Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership 9811644039, 9789811644030

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Yan Wang

Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership

Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership

Yan Wang

Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership

Yan Wang Accounting School Research Center for Accounting and Economic Development of Guangdong-Hong Kong-Macao Greater Bay Area Guangdong University of Foreign Studies (GDUFS) Guangzhou, China

This research is granted by the key project of the National Social Science Fund of China “Research on mechanism innovation and practice path of deepening mixed ownership reform” under grant number 21ZDA039. ISBN 978-981-16-4403-0 ISBN 978-981-16-4404-7 (eBook) https://doi.org/10.1007/978-981-16-4404-7 Jointly published with Science Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Science Press. © Science Press 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgment

The author gratefully acknowledges the financial support from the key project of the National Social Science Fund in China “Research on mechanism innovation and practice path of deepening mixed ownership reform”.

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Contents

1

2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Research Background and Significance from the Perspective of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Research Background from the Perspective of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Research Significance from the Perspective of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Research Goal, Approach and Methodology . . . . . . . . . . . . . . . . . . 1.2.1 Research Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 Research Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Organizational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Theoretical Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Indicator Evaluation System . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Deduction Based on Game Theory . . . . . . . . . . . . . . . . . . 1.3.4 Empirical Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.5 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.6 Research Conclusions and Suggestions . . . . . . . . . . . . . . 1.4 Innovation Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Research Perspective: Mixed Ownership-Oriented M&A of Chinese SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Research Content: Deduction with Game Theory Based on the Principle of Competitive Neutrality . . . . . . 1.4.3 Research Approach: Linkage Effect of Innovation Ability and Trust Mechanism . . . . . . . . . . . . . . . . . . . . . . . Literature Review on Chinese SOEs’ Mix Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Summary of Research on the Development of the State-owned Economy and Mixed-ownership System . . . . 2.1.1 Research on the Development of the State-owned Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 7 9 9 11 12 16 16 18 18 19 19 19 20 20 20 21 23 24 24 vii

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2.2

2.3

2.4

2.5

2.6 3

2.1.2 Research on Mixed Economy . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Summary of Research on Mixed Ownership-oriented Reform of SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 SOEs Invest in or Merge/Reorganize Non-SOEs . . . . . . . 2.2.2 SOEs Increase Capital and Shares to Introduce Non-public Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 SOEs Launch Employee Stock Ownership Plan . . . . . . . 2.2.4 Government Social Capital Cooperation (PPP) Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Research on Trust and Corporate Value . . . . . . . . . . . 2.3.1 Research on “Trust” in Different Fields . . . . . . . . . . . . . . 2.3.2 Research on the Relationship Between “Trust” and Corporate Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Research on Innovation and Corporate Value . . . . . . 2.4.1 Research on the Connotation of Innovation . . . . . . . . . . . 2.4.2 Research on the Connotation of Innovation Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.3 Research on the Relationship Between Innovation Ability and Corporate Value . . . . . . . . . . . . . . . . . . . . . . . . 2.4.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Research on Motivations of M&A and Post Merger Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1 Research on Motivations of M&A . . . . . . . . . . . . . . . . . . . 2.5.2 Research on Post Merger Integration . . . . . . . . . . . . . . . . 2.5.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Theoretical Basis of Trust and Innovation Mechanism in M&A of China’s SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Related Theories on State-Owned Sector and Mixed Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 The State-Owned Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 The Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 The Mixed Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4 Theories of Mixed Economy with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Theory of New Institutional Economics . . . . . . . . . . . . . . . . . . . . . 3.2.1 Transaction Cost Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Property Rights Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Corporate Governance Theory . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Institutional Change Theory . . . . . . . . . . . . . . . . . . . . . . . .

30 32 32 33 34 38 39 40 41 41 45 48 49 49 50 52 53 54 54 62 66 67 71 72 72 73 74 76 77 78 78 79 79 80

Contents

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3.2.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Theory of Strategic M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 3.3.1 Motivations of Strategic M&A . . . . . . . . . . . . . . . . . . . . . . 81 3.3.2 Economic Consequences of Strategic M&A . . . . . . . . . . 82 3.3.3 Risks of Strategic M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 3.3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 3.4 Theory of Contract Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 3.4.1 Incomplete Contract Theory . . . . . . . . . . . . . . . . . . . . . . . . 84 3.4.2 Design of Incentive Contract . . . . . . . . . . . . . . . . . . . . . . . 85 3.4.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.5 Information Economics Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.5.1 Information Asymmetry Theory . . . . . . . . . . . . . . . . . . . . 87 3.5.2 Signal Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 3.5.3 “Principal-Agent” Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 88 3.5.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.6 Informal Institution Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.6.1 Institutional Environment . . . . . . . . . . . . . . . . . . . . . . . . . . 89 3.6.2 Corporate Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.6.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 3.7 Enterprise Capability Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 3.7.1 Enterprise Resource Theory . . . . . . . . . . . . . . . . . . . . . . . . 93 3.7.2 Core Competence Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.7.3 Dynamic Capability-Based Entrepreneurial Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 3.7.4 Knowledge-Based Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 94 3.7.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3.8 Trust Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 3.8.1 Trust Source Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 3.8.2 Trust Transmission Theory . . . . . . . . . . . . . . . . . . . . . . . . . 97 3.8.3 Organizational Trust Theory . . . . . . . . . . . . . . . . . . . . . . . . 97 3.8.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.9 Innovation Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.9.1 Schumpeter’s Innovation Theory . . . . . . . . . . . . . . . . . . . . 99 3.9.2 Technical Innovation Theory and Institutional Innovation Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 3.9.3 Innovation Diffusion Theory . . . . . . . . . . . . . . . . . . . . . . . 100 3.9.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 3.10 Brief Summary of Theoretical Foundations . . . . . . . . . . . . . . . . . . 101 3.3

4

The Theoretical Framework of Trust and Innovation Mechanism in M&A of China’ SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4.1 Review of Mixed-Ownership Reform of China’s SOE . . . . . . . . . 106 4.1.1 Review of the Development of China’s State-Owned Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

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Contents

4.1.2

4.2

4.3

4.4

4.5

5

Review of the Development of China’s Mixed Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 A Review of the Mixed Ownership Reform of China’s SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research on Problems in the M&A of China’s SOEs . . . . . . . . . . 4.2.1 Analysis of Pre-merger Problems of China’s SOEs . . . . 4.2.2 Analysis of Problems in M&A of China’s SOEs . . . . . . . 4.2.3 Analysis of Post-merger Problems of China’s SOEs . . . . 4.2.4 Resolve Problems in China’s SOE Reform Through the “Innovation-Mergers and Acqusitions- Trust” Mechanism . . . . . . . . . . . . . . . . . Research on the Three-Dimensional Macro-Mechanism of “Innovation-M&A-Trust” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Macro-Innovation Mechanism and M&A from China’s Perspective . . . . . . . . . . . . . . . . . 4.3.2 Macro Trust Mechanism and M&A from China’s Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research on the Three-Dimensional Meso-Level Industrial Development Mechanism of “Innovation-M&A-Trust” from China’s Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 The Collaborative Innovation Mechanism and Mixed Ownership Mergers from China’s Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 “Meso-Level” Trust Mechanism and M&A from China’s Perspective . . . . . . . . . . . . . . . . . Research on the Three-Dimensional Micro Enterprise Development Mechanism of “Innovation- M&A-Trust” from China’ Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Micro Enterprise Innovation Mechanism and M&A of China’s SOE . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 Micro Trust Mechanism and M&A of China’s SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research on the Evaluation Index System of Trust and Innovation Studies Based on Mixed Ownership Reforms of SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 On the Construction of the Evaluation System of Mixed Ownership M&A Value of SOEs from the Perspective of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Evaluation System of Trust Mechanism . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Evaluation Index of Shareholder Trust . . . . . . . . . . . . . . . 5.2.2 Evaluation Index of Creditors’ Trust . . . . . . . . . . . . . . . . . 5.2.3 Evaluation Index of Suppliers’ Trust . . . . . . . . . . . . . . . . . 5.2.4 Evaluation Index of Buyers’ Trust . . . . . . . . . . . . . . . . . . . 5.2.5 Evaluation Index of Enterprises’ Integrity . . . . . . . . . . . .

