceuticals and Biotech Henan Pinggao Electric Co.,Ltd. Electronic and Electrical Equipment Tasly Pharmaceutica Group CO., LTD. Pharmaceuticals and Biotechnology SHANGHAI CONSTRUCTION GROUP CO.!LTD Construction and Materials SHANDONG HUALU-HENGSHENG CHEMICAL CO.!LTD Chemicals Guangzhou Baiyun International Airport Co.,ltd. Industrial Transportation SHANDONG HUALU-HENGSHENG CHEMICAL CO.!LTD Chemicals ZHEJIANG HISUN PHARMACEUTICAL CO.,LTD Pharmaceuticals and Biotech GUANGXI GUIGUAN ELECTRIC POWER CO.,LTD. Electricity Fiberhome Telecommunication Technologies Co.,Ltd Technology Hardware & Equipment GUANGXI GUIGUAN ELECTRIC POWER CO.,LTD. Electricity NANJING TANKER CORPORATION Industrial Transportation XinJiang Ba Yi Iron & Steel Co., Ltd Industrial Metals & Mining XIAMEN TUNGSTEN CORP. Industrial Metals and Mining XinJiang Ba Yi Iron & Steel Co., Ltd Industrial Metals & Mining Anhui Jianghuai Automobile Co.,Ltd. 3763109 Automobiles and Parts Anhui Hengyuan Coal Industry and Electricity Power Co., Ltd. Mining BEIQI FOTON MOTOR CO.,LTD. Automobiles and Parts CHINA MERCHANTS ENERGY SHIPPING CO., LTD. Industrial Transportation Neusoft Corporation Software & Computer Services Inner Mongolia Yili Industrial Food Producers Huadian Power International Corporation Limited Electricity Jiangsu Expressway Company Limited Industrial Transportation 6,920.04 6,988.30 6,814.57 7,551.20 7,946.28 7,775.38 7,302.38 7,272.64 8,095.35 8,166.32 8,215.80 8,891.40 8,965.23 9,165.35 8,965.23 9,901.99 10,248.61 9,905.19 9,588.86 10,160.28 10,468.10 10,392.63 10,248.61 10,516.89 10,952.97 10,516.89 10,931.19 11,120.34 11,645.16 11,672.50 11,645.16 11,673.60 11,646.75 11,804.89 11,646.75 12,096.06 12,263.18 12,909.86 12,263.18 13,725.04 13,345.90 17,457.57 19,433.01 21,350.68 21,166.06 28,676.09 27,244.43 5.19 4.46 5.04 3.69 4.05 3.05 2.8 2.8 2.74 3.14 3.2 2.17 1.63 1.51 1.63 6.68 4.56 3.75 3.56 3.18 2.82 4.19 4.56 3.86 3.36 3.86 3.31 1.44 2.44 1.78 2.44 4.33 3.85 3.36 3.85 2.8 3.63 5.05 3.63 2.56 2.44 2.17 1.99 4.99 5.02 2.25 2.2

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YEAR 4 Company Name QingHai HuaDing Industrial C0.,Ltd.

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Industry Industrial Engineering Automobiles and parts Construction & Materials Travel and Leisure Construction & Materials Automobiles and parts Industrial Transportation Forestry & Paper Chemicals Technology Hardware and Equipment Industrial Engineering Chemicals Travel & Leisure Chemicals Travel & Leisure Real estate investment & Services
Industrial Transportation

Size (RMB Thouands)

M2B

NBTM NEW MATERIALS GROUP Co., Ltd. LONGJIAN ROAD & BRIDGE CO.,LTD.
JIANGXI CHANGYUN CO.,LTD.

2,190.86 2,248.25 2,426.37 2,427.41 2,426.37 2,248.25 2,459.20 3,506.10 3,561.96 3,233.34 3,552.00 3,561.96 3,827.78 3,740.97 3,827.78 3,861.02 3,920.15 3,965.98 4,605.27 4,525.01 4,777.11 4,888.46 4,876.58 5,087.25 5,052.91 5,123.25 5,164.75 5,052.91 5,123.25 5,956.11 5,857.48 5,988.63 5,856.16 6,194.56 5,988.63 6,266.22 6,016.04 6,187.50 6,530.14 6,405.67 6,390.12 6,862.54 7,045.27 7,002.85 7,017.01 7,757.26 7,884.21 7,764.27 7,801.33 7,841.69 7,846.94 7,827.81 7,884.21 7,211.96 8401.43 8,144.57 8,601.22 8,977.10 8,691.53 9,271.52 9,452.71 9,001.68 9,048.16 9,848.33 9,452.71 9,936.09 9,452.71 10,143.00 10,033.97 10,900.49 10,891.29 10,933.32 10,891.29

