Why are the big shareholders and executives of gem companies fleeing wildly?

Absrtact: With the Gem 2010 Annual Report and the 2011 first quarterly Bulletin of the disclosure, was dubbed high performance, high growth of the myth of the gem company performance flat, growth no longer, make people surprised. At the same time, since the beginning of this year to the author deadline for a deal

With the 2010 Annual report of the Gem and the first quarterly bulletin in 2011, the company was crowned with high performance and high growth myth, and the growth was no longer. At the same time, since the beginning of this year to the author of the day before the deadline, such as Chart 1, according to our incomplete statistics, 21 gem companies 30 major shareholders or senior executives reduced by 68 times, reducing the amount of nearly 3 billion yuan. Why are the big shareholders and executives of gem companies fleeing wildly? Will their reduction endanger and to what extent endanger the interests of small shareholders? What causes them to flee madly?

Why do big shareholders and executives reduce their holdings? Are they going to sell the stocks they hold? Definitely not! The stock price is overvalued, they will reduce? Of course! Once there was a doubt that the gem might have a valuation bubble, analysts, some media and some academics always defended the gem's valuation bubble with high performance and high growth. At the moment, big shareholders and executives are using their holdings to provide indisputable evidence of the gem's valuation bubble and the near-castle-like growth of the gem. Do the reduction actions of big shareholders and executives give their defenders a slap in the face? Or are their defenders winning the time for their strategic retreat?

Chart 1 reports the valuation Index and financial data of some of the gem reduction companies. There are a few things we can do to analyze this:

First, reduce the price/earnings ratio, that is, the average reduction of large shareholders and senior executives and the sale of earnings per share in the previous year. From our 21 sample companies, the average rate of reduction is 73.5 times times, the level of valuations in the Shanghai and Shenzhen, the highest 25%. You may wish to consider if the average return on investment in the whole society is 10%. We will be 1 yuan profit sold a price of 73.50 yuan, and then it is 10% of the return on investment will be 73.50 yuan to reduce the price of investment, every year can earn 7.35 yuan profit? Does that mean 6.35 times times more than the 1 dollars we sell a year? Does this mean that the reduction in holdings is overvalued by nearly 7.35 times times?

We may wish to further think, if Zhang will be worth only 10 yuan of Apple at 30 yuan to sell the price to Doe, then the price of Apple back to 10 yuan, Zhang is not earned 20 yuan? Did Lee four lose 20 dollars? Will selling overvalued stocks to retail investors mean that big shareholders and executives Rob retail investors?

Second, the change in performance. The change in earnings per share in Figure 1 refers to the difference between earnings per share in 2010 years and earnings per share in the year before the IPO, from 21 sample companies, reducing the company's earnings per share of the average reduction of 0.0044 yuan, of which Meteno earnings per share fell 0.41 yuan, Dayu water saving per share fell by 0.20 yuan. The change in the return on net assets in Chart 1 also refers to the 2010-year rate of return on net assets relative to the amount of the year before the IPO. The return on net assets of 21 companies has fallen by 12.77% per cent. Does this mean that the previously acclaimed high performance and growth is but a "beautiful legend"? The bursting of the myth of high performance and high growth undoubtedly strengthens the urgency of reducing the large shareholder and executive. We define the waiting period for the first reduction day and restricted shares of the days between the lifting date, it is not difficult to find that 21 sample companies on the average in the restricted shares after the lifting of the 20 days that began to reduce, of which 5 companies in the lifting on the day that began to reduce. Is the urgency of reducing the lack of confidence in the future performance and growth of large shareholders and executives who have an advantage over retail investors? Does it mean that if you don't rush out, you'll get caught?

We will report the relevant data of the sample company in Figure 2 by the horizontal ratio of the large shareholder and senior executives, and the vertical axis by reducing the quantity. It is not difficult to find that the reduction of P/E and reduction in quantity is roughly positive correlation. In other words, the higher the price/earnings ratio, the more the reduction. Does this indicate that the higher the level of valuation of gem companies, the higher the degree of overvaluation, the stronger the incentive for large shareholders and executives to reduce their holdings? Does this mean that the more wealth the big shareholders and executives rob from retail investors?