108 112 114 114 116 117

119 121 122 124

126

127 131

134 135 138

141

142 143 144 150 154 156 159

Contents

5.3

Evaluation System of Innovation Mechanism . . . . . . . . . . . . . . . . . 5.3.1 Evaluation of the Technological Innovation Capability and Innovation Mechanism . . . . . . . . . . . . . . . 5.3.2 Evaluation of Market Competitiveness and Innovation Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Evaluation of Sustainable Development Ability and Innovation Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . Evaluation System of M&A Value . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Tobin’s Q . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Operating Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Return on Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.4 Enterprise Governance Capabilities . . . . . . . . . . . . . . . . . . Empirical Research Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 OLS Linear Regression Model . . . . . . . . . . . . . . . . . . . . . . 5.5.2 Multivariate Discriminant Analysis Model . . . . . . . . . . . . 5.5.3 Logistic Regression Model . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.4 Probit Regression Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.5 Cluster Analysis Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.6 Structural Equation Model . . . . . . . . . . . . . . . . . . . . . . . . . Case Study Model Based on Balanced Scorecards . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

167 168 169 170 171 172 173 173 175 176 177 178 178 180 185

Game Analysis of China’s Enterprise M&A Pricing Based on Expected Market Excess Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Institutional Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Construction of M&A Game Model . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Basic Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Game Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Construction of Game Model . . . . . . . . . . . . . . . . . . . . . . . 6.4 Empirical Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Verifiable Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Sample Selection and Empirical Research Methods . . . . 6.4.3 Descriptive Statistics and Correlation Analysis . . . . . . . . 6.4.4 OLS Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.5 Robustness Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189 189 193 193 194 194 197 199 199 200 204 207 208 209

Trust, Innovation and M&A Value: An Empirical Study in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 The Institutional Background from the Perspective of China . . . . 7.3 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Trust and Enterprise Value . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Innovation and Core Competence of Enterprises . . . . . . . 7.4 Research Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

211 211 214 215 215 216 217

5.4

5.5

5.6 5.7 6

7

xi

164 165 167

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7.4.1

7.5

7.6

7.7 7.8 7.9 8

9

Mixed Ownership M&A and Enterprise Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Stakeholder Trust, Innovation Capability and M&A Value of Mixed Ownership of SOEs . . . . . . . . Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.1 Research Samples and Data Sources . . . . . . . . . . . . . . . . . 7.5.2 Research Model and Variable Definition . . . . . . . . . . . . . Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.1 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.2 Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Further Analysis: Missing Variables and Endogeneity . . . . . . . . . Robustness Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trust Mechanism and M&A Performance: Trust Mechanism in Chinese SOEs’ Mixed Ownership-Oriented M&A . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Institutional Background Based on China Perspective . . . . . . . . . . 8.3 Theoretical Analysis and Research Hypothesis . . . . . . . . . . . . . . . 8.4 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 Sample Selection and Data Sources . . . . . . . . . . . . . . . . . . 8.4.2 Model Setting and Definition of Main Variables . . . . . . . 8.5 Empirical Results and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.1 Descriptive Statistical Analysis . . . . . . . . . . . . . . . . . . . . . 8.5.2 Multivariate Regression Analysis . . . . . . . . . . . . . . . . . . . 8.5.3 Further Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.4 Robustness Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 Rethinking SOEs’ Mixed Ownership-Oriented M&A Based on Social Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Case Study of Mixed Ownership-Oriented M&A and Innovation-Driven Development of Chinese SOEs . . . . . . 9.1 Research on Problems Embedded in the Background of China’s Economic Transformation and Upgrading . . . . . . . . . . 9.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.1 Corporate M&A and the Development of Independent Innovation Capabilities . . . . . . . . . . . . . . . 9.2.2 SOEs’ Reform and Mixed Ownership-Orientde M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.3 Mixed Ownership-Oriented M&A and Independent Innovation Capabilities of Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.4 Research Review and Gaps . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Research Design and Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 Research Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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9.3.2 Selection of Case Enterprise . . . . . . . . . . . . . . . . . . . . . . . . 9.3.3 Constructive Measurement . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.4 Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.5 Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.1 Formation of Original Innovation Capabilities and Accumulation of Independent Innovation Capabilities in M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.2 Evolution from Government-Led M&A and Open Innovation to Secondary Innovation Capabilities . . . . . . 9.4.3 The Evolution of Mixed Ownership-Oriented M&A and Open Innovation to Integrated Innovation Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Analysis and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.1 Prerequisites for Realizing Innovation-Driven Development Through M&A . . . . . . . . . . . . . . . . . . . . . . . 9.5.2 Positive Impacts of Mixed Ownership-Oriented M&A on Realizing Innovation-Driven Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusions and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.1 Research Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.2 Theoretical Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.3 Practical Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Research Conclusions and Policy Recommendations for Mixed Ownership-Oriented M&A of Chinese SOEs . . . . . . . . . . . 10.1 Research Conclusions on China’s Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1.1 Research Conclusions on the Theoretical Framework of China’s Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1.2 Conclusions of Empirical Test for China’s Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . 10.1.3 Conclusions from Case Study . . . . . . . . . . . . . . . . . . . . . . 10.2 Policy Recommendations for China’s Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 Improve Market-Oriented Allocation of Production Factors Starting from Mixed Ownership-Oriented M&A of SOEs . . . . . . . . . . . . . . . . . 10.2.2 Reduce Administrative Intervention from the Government, Establish a Trust Mechanism and Cultivate Innovation Growth Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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10.2.3 Clarify Property Relations and Improve the Efficiency of Mixed Ownership-Oriented M&A of SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.4 Reduce Irrational Behaviors in the Game of SOEs in Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . 10.2.5 Emphasize the Establishment of Trust Mechanism in Integrating Innovation Abilities of SOEs . . . . . . . . . . . 10.2.6 Cultivate a Mature Capital Market and Accelerate SOEs’ Mixed Ownership Reform Through M&A . . . . . . 10.2.7 Improve Laws and Regulations on M&A and Provide Effective Operating Platforms for SOEs to Conduct Mix Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Prospects of Research on China’s Mixed Ownership-Oriented M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