2.79 3.51 3.2 3.18 3.2 3.51 3.41 2.41 2.48 2.85 3.08 2.48 3.04 2.52 3.04 2.97 1.89 1.29 5.48 5.79 5.39 1.51 2.33 4.33 4.79 3.94 4.38 4.79 3.94 2.33 2.04 2.1 2.25 1 2.1 5.49 5.58 4.56 2.28 2.48 2.51 2.42 2.14 1.82 1.85 1.92 1.57 5.41 4.09 4.09 5.71 1.56 1.57 1.43 2.99 2.86 3.69 2.12 2.37 4.73 3.92 3.92 3.9 4.64 3.92 5.81 3.92 1.48 3.22 2.67 6.6 3.28 6.6

LONGJIAN ROAD & BRIDGE CO.,LTD. NBTM NEW MATERIALS GROUP Co., Ltd. Y.U.D Yangtze River Investment Industry Co.,Ltd.
NanZhi Co.,ltd.,Fujian

Jiangsu Jiangnan High Polymer Fiber CO.,Ltd Wuhan Yangtze Communication Industry Group Co.,Ltd
FUJIAN LONGXI BEARING !GROUP"CO.,LTD.

Jiangsu Jiangnan High Polymer Fiber CO.,Ltd SHANGHAI HAIBO CO.,LTD.

Kaile Technology Co.,ltd.Hubei

SHANGHAI HAIBO CO.,LTD. SHANGHAI TONGJI SCIENCE & TECHNOLOGY INDUSTRIAL CO.,LTD.
NINGBO MARINE COMPANY LIMITED.

SHANDONG BOHUI PAPER INDUSTRIAL CO.,LTD.

Shanghai Baosight Software Co., Ltd.

Forestry and paper

Software & Computer Services

LESHAN ELECTRIC POWER CO.,LTD. WUHAN EAST LAKE HIGH TECHNOLOGY GROUPE CO.,LTD.
TOP ENERGY COMPANY LTD.SHANXI

Electricity Real Estate Investment and Services

Oil & Gas Producers

CHANGLIN COMPANY LIMITED

GUIZHOU REDSTAR DEVELOPING COMPANY LIMITED

Industrial Engineering
Chemicals

HUNAN CORUN NEW ENERGY CO.#LTD. CHINA NATIONAL SOFTWARE & SERVICE COMPANY LIMITED
anhui$xinke$new$materials$co.,ltd.

Industrial Metals and Mining Software & Computer Services

Industrial Metals and Mining

HUNAN CORUN NEW ENERGY CO.#LTD. CHINA NATIONAL SOFTWARE & SERVICE COMPANY LIMITED
CHINA CYTS TOURS HOLDING CO.,LTD.

Industrial Metals and Mining Software & Computer Services

Travel and Leisure

Shanghai QiangSheng Holding Co.,LTD. SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD. LONG YUAN CONSTRUCTION GUOUP CO.,LTD
Shandong Huatai Paper Co.,Ltd.

Travel & Leisure Real Estate Investment Services Construction and Materials
Forestry & Paper

SHANGHIA JINQIAO EXPORT PROCESSING ZONE DEVELOPMENT CO.LTD.

YABAO PHARMACEUTICAL GROUP CO., LTD.

Real Estate Investment Services Pharmaceuticals and Biotech Industrial Engineering Electronic and Electrical Equipment
Industrial Metals and Mining

SHAANXI AEROSPACE POWER HI-TECH CO.,LTD Xiamen Faratronic Co.,LTD.

XINING SPECIAL STEEL CO.,LTD

CHONGQING JIULONG ELECTRIC POWER CO.,LTD Changchun FAWAY Automobile Components Co., Ltd WINTIME ENERGY CO.,LTD.
BEIJING VANTONE REAL ESTATE CO.,LTD

Electricity Automobiles & Parts Oil and Gas Producers

Real Estate and Investment Services

Lingyuan Iron & Steel Co.,Ltd NINGXIA BUILDING MATERIALS GROUP Co.,Ltd
TANGSHAN SANYOU CHEMICAL INDUSTRIES CO.,LTD..

Industrial Metals and Mining Construction and Materials

Chemicals

JIANGSU HONGTU HIGH TECHNOLOGY CO.,LTD.