Let's take a look at the relationship between the reduction of the P/E ratio and the holding period of large shareholders and senior executives as shown in Figure 3. We found that the higher the price/earnings ratio, the shorter the deadline for large shareholders and executives to wait after the lifting of restricted shares, and the higher the urgency of the reduction, does this indicate that the higher the degree of overvaluation, the more urgent the major shareholders and executives want to escape in order to avoid the return of stock prices to value?

Combined with the above evidence, we have enough reason to believe that, at least for our sample companies, reducing the gem stock, there is a valuation bubble, the larger the valuation bubble, the more the number of reduction, the urgency of reducing the stronger!

As we have previously analysed, the reduction of gem stocks with valuation bubbles will undoubtedly mean reducing the redistribution of wealth between shareholders and executives and retail investors. At the same time, we also noted that, on average, 21 sample companies in the IPO to reduce the day, the average increase in the reduction of shares of 65.26%, and in the reduction date to the author two days before the deadline, the average reduction in the stock price of 30.11%. In other words, these underweight people, almost very accurately in the stock price at the highest level of reduction. And at the highest level of reduction, is often the highest value bubble, the reduction of the number of people from the hands of the investors robbed the most wealth. According to media reports, Tianlong photoelectric in the large shareholder reduction before the disclosure of "into the polysilicon ingot Furnace" and "LED Sapphire long Crystal Furnace" project, the two-tier market share price rose. At the same time, "Dongxing, Guohai, Warburg and the Yangtze River, such as seller agencies constantly recommended", and gave a very high target price and profit forecasts. If this is just a coincidence, we can only sigh, it is a coincidence that "can"! If it is intentional collusion, it means that analysts, listed companies and the reduction of the mutual cooperation between the robbery of retail investors!

Reduction is because of valuation bubbles, then the cause of the gem valuation bubble? There is no doubt that the existing distribution system and the lack of supervision.

First, the lack of market restraint forces. From the interest point of view, securities brokers, sponsors, listed companies and their major shareholders and executives, is undoubtedly a vested interest in high valuations, they naturally want to 1 yuan to sell the profits of the highest possible price. But market constraints, such as investment funds, such as institutional investors, the vast number of retail, not to buy at high prices, the valuation bubble will not be formed.

Many underwriters ' stock quotes and investment-value reports are written by a researcher who is "seconded to the investment Banking Department" based on customer needs. This means that industry researchers are not independent of the investment banking sector, in other words, the researchers and investment banking departments are complicit. This investment value report will undoubtedly entice retail investors to believe that the company's continued high performance and high growth. At the same time, a a-share market for many years to play new shares of huge profits, so that the retail investors formed a stable expectation, the new stock to make steady profits do not compensate! For institutional investors, such as investment funds, what they need is the expectation that retail investors believe that the new shares are making a profit and that the retail investors are convinced of the high valuations of high performance and high growth stocks, because of this anticipation and conviction that they can successfully ship to retail investors at higher prices after they hit new shares. As a result, institutional investors are also willing to declare subscription prices from high to maximize the probability and number of successful purchase.

Under the background of the lack of market constraint power, it is obviously inappropriate to emphasize the marketization of the distribution system.

Second, the restricted period is short. According to the original system, "the issuer of the IPO prospectus in the first 12 months to increase the share of shares in the way of the sale of the holder" of the restricted period of 36 months, and "October 2008 implementation of the IPO rules" will be shortened to 12 months. The artificially fabricated high performance and high growth myth will surely prove to be a decline in future performance and growth. So a long period of restricted sales will not put the big shareholders and executives of companies that have a valuation bubble on the market longer?

In summary, the short period of restricted sale, sponsors, underwriters, researchers, institutional investors collusion, retail analysis of the report and a new stable "naïve" expectations, is leading to a valuation bubble, which led to retail wealth by the reduction of the deep institutional background of the robbery.

"Shareholders are blood donors," says Mr Pihai. Sina financial netizen "stock MLM" sigh: Gem this one "the bottom of the food chain of retail investors certainly and rich no, plankton retail investors will eventually become rich in the belly of things, become the production of rich man's consumables." Indeed, it is worth the supervision department to ponder, has degenerated into "creates the rich board" the gem, whether has realized its original intention? If not, how can the existing distribution system be reformed to better protect the interests of individual investors?

(the author is professor of accounting School of Central University of Finance and Economics)