Chapter 1

Introduction

Under the “new normal” of Chinese economic development, Chinese state-owned enterprises (SOEs) are actively exploring property rights reform by reorganizing existing resources. In this process, M&A has become an important means for them to carry out mixed-ownership reform. At the Third Plenary Session of the 18th CPC Central Committee, it was proposed to actively develop a mixed-ownership economy. In the report to the 19th CPC National Congress, President Xi Jinping pointed out to “deepen SOE reform and develop a mixed-ownership economy”. Then at the Fourth Plenary Session of the 19th CPC Central Committee, it was made clear to “develop a mixed-ownership economy and enhance the competitiveness, innovation, control, influence and risk resistance of the state-owned economy”. Later at the Third Session of the 13th CPC National People’s Congress, it was brought up that SOE reform should focus on one core—stimulating the vitality of market players, lies in three key points—implementing the three-year action for China’s SOE reform, enhancing the effectiveness of SOE reform, and improving the core competitiveness of SOEs, and needs to finish five tasks—improving state-owned assets supervision system, enhancing mixed-ownership reform, detaching the social functions of SOEs, focusing on main responsibilities and main businesses, and strengthening marketoriented operating mechanism. The above-mentioned major guidelines and policies have provided goals and feasible paths for the mixed-ownership reform of Chinese SOEs through M&A. Taking advantage of opportunities brought by the diversification of property rights, SOEs create corporate value through corporate governance, resource integration, and integration of systems and mechanisms. In actual corporate M&A transactions, there has always been a black box—post-merger puzzle. Although M&A can bring good market performance to companies, it hardly creates corporate value. Facts of mixed-ownership reform of China’s SOEs prove that the focus of enterprise property rights reform is to achieve optimal ownership arrangement and release institutional dividends through M&A. In recent years, research on trust mechanism and innovation mechanism in M&A has gradually become a new perspective to explain why M&A produces inconsistent performance in the short and © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_1

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long term and how to make it consistent. “Mixed but not integrated” is a common problem in mixed-ownership reform. In particular, that the lack of trust hinders the improvement of innovation ability may be the main obstacle affecting the creation of corporate value after M&A. However, there are rare systematical theoretical and practical research from this perspective (Chen et al. 2014; Li and Yu 2015). Against the above theoretical and realistic background, this book follows the logical relationship among the motivation of M&A, post merger integration and corporate value creation to embed trust mechanism and innovation mechanism in the M&A of Chinese SOEs under mixed-ownership reform, aiming to promote the reform and development of Chinese SOEs. The following chapter first introduces research background and motivation, then explains research goals, content and methods, and finally summarizes main innovations.

1.1 Research Background and Significance from the Perspective of China 1.1.1 Research Background from the Perspective of China The primary stage of China’s socialism is featured with public ownership as the mainstay and joint development of diverse forms of ownership. After the founding of the People’s Republic of China, especially during the past 40 years of reform and opening up, China’s SOE reform has experienced four main stages: the “granting decision-making power to enterprises and allowing them to keep more profits” stage from 1978 to 1993, the “institutional innovation” stage from 1993 to 2003, the “state-owned assets supervision” stage from 2003 to 2013, and the “classified reform” stage from 2013 to present. After these four stages of development, China has embraced great achievements in SOE reform and made outstanding contributions to promoting economic development (now the second largest economy in the world), social harmony, and people’s living and work in peace and contentment. However, we must clearly realize that there are still problems in China’s SOEs, which require constant reforms. China’s state-owned economy covers public welfare and commercial sectors, in which the economic performance and social performance targets of SOEs are not fully clarified. Besides, some corporate leaders also assume positions in the government, but their positioning as enterprise operator and administrator is unclear. That’s why China’s SOEs have not really established their position as market players and are questioned by Western countries in opening up. It is not difficult to see that Chinese SOEs are more or less caught in development “bottlenecks”. Mixed-ownership reform is the best way for them to break existing constraints, move towards high-quality development, and establish a modern market economy system. On the one hand, Chinese SOEs are widely distributed, in large numbers and cover extensive fields. In production and operation, Chinese SOEs and private enterprises may cooperate with each other for a win–win situation or compete

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3

with each other due to different nature of property rights. In recent years, it is not uncommon for private enterprises to seek rent in order to compete with SOEs for resources. The development of a mixed-ownership economy allows SOEs and private enterprises to cooperate without being troubled by the nature of property rights, seek common development and share benefits, thereby fully mobilizing their enthusiasm and building momentum for their development (Ji 2019). On the other hand, the public owned economy and the non-public owned economy have different functions and advantages. The state-owned economy plays a leading role in China’s national economy by controlling, coordinating and determining the overall situation. Chinese SOEs generally play a role in non-competitive fields such as natural monopolies and public services. In contrast, China’s non-public owned economy is highly adaptable, flexible in mechanism, and urges the formation of market relations and competitive relations. Chinese private enterprises are full of vitality in general competitive fields. China’s public owned economy and non-public owned economy play their irreplaceable roles respectively, and can complement and promote each other in function (Wang 2020). As China’s economy is moving towards a high- quality development stage, developing a mixed-ownership economy is the best way for Chinese SOEs to secure high-quality development and establish a modern market economy system. Since the founding of the People’s Republic of China in 1949, a mixed-ownership economy has existed. At the Third Plenary Session of the 18th CPC Central Committee, it was made clear that mixed ownership is a micro form for realizing China’s basic economic system. At the Fourth Plenary Session of the 19th CPC Central Committee held in November 2019, China’s basic economic system of socialism was expanded from a single system to a three-dimensional one,1 which makes this author reflect on whether it is necessary to reposition or extend the connotation of mixed-ownership economy? It has been 6 years from the Third Plenary Session of the 18th CPC Central Committee in 2013 to the Fourth Plenary Session of the 19th CPC Central Committee in 2019. According to data from different sources, certain results have achieved in the mixed-ownership reform of Chinese SOEs,2 but actually there is a lack of endogenous motivation. After dividends brought by ownership reform in the late 1990s disappeared, Chinese SOEs experienced new development difficulties. Some of them experienced a downturn of benefits due to poor performance or overcapacity. In the face of mixed-ownership reform, the SOEs were quite confused. For example, some worried that the reform would result in the loss of state-owned assets if taken advantage of by people. How does mixedownership reform ensure that China’s state-owned capital controls the SOEs? Is it 1

At the Fourth Plenary Session of the 19th CPC Central Committee, China’s basic economic system of socialism was stated as “a basic economic system whereby public ownership is the mainstay while various forms of ownership are able to develop side by side, distribution according to work is dominant and diverse modes of distribution coexist, socialist basic economic system such as the socialist market economic system”. 2 For example, according to data released by State-owned Assets Supervision and Administration Commission of the State Council of China, as of the end of 2017, among central enterprises and their subsidiaries at all levels under their supervision, the number of enterprises with mixed ownership accounted for 69% and that of provincial SOEs with mixed-ownership took up 56%.