JIANGSU KANION PHARMACEUTICAL CO.,LTD

Technology Hardware and Equipment

Pharmaceuticals and Biotech

ZHENGZHOU COAL INDUSTRY & ELECTRIC POWER CO.,LTD. Deluxe Family Co., Ltd. TIANJIN ZHONGXIN PHARMACEUTICAL GROUP CORPORATION LIMITED
NANJING TANKER CORPORATION

Mining Construction and Materials Pharmaceuticals and Biotechnology

Industrial Transportation

JIANGSU HONGTU HIGH TECHNOLOGY CO.,LTD. HUAXIN CEMENT CO., LTD.

FANGDA SPECIAL STEEL TECHNOLOGY CO., LTD

Technology Hardware and Equipment Construction & Materials

Automobiles and Parts Construction & Materials Electronic and Electrical Equipment Technology Hardware & Equipment Industrial Metals & Mining Electronic and Electrical Equipment Technology Hardware & Equipment Software and Computer Services Industrial Engineering Electronic and Electrical Equipment Technology Hardware & Equipment Technology Hardware & Equipment Technology Hardware & Equipment Industrial Transportation Electricity Electronic and Electrical Equipment Automobiles & Parts Automobiles and Parts Automobiles & Parts

GANSU QILIANSHAN CEMENT GROUP CO.,LTD. Guodian Nanjing Automation Co.,LTD.

FOUNDER TECHNOLOGY GROUP CORP.

XinJiang Ba Yi Iron & Steel Co., Ltd

CHINAKINWA HIGH TECHNOLOGY CO., LTD

Jiangsu Changjiang Electronics Technology Co., Ltd. Beijing Teamsun Technology Co.,Ltd Xiangtan Electric Manufacturing Co., Ltd.
CHANGYUAN GROUP LTD.

Jiangsu Changjiang Electronics Technology Co., Ltd.

Hangzhou Silan Microelectronics Co.,Ltd.

Jiangsu Changjiang Electronics Technology Co., Ltd.

Guangzhou Baiyun International Airport Co.,ltd.

GUANGXI GUIGUAN ELECTRIC POWER CO.,LTD.

SHENGYI TECHNOLOGY CO., LTD.

DOUBLE COIN HOLDINGS LTD.

Zhengzhou Yutong Bus Co.,Ltd.

DOUBLE COIN HOLDINGS LTD.

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Anhui Jianghuai Automobile Co.,Ltd. 3763109

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DASHANG CO.!LTD.
KEDA INDUSTRIAL CO.,LTD.

AVIC HEAVY MACHINERY CO.,LTD

SHANGHAI CONSTRUCTION GROUP CO.!LTD

CHINA MERCHANTS ENERGY SHIPPING CO., LTD.

Huadian Power International Corporation Limited

CHINA MERCHANTS ENERGY SHIPPING CO., LTD.

Beijing TongRenTang Co.,Ltd

CHONGQING DEPARTMENT STORE CO.,LTD. Fiberhome Telecommunication Technologies Co.,Ltd Tasly Pharmaceutica Group CO., LTD.
ZHEJIANG HISUN PHARMACEUTICAL CO.,LTD

Tasly Pharmaceutica Group CO., LTD.

Guangxi Wuzhou Zhongheng Group CO.,LTD.

Tasly Pharmaceutica Group CO., LTD.

Neusoft Corporation

Automobiles and Parts General Retailers Industrial Engineering Industrial Engineering Construction and Materials Industrial Transportation Electricity Industrial Transportation Pharmaceuticals and Biotech General Retailers Technology Hardware & Equipment Pharmaceuticals and Biotechnology Pharmaceuticals and Biotech Pharmaceuticals and Biotechnology Pharmaceuticals and Biotech Pharmaceuticals and Biotechnology Software & Computer Services General Retailers Automobiles and Parts Mining Industrial Metals and Mining Food Producers

13,699.27 13,919.32 14,265.33 14,735.36 15,203.64 14,111.25 17,408.57 14,111.25 17,853.92 16,416.10 18,272.84 21,049.32 18,615.85 21,049.32 19,351.22 21,049.32 19,690.59 21,692.31 25,611.39 25,949.99 32,455.42 30,582.08

2.39 3.93 7.15 4.92 1.46 1.5 1.36 1.5 5.14 6.02 4.7 5.84 4.14 5.84 9.69 5.84 4.21 4.04 2.89 2.79 9.43 5.08

BEIJING WANGFUJING DEPARTMENT STORE (GROUP)CO.,LTD.

BEIQI FOTON MOTOR CO.,LTD.

Shanxi Coal International Energy Group Co.,LTD

XIAMEN TUNGSTEN CORP.

Inner Mongolia Yili Industrial