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1 Introduction

intended to develop socialism or capitalism? M&A, as an important means to promote mixed-ownership reform of Chinese SOEs, are conducive to realizing their strategic adjustment. M&A can not only enhance the core competitiveness of Chinese SOEs, but also make them more adapt to market-oriented competition and increase the value of state-owned assets. From the perspective of M&A, the world has witnessed five waves of M&A and is experiencing the sixth one. The core of the sixth wave is to optimize resource allocation, improve innovation capabilities, and drive the flow and optimized combinations of other production factors. In the previous five waves, Chinese enterprises, especially small and medium-sized enterprises (SME), have entered the fast lane of development with low-end products. However, they faced problems like weak capabilities for sustainable development and difficulties in obtaining and maintaining core competitiveness. The 2008 financial crisis was the most serious economic crisis since the end of World War II. The scale of global cross-border M&A reached 3.67 trillion USD in 2007, but fell to the bottom in 2009 at only 1.7 trillion USD, which has had great impacts on developed economies such as the United States so far. However, the global economic crisis has brought new opportunities for Chinese companies, who, by merging and acquiring domestic companies, adjusted industrial structure and transformed growth mode, thus improving their statues in cross-border M&A. Moreover, in recent years, a large number of Fortune 500 companies have emerged in China. Their growth and success have provided an empirical model and a repeatable path for Chinese companies to achieve resource optimization and innovation in the sixth wave of M&A. In China, M&A, as a way to achieve corporate strategic goals, have undergone five stages of development and become increasingly mature. The first stage was the beginning stage (1984–1992). Under the guidance of the principle of “separation of ownership and management rights”, China issued a series of policies to implement paid property rights transfer.3 The second stage witnessed rapid growth (1992–1997). In this stage, economic system reform was conducted and rapid marketization was achieved. The free flow of property rights was no longer limited to small Chinese SOEs. The shareholding system reform of enterprises and the rise of the securities market have accelerated corporate M&A under incentive mechanism. The “Baoyan Disturbance”4 in 1993 ushered in M&A in the China securities market. During this stage, the main motivation for M&A was to seek financing through backdoor listings. The third stage embraced equal emphasis on development and regulation (1997– 2002). The market economy developed rapidly. Capital market transactions were active. However, laws and regulations have apparently lagged behind. There was a lack of protection mechanisms for the rights and interests of small and medium 3

For example, the report to the 13th National People’s Congress in 1987 encouraged the conditional and paid transfer of small SOEs. In 1989, the first law on corporate M&A, the Interim Measures on Corporate Mergers, was formally promulgated. After that, M&A transactions became active. That period was characterized by direct intervention in the M&A of market entities. 4 In 1993, China Baoan Group acquired Shanghai Yanzhong Industrial Co., Ltd. via secondary market, which became the first M&A of a listed company after 1949, known as the “Baoyan Disturbance” in history.

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investors. The main motivation for M&A was scale expansion. The fourth stage featured standardized development (2002–2005), when China entered the heavy industries era. Changes in industrial structure and increasing industrial concentration have prompted large-scale horizontal and vertical M&A. China’s competent organs introduced regulations one after another, which increased the transparency of corporate M&A. For this stage, the motivation for M&A shifted to strategic restructuring. The fifth stage is the post non-tradable share era (2005-present). With the completion of the non-tradable share reform, China’s capital market has gradually matured, with freer M&A and increasingly fair and market-oriented pricing. Especially after the split-share structure reform, public and non-public additional issuance, share swap acquisition, etc. emerged. However, in actual corporate M&A, there has always been a black box—postmerger puzzle. Although M&A transactions can bring good market performance, it hardly creates corporate value. The motivation of strategic M&A is to improve the efficiency of resource allocation. If it cannot create corporate value or improve the efficiency of resource allocation, it will end in failure. The result may be bankruptcy of the acquirer, the target company being traded again, or the transfer of control of the acquirer. According to a survey report by the McKinsey Global Institute, the success rate of global M&A is only 39%. According to a report by Chinese enterprise Zero2IPO Group, the success rate of M&A by Chinese companies is less than 30%. As far as Chinese SOEs with mixed-ownership is concerned, there are problems such as low growth in performance after M&A and even failure of M&A, the reasons for which include formal systems and informal systems. Informal systems also play a very important role in whether M&A can create value. As M&A are in full swing, the academic and practical circles urgently need to analyze the black box of Chinese SOEs’ M&A under mixed ownership. Can mixed ownership-oriented M&A create value for SOEs? How to create corporate value? On the basis of a series of studies, this book puts forward some constructive and meaningful targeted suggestions for the theoretical and practical development of Chinese SOEs’ mixed ownership-oriented M&A. Researchers of strategic M&A believe that strategic M&A should be based on enterprise’ development strategy. When various production factors cooperate, the effectiveness of resource allocation can be optimized. The synergy among production factors is a necessary condition for the success of strategic M&A. Researchers of contract economics believe that agreements with legal coercive force reached by setting rights and obligations are incomplete contracts. In M&A, synergy cannot be fully realized only by contracts with legal effect. Default contracts are an important guarantee for promoting the performance of incomplete contracts and achieving synergy among production factors. The school of new institutional economics believes that “economic systems” include “formal systems” and “informal systems”, the latter of which cover concepts of value, ethics, customs, ideologies and so on. In corporate M&A, informal systems are implicit, but they affect the effectiveness of formal systems in enterprises by acting on employees. M&A is a huge project combining ideals and reality. Effective M&A is an idealized expectation. Although this idealized expectation is formed based on due diligence, mode inference, asset

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evaluation and analysis of consultants, two enterprises have to deal with various changes in internal and external environment if they truly want to merge together. Trust is the main link between two enterprises in M&A. Under trust mechanism, parties to M&A can form a default contract and promote the successful performance of incomplete contract. Informal systems drive formal systems to produce effect. People in factors of production generate a synergistic effect based on trust. The synergy of people will naturally affect the synergy of things. Similarly, synergy in M&A promotes the creation of corporate value. Meanwhile, the fundamental motivation of strategic M&A is to obtain core competitiveness. The core competence of enterprises lies in combining the technology and innovation capabilities of both parties, upgrading them to new innovative forces, and internalizing them into productivity through integration. The improvement of innovation capabilities is essential, and can even be said to be the main factor affecting the creation of enterprise value. Therefore, in the study of Chinese SOEs’ mixed ownershiporiented M&A, by studying the mechanism of forming and developing innovation capabilities, examining trust issue within enterprises from a micro perspective, building trust mechanism in stakeholders on organizational boundaries, and combining theories including state-owned economy theory, information economics theory, mixed-ownership economy theory, strategic M&A theory, corporate capability theory, contract economics theory, corporate culture theory based on organizational capital and innovation-related theories, we will create a new research perspective for analyzing post-merger puzzle and value creation in Chinese SOEs’ mixed ownership-oriented M&A. This book believes that M&A is a path chosen by enterprises for strategic changes when their endogenous development cannot maintain sustainable competitiveness and achieve strategic goals. In the process of expanding organizational boundary, enterprises need to adapt to new organizational environment (Kyei-Poku and Miller 2013; Greve and Zhang 2016). While overcoming negative externalities in production, management and finance after conducting mixed ownership-oriented M&A, Chinese SOEs need to deal with lack of trust mechanism, which may become an obstacle for them to adapt to organizational environment. The lack of trust has a negative impact on the transfer and integration of core capabilities in such M&A, making it difficult for enterprises to enhance innovation capabilities and create corporate value. Once trust mechanism and innovation capabilities are linked to Chinese SOEs’ mixed ownership-oriented M&A from a micro perspective, more attention is paid to study the economic consequences of trust from the interest game between people, between enterprises and stakeholders, measure the synergy of parties to such M&A in terms of the improvement of innovation capabilities, interpret the role of trust in organizational assets and in the benefit balance mechanism of stakeholders from the perspective of incomplete contract theory and informal systems, study the process of transition from open innovation to independent innovation in such M&A, examine the role of trust mechanism in the development of innovation capabilities, and build a theoretical framework covering trust mechanism, innovation capabilities and value creation in such M&A, trying to explain new strategies in the mixed-ownership reform of Chinese SOEs based on M&A and analyzing why

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Chinese SOEs achieve good short-term market performance in the capital market after merging and acquiring private enterprises. However, in response to post-merger puzzle characterized by difficulty in increasing corporate value and decline of longterm book performance, it is necessary to re-understand the mechanism of Chinese SOEs’ mixed ownership-oriented M&A from the viewpoint of trust mechanism and innovation ability, realize theoretical innovation, and provide practical reference for decision-making.

1.1.2 Research Significance from the Perspective of China This book combines macroeconomic environment and the dynamics of the capital market to study trust mechanisms in psychology, sociology, economics, and organizational behavior; review the connotation of innovation, the connotation of innovation ability and factors affecting the development of innovation ability based on the theory of corporate competence; conduct literature review from five dimensions—the development of China’s state-owned economy, Chinese SOEs’ mixed-ownership reform, trust mechanism and corporate value, innovation capability and corporate value, motivation of M&A and post merger integration based on mixed-ownership reform, construct internal integrity culture-based trust mechanism and external stakeholderbased trust mechanism based on theories on state-owned economy, mixed-ownership economy, strategic M&A, corporate capability, information economics, contract economics, new institutional economics, corporate culture based on organizational capital, and innovation-related theories, measure changes in Chinese SOEs’ innovation capabilities before and after mixed ownership-oriented M&A, establish the theoretical framework of trust mechanism and innovation capability of Chinese SOEs in mixed ownership-oriented M&A with normative research, game derivation, model construction, empirical research, case analysis and other methods, study the influence of trust mechanism and innovation capability on the creation of corporate value of Chinese SOEs after conducting mixed ownership-oriented M&A, and put forward policy suggestions.

1.1.2.1 1.

Theoretical Significance

This book constructs a theoretical framework of trust mechanism and innovation mechanism based on Chinese SOEs’ mixed ownership-oriented M&A and deepens the contents of research on M&A. On the basis of theories on organizational behavior and organizational capital, it highlights the M&A of Chinese SOEs and private enterprises in organizational environment, builds a trust mechanism for trustworthy corporate culture therefrom, constructs the boundary of organizations under M&A based on the game of maximizing the interests of stakeholders and theories on topics like strategic M&A, and builds

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1 Introduction

the trust mechanism of stakeholders. The book also reveals how profit incentives of Chinese SOEs under mixed ownership-oriented M&A in the capital market affect the establishment of stakeholder trust mechanism and directly affect the short-term market performance of acquiring firms. In post merger integration, trust mechanism significantly enhances innovation capabilities and value creation. This trust mechanism originates from integrity culture within enterprise rather than the external encompassing interests of stakeholders, which helps deepen the research on M&A theories in this book. This book starts from trust mechanism and expands research on behavioral finance. Taking Chinese SOEs’ mixed ownership-oriented M&A as the research background, it expands research on behavioral finance and obtains new conclusions based on theories like new institutional economics. Focusing on interestdriven trust mechanism, this study finds that in the mixed ownership-oriented M&A of Chinese SOEs, acquirers, namely SOEs, follow the principle of maximizing returns in pricing. Pricing in transactions is determined based on expected excess returns of the market. However, due to the complexity of the environment and the uncertainty of long-term returns, their behaviors show bounded rationality (Givoly and Hayn 2000). A new theoretical explanation for how M&A creates market performance from the perspective of behavioral finance is provided. In addition, the trust of stakeholders such as customers, suppliers, creditors and shareholders are integrated into the inner mechanism of the occurrence and change of financial behaviors and reflected in finance to analyze the impact of trust-based financial behaviors on corporate value. This book combines two informal systems (trust mechanism and innovation mechanism) with China’s formal system (mixed-ownership reform), having expanded research on informal systems. This book reveals the feasibility and importance of informal systems in helping Chinese SOEs reduce information asymmetry and transaction costs to create M&A value in mixed ownershiporiented M&A transactions in China’s capital market which is experiencing transformation, which not only provides a new perspective for understanding M&A in China’s capital market during economic transformation, but also enriches research on informal systems. To gain trust and create corporate value in M&A, acquiring firms mainly rely on formal systems in transactions and integration, and try to integrate formal and informal systems, which are of great significance to their sustainable development.

1.1.2.2 1.

Practical Significance

Against the background of China’s mixed-ownership reform, Chinese SOEs introduce private equity and carry out mixed-ownership reform through M&A, the purpose of which is not only to implement national policy, but also to develop the economy, which has great practical significance. After acquiring private enterprises, Chinese SOEs can not only directly make use of the resources and opportunities of target firms to expand their own advantages, but also take

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3.

9

this opportunity to adjust existing problems in the business and management of target firms, enhance its core competitiveness and maintain or increase its value, which are beneficial for both parties. The sixth wave of M&A, mainly principally driven by innovation and technological core competitiveness, mostly happen in China. It is an excellent opportunity for China to realize industrial restructuring and upgrading and growth of the real economy. Based on their own characteristics, Chinese SOEs create a culture of corporate integrity focusing on trust and innovation, establish trust and cooperation with stakeholders, resolve “post-merger puzzle” in their mixed ownership-based M&A by emphasizing the improvement of innovation capabilities in integration, and promote enterprises to create corporate value after M&A, which is conducive to the sustainable development of micro enterprises, the transformation of China’s economic growth mode and the development of the real economy. Chinese SOEs’ mixed ownership-based M&A involve parties to the M&A, shareholders and creditors who provide funds to acquiring firms, and the counterparty suppliers and buyers of acquiring firms. Behind the actions of each stakeholder are his/her motives and intentions, which are generated based on interest expectations. The degree of realization of benefits affects acquiring firms’ ability of creating corporate value. Identifying the motives and interest expectations of parties and stakeholders before, during and after the M&A will help the government formulate and improve relevant laws and regulations, regulate M&A transactions, guide acquiring firms to balance the interests of parties and stakeholders through creating corporate value, and help parties to the M&A identify long-term mechanisms for gaining trust and enhancing innovation capabilities. Simultaneous use of formal systems and informal systems guides the healthy development of Chinese SOEs in mixed ownership-oriented M&A.

1.2 Research Goal, Approach and Methodology 1.2.1 Research Goal The overall research objective of this book is to analyze the motives, interest expectations and degree of realization of benefits of parties and stakeholders before, during and after M&A based on the mixed ownership-oriented M&A transactions of Chinese SOEs. The book introduces trust mechanism embedded research, studies the influence of cooperation mechanism based on the trust of outer stakeholders on enterprises’ innovation capabilities, the influence of the integrity culture of internal M&A parties on enterprises’ innovation capabilities and the role of trust and innovation on the value creation of enterprises in M&A centering on the transformation from open innovation to independent innovation in integration, and interprets the path and mechanism of influence of trust mechanism and innovation abilities on the creation

10

1 Introduction

of corporate value by M&A. Under the guidance of this overall objective, it has the following specific goals: (1)

(2)

(3)

Establish a trust mechanism and an innovation capability theory based on Chinese SOEs’ mixed ownership-oriented M&A. On the basis of state-owned economy theory, mixed-ownership economy theory, M&A motivation and post merger integration theory, corporate capability theory, new institutional economics theory, and corporate culture theory based on organizational capital, the author analyzes the motivation of Chinese companies for strategic M&A and incentives in the capital market, studies interest game between parties to the M&A and stakeholders before, during and after the M&A, builds the path of the formation and development of trust in parties to M&A and stakeholders, formulates the mechanism of trust in transferring enterprises’ core capabilities and enhancing their innovation capabilities in integration, and forms a trust mechanism and an innovation ability theory based on value creation in M&A by studying the influence of trust mechanism and innovation abilities on value creation in M&A. Use theories on contract economics and information economics to build a game model for parties to M&A from the perspective of acquirers, i.e., Chinese SOEs. Based on interest-driven trust mechanism, pricing is the focus of M&A game. As far as the acquirer is concerned, pricing is a strategy based on the expectation of excess returns in the stock market. Due to the scarcity of corporate resources, the cost of capital needs to be taken into account in the pricing. Expected excess returns of the market is a function of pricing and the cost of capital. After making a mathematical model, the author carried out empirical analysis on data of China’s A-share listed SOEs since 1998, and explored the mechanism for realizing expected market returns by pricing in M&A game. Show the influence of trust mechanism and innovation mechanism in Chinese SOEs’ mixed ownership-oriented M&A through empirical tests and case studies. Firstly, with a total of 186 samples of major asset restructuring by listed Chinese SOEs in the form of cross-shareholding from 1998 to 2011, the author analyzed the ways and paths of trust mechanism and innovation capabilities on the value of Chinese SOEs after mixed ownership-oriented M&A, which provide new theoretical explanations for increasing number of M&A transactions since the end of the nineteenth century. Secondly, this author studied mixed ownership-oriented M&A and reorganizations of Chinese Ashare listed SOEs in Shanghai Stock Exchange and Shenzhen Stock Exchange from 1998 to 2014, and examined the impact of social trust under informal systems on corporate value creation after M&A from the perspective of costs of M&A transactions. Thirdly, the author put forward a framework of theoretical analysis based on the evolution path from open innovation to independent innovation capabilities brought about by M&A, the relationship between innovation capabilities and enterprise development and the mechanism of mixed ownership on innovation-driven development, and explored the internal mechanism of mixed ownership -oriented M&A of Chinese SOEs in promoting

1.2 Research Goal, Approach and Methodology

11

innovation-driven development by a case study of the three M&A transactions of a local Chinese SOEs Grandblue Environment.

1.2.2 Research Approach This book believes that against the general background of China’s mixed-ownership reform, mixed ownership-oriented M&A is an important way for Chinese SOEs to implement the reform. Strategic M&A, as a way for enterprises to realize their strategies, have similarities with other strategies in terms of value creation. For example, enterprises hope that the organization developed based on M&A can adapt to external environment, which is no different from their endogenous growth and establishment of strategic alliances. However, in actual M&A, such transactions always fail to create corporate value, which shows M&A has its special mechanisms. If acquiring firms still operate and manage the entity after M&A with methods of non-acquiring firms, it may lead to a failure of the M&A. Therefore, this book establishes line of research based on China’s mixed ownership reform and the particularity of Chinese SOEs. There are two types of people, i.e., parties to M&A and stakeholders, in M&A transactions. Chinese SOEs’ mix ownership-oriented M&A involve three stages, namely before, during and after M&A. Before and during M&A, main persons involved are the acquiring firm, the target firm and their shareholders. Under information asymmetry and limited rationality of participants, parties to M&A establish a trust mechanism based on expected benefits. Aiming to maximize total income, the acquiring firm carries out M&A game and reaches equilibrium of the game at the intersection of expected excess returns of the short-term market and transaction pricing. In the process of realizing expected excess returns of the short-term market, the acquiring firm announces specific good news about M&A with high premiums and promotes its realization by taking advantage of the retrospective and expected information transmission functions of stock price. With the realization of such expected excess returns and shareholders’ interests, the acquiring firm, as a representative of stakeholders’ encompassing interest,5 takes the lead in establishing a trust mechanism. In the meanwhile, other stakeholders also establish a trust mechanism based on interest expectations. The trust mechanism can more effectively enhance innovation capabilities to promote the creation of M&A-based corporate value. It comes from the internal integrity culture of enterprises rather than the encompassing interests of stakeholders, which helps this study solve post-merger puzzle in the mix ownership-oriented M&A of Chinese SOEs (Fig. 1.1).

5

In Power and Prosperity, Mancur Olson put forward the term encompassinginterests. If corporate M&A achieves success, profits gained by shareholders will account for most of the value created by M&A. But if it fails, shareholders will suffer the heaviest loss. Therefore, shareholders are the most important persons that encompass interests.

12

1 Introduction

Fig. 1.1 Map of research approach

1.2.3 Research Methodology This book aims to build a framework for the analysis of trust and innovation issues in Chinese SOEs’ mixed-ownership M&A and identify the path and mode of how the trust of parties to M&A influences M&A transactions, how the trust of stakeholders influences enterprises’ innovation capability and economic consequences of M&A, and how the integrity culture of parties to M&A influences enterprises’ innovation capability and economic consequences of M&A. Based on the characteristics of research objects, the author comprehensively employs normative analysis,

1.2 Research Goal, Approach and Methodology

13

grounded theory, case study, system dynamics, game theory, mechanism design, indicator evaluation system and empirical research.

1.2.3.1

Normative Research

1. Integration of Theories from Multiple Disciplines Research methods in economics, management, political science, statistics and other disciplines are used for theoretical analysis, indicator and model building, empirical research, case study and effect evaluation. On the basis of theories on stateowned economy, mixed-ownership economics and strategic M&A, the book analyzes trust and innovation mechanism in mixed ownership-oriented M&A of Chinese SOEs from perspectives of theories on enterprise capability, information economics, innovation, etc. 2. Combination of Deduction and Induction Starting from the announcement of M&A by the acquiring firm (SOEs), the book conducts theoretical analysis on motivation for M&A and the influence of trust mechanism and innovation ability on M&A-based value creation. By comparing and refining conclusions in research on Chinese and foreign M&A, it sorts out and analyzes the differences between domestic and foreign theoretical research on this topic and takes into consideration China’s economic environment, institutional environment and stock market to build a theoretical framework of research on trust and innovation mechanism that is suitable for China’s national conditions and can promote the creation of corporate value in Chinese SOEs’ mixed ownership-oriented M&A. 3. Literature Analysis and Text Analysis With the help of the Internet and libraries, the author has extensively collected documents related to the development of SOEs, mixed ownership-oriented M&A, trust and innovation. Based on analysis of those documents, the author extracted representative opinions, found out blind spots in previous studies and added new contents in this book.

1.2.3.2

Grounded Theory and Case Study

This book improves and develops concepts and scales related to the macro, medium and micro mechanisms of institutional supply, motivation of innovation and governance guarantee based on China context. The main purpose of grounded research is to establish a theory based on empirical data (Strauss 1987). By case analysis, it applies concepts and scales formed by grounded research, responds to grounded theory through case analysis and refinement of general rules, and conducts highly integrated theoretical and practical innovations. Case study in this book is guided by Xi

14

1 Introduction

Jinping’s thoughts on innovation. Focusing on the essential motivation in M&A that parties to it enhance their independent innovation capabilities by strengthening open cooperation on innovation capabilities, this books explores the mechanism and path of integrating “state-owned” and “non-state owned” capital and production factors in mixed ownership-oriented M&A and analyzes the internal mechanism of how mixed ownership-oriented M&A promotes innovation-driven development, which are inspiring for China’s continuous and in-depth implementation of innovationdriven development strategy. While exploring how to enhance its independent innovation capabilities, case enterprise Grandblue Environment has transited from M&A funded by local government to market mechanism-led mixed ownership-oriented M&A, and grown into a high-tech enterprise (engaged in environmental protection) whose services cover the whole country and overseas from a public-benefit local SOE (engaged in water affairs). It can share typical experience and serve as a reference of decision-making for traditional Chinese local SOEs faced with constraints in resource endowment on how to stimulate innovation and transform and upgrade into an advanced high-tech enterprise via mixed ownership-oriented M&A. “Mixed but not integrated” is a common problem faced by Chinese SOEs in mixed-ownership reform, in which lack of trust is may be a main obstacle to the creation of corporate value after M&A. In case study, Grandblue Environment integrated trust mechanism into improving its innovation capabilities. A theoretical framework for enhancing corporate value via trust innovation mechanism has been built on this basis, which makes this research of a certain academic value and practical significance.

1.2.3.3

System Dynamics and Comprehensive Analysis

System dynamics is a method of analysis commonly used in socio-economic issues. It combines system analysis with traditional measurement or normative research to seek optimized paths through continuous system improvement based on actual situation. Empirical research and indicator evaluation system in this book are all based on abstract assumptions. In empirical research, the cause and result, the main driving factor and control variable, and the type of endogenous problem resulting from what reason were first assumed theoretically. In indicator evaluation system, there are established premises and standards. What is the scope and boundary of evaluation? How to select evaluation indicators? Based on these above, this book will reveal feedback procedures, synergy, evolution path and dynamic mechanism among various subjects and subsystems within the black box using system dynamics. In mixed ownership-oriented M&A, Chinese SOEs need to closely combine theory with practice, quickly feedback problems found in practice to top-level designers, and constantly adjust related mechanism. If they just focus on “construction” instead of “implementation”, their reform may fall into empty talk. This study avoids the negative situation in which policy measures formed by related mechanism are twisted, so that enterprises can only obtain largely reduced benefits, which requires the use of

1.2 Research Goal, Approach and Methodology

15

comprehensive analysis and the formation of a feedback system on indicator evaluation to strengthen the comprehensive system thinking of this research in mechanism design.

1.2.3.4

Game Theory and Method for Mechanism Design

Regarding system and mechanism design, this book focuses on game theory and mechanism design. It refers to the role of interest-driven trust in economic cooperation put forward by Nooteboom (2002) and the stakeholder theory of Clarkson (1995) to derive two cooperative game strategies based on hypothesis of economic man and information asymmetry of parties to M&A by gaming before, during and after M&A: high-quality acquiring firms acquire high-quality target firms, and acquiring firms with shell resources onlyacquire high-quality target firms. In a state of trust in which the interests of stakeholders are balanced, a profit function of Chinese SOEs’ mixed ownership-oriented M&A transactions was built. Mechanism design theory is a comprehensive application of game theory and social choice theory. Based on the limited rationality of subjects of mixed ownership-oriented M&A, the author finds the equilibrium point of the game among stakeholders through game theory, designs a “system-innovation-governance” mechanism, evaluates Chinese SOEs’ mixed ownership-oriented M&A via indicator evaluation system, and constructs an optimal matching theory model on this basis to analyze the optimal path of such M&A. The “innovation-mixed ownership-oriented M&A-trust” mechanism proposed in this study by integrating game theory and mechanism design means not only “construction”, but more importantly, “realization”, on which basis policy recommendations proposed herein are optimized.

1.2.3.5

Construction of Indicator Evaluation System

Constructing indicator evaluation system is one of an important means for people to know, understand and influence things, which mainly includes design principle and construction process. As for design principle in this book, following the ideas and methods of Drucker (2009) and Peng Zhanglin et al. (2017), an evaluation indicator system for mixed-ownership economic development was designed based on the principle of scientifically-oriented purpose, completeness, operability, independence, distinctiveness and dynamics. After that, the author follows the “five-stage” process of constructing an evaluation indicator system (Qin 2003; Gu 2010) to conduct preliminary building of the mixed-ownership M&A indicator system of SOEs, preliminary screening based on qualitative and quantitative analysis, quantitative screening with statistical approach, rationality test with quantitative analysis, and feedback test through qualitative and quantitative analysis. In this book, a comprehensive indicator evaluation system is established to evaluate the mixed ownership-oriented M&A of SOEs.

16

1 Introduction

1.2.3.6 1.

2.

3.

Empirical Research Method

According to the conclusion derived from the game, expected excess returns of the market is a function of transaction pricing and capital cost. This study takes all mixed ownership-oriented M&A transactions of China’s A-share listed SOEs between 1998 and 2015 on first notice date as samples to perform OLS regression analysis on M&A premium, company capital cost and short-term market performance after M&A with M&A premium as a proxy variable for transaction pricing and to provide a new explanation for the mechanism of realizing the goal of game in terms of the information characteristics of M&A. With data on major asset restructuring completed by listed Chinese SOEs in the form of cross-shareholding from 1998 to 2011, the relationship among trust mechanism, innovation capability and M&A value is analyzed. This study finds that Chinese SOEs’ trust mechanism and innovation capabilities affect the creation of corporate value after M&A. By examining the relationship between SOEs’ innovation capabilities and value created by mixed ownership- oriented M&A, it analyzes the role of improvement of innovation capabilities on value creation after M&A, which is closely related to trust mechanism. Taking the mixed ownership-oriented M&A and restructuring of A-share listed Chinese SOEs listed on Shanghai Stock Exchange and Shenzhen Stock Exchange from 1998 to 2014 as research objects, this study examines the impact of informal institutional social trust on the value creation of corporate M&A from the perspective of transaction costs and reveals the feasibility and importance of informal systems in helping acquiring firms reduce information asymmetry and transaction costs through regional trust and create value. The research conclusions not only provide a new way to understand M&A behaviors in China’s capital market during economic transition, but also enriches the area of research of informal systems.

1.3 Organizational Structure The logical structure of this book is shown in Fig. 1.2. Main contents of the book are summarized as follows:

1.3.1 Theoretical Research This Chapter is introduction, which mainly introduces the motivation, significance, goals, approach, methodology, logical structure and innovations of this study. Chapter 2 is about literature review on mixed ownership-oriented M&A of Chinese SOEs. It mainly reviews existing research results on the mixed-ownership reform,

1.3 Organizational Structure

Fig. 1.2 Structural diagram of research logic

17

18

1 Introduction

trust and innovation of Chinese SOEs from five aspects (the development of stateowned economy and mixed ownership system, mixed ownership reform of Chinese SOEs, trust mechanism and corporate value, innovation capability and corporate value, motivation of M&A and post merger integration based on mixed-ownership reform) and proposes topics for prospective study. Chapter 3 elaborates on the theoretical basis of trust and innovation mechanism in Chinese SOEs’ mixed ownership-oriented M&A, including theories on state-owned economy, mixed-ownership economy, strategic M&A, corporate capability, information economics, contract economics, new institutional economics, corporate culture based on organizational capital and innovation, which form the basic theoretical framework of this book. Chapter 4 talks about the theoretical research framework of trust and innovation mechanism in Chinese SOEs’ mixed ownership-oriented M&A. It first reviews the history of Chinese SOEs’ mixed ownership-oriented M&A, then summarizes existing problems in the M&A, elaborates trust and innovation mechanism in it following “economy in the macro aspect—industry in the meso aspect—enterprise in the micro aspect”, and establishes “innovation—mixed ownership-oriented M&A— trust” system in the macro aspect, “innovation—mixed ownership-oriented M&A— trust” three-dimensional industry development mechanism in the meso aspect and “innovation— mixed ownership-oriented M&A—trust” three-dimensional enterprise development mechanism in the micro aspect.

1.3.2 Indicator Evaluation System Chapter 5 studies an evaluation indicator system of trust and innovation research based on Chinese SOEs’ mixed ownership-oriented M&A. It links trust and innovation evaluation indicators with corporate M&A value evaluation system, incorporates multiple research models that reflect the value and influencing factors of M&A, analyzes the influence of trust and innovation on the value of M&A, and forms a comprehensive evaluation system for the influence of trust mechanism and innovation mechanism on the value of M&A.

1.3.3 Deduction Based on Game Theory Chapter 6 focuses on analysis of game in the mixed ownership-oriented M&A of Chinese SOEs. It studies the incomplete information game of parties to M&A from the perspective of acquiring firm, constructs a game model of transaction pricing and expected excess returns of the market, and conducts an empirical test of the game model with empirical data from the mixed ownership-oriented M&A of A-share listed Chinese SOEs.

1.3 Organizational Structure

19

1.3.4 Empirical Research Chapter 7 talks about trust mechanism, innovation capability and value of corporate M&A based on empirical study of Chinese SOEs’ mixed ownership-oriented M&A. On the basis of data on major asset restructuring completed by listed Chinese SOEs in the form of cross-shareholding from 1998 to 2011, it analyzes the relationship among trust mechanism, innovation capabilities and value of corporate M&A, aiming to explain the continuous increase of M&A transactions in China since the end of the last century. Chapter 8 elaborates on trust mechanism, M&A performance in Chinese SOEs’ mixed ownership-oriented M&A. Focusing on the mixed ownership-oriented M&A and restructuring of A-share listed Chinese SOEs listed on Shanghai Stock Exchange and Shenzhen Stock Exchange from 1998 to 2014, it examines the influence of informal systems and social trust in the regions where Chinese listed companies are located on the value creation of subjects in M&A in terms of transaction costs.

1.3.5 Case Study Chapter 9 is a case study of the mixed ownership-oriented M&A and innovationdriven development of Chinese SOEs. It proposes the framework for theoretical analysis based on the evolution path from open innovation to independent innovation brought about by M&A, the relationship between innovation capability and enterprise development, and the mechanism of mixed ownership on innovation-driven development, and explores the internal mechanism of mixed ownership-oriented M&A to promote innovation-driven development with local Chinese SOE Grandblue Environment as an example which has conducted three M&A transactions.

1.3.6 Research Conclusions and Suggestions Chapter 10 focuses on research conclusions and policy implications for Chinese SOEs’ mixed ownership-oriented M&A. Based on analysis in previous chapters, it summarizes main research conclusions of the book in terms of the influence of trust mechanism and innovation mechanism on corporate value creation in M&A, thereby fully revealing the path and mechanism of how trust and innovation mechanism affect M&A. After that, it provides decision-making basis for parties and stakeholders of M&A as well as policy support for policy makers and regulators. Finally, the limitations of this study and directions for future research are presented.

20

1 Introduction

1.4 Innovation Points 1.4.1 Research Perspective: Mixed Ownership-Oriented M&A of Chinese SOEs Mixed ownership-oriented M&A of Chinese SOEs described in this book is an innovative research perspective. In M&A of the micro field, it is urgent to solve problems in corporate value rediscovery and realization path, mix “capital and production factors” by developing mixed ownership through M&A, and embed trust mechanism and innovation mechanism in post merger integration, which is a feasible path to deepen the reform of China’s SOEs and develop mixed ownership under the “new normal” and “new era” of economic development. Designing a path for releasing institutional dividends in terms of micro mechanism is a new perspective for subsequent research on mixed ownership. The focus of mixed ownership-oriented M&A of Chinese SOEs in this book is not how shareholders better control their holdings, but how to improve and enhance government capital and give play to the leading role of the state-owned economy under equal shareholder rights and rules with capital as a link by M&A while following the free flow of market-oriented production factors and rules for property rights transaction and achieving the goal of maximizing shareholder wealth by optimizing efficiency of existing resources allocation. Competitive neutrality and market mechanism are emphasized in the mixed ownership-oriented M&A of Chinese SOEs. Regarding theoretical framework, the author first designs the macro mechanism of “system-innovation-trust”, adopts appropriate “systeminnovation-trust” development path in the development of industries in the meso aspect and the development of enterprises in the micro aspect, and optimizes the layout of China’s state-owned economy by promoting the adjustment of the structure of state-owned economy through path planning. Focusing on the micro subjects of the state-owned economy—Chinese SOEs, this study clarifies the mission of mixed ownership-oriented M&A, which is to create corporate value by integrating existing resources, prevent pure capital operations during M&A, and allow private capital to private capital become a source of funds for Chinese SOEs to improve liquidity.

1.4.2 Research Content: Deduction with Game Theory Based on the Principle of Competitive Neutrality This book follows the essential characteristics of rational economic man, emphasizes competitive neutrality and market mechanism in Chinese SOEs’ mixed ownershiporiented M&A, and derives the relationship between transaction pricing and value creation in M&A through game theory. First, it studies the relationship between transaction pricing and value creation in Chinese SOEs’ mixed ownership-oriented M&A from the perspective of game. It is found that in M&A game, acquirers (SOEs) fix

1.4 Innovation Points

21

the price following the principle of maximizing revenue, but show limited rationality in their behaviors due to the complexity of the environment and the uncertainty of long-term income (Givoly and Hayn 2000), and finally launch a game on transaction pricing based on expected excess returns of the market during window period of M&A transactions. These research results provide a new theoretical explanation for the question why M&A can bring better market response from the perspective of game (Zhai et al. 2010). Second, a large number of literatures on transaction pricing and value creation in M&A point out that higher transaction pricing premiums cannot create value for companies (Hunter and Jagtiani 2003; Chen and Lu 2013) and give corresponding explanations from synergy hypothesis at enterprise level, principalagent hypothesis at executive level and overconfidence hypothesis. However, this study finds that from the perspective of game in M&A, there is a significant positive correlation between M&A premium and the short-term market performance of the acquirer, which is a supplement to literature on the relationship between premium and value creation in M&A. Third, game model and empirical research are employed in this study, which to a certain extent help avoid the subjectivity of model selection and the endogenousness of variable selection and enrich methods for studying M&A.

1.4.3 Research Approach: Linkage Effect of Innovation Ability and Trust Mechanism This book studies the mechanism of mutual effect between trust mechanism and innovation ability on the value of SOEs’ mixed ownership-oriented M&A and expands research on factors affecting the value of M&A. First, trust mechanism is divided into an outer mechanism and an inner mechanism. Outer trust mechanism is reflected by the encompassing interests of stakeholders, while inner trust mechanism is reflected by the integrity culture of parties to M&A, which deepens the understanding of formal systems and informal systems in new institutional economics and expands research on the process and path of how trust mechanism influences the value of corporate M&A (Hutton et al. 2015). In addition, through cross-shareholding, target firms’ shareholders are included in interest encompassing entity. M&A premium is not considered as a cost factor. By eliminating the interference of managerial arrogance and wealth transfer theory, this study focuses on the motivation of M&A on corporate value creation and extends the research scope of existing literature on crossshareholding mainly used in M&A payment (Xie and Zhang 2013). Second, there are few studies on corporate culture in M&A in existing literature. Most studies regard corporate culture as a fixed effect, which is excluded rather than analyzed by fixedeffect model of panel data. However, M&A has expanded organizational boundaries. In the process of environmental changes, corporate culture has formed exogenous shocks. Scholars who have noticed this mainly study the degree of difference in M&A and post merger integration (Zhou and Li 2008). They conducted regression on degree of organizational integration, company value, company risk, etc., but

22

1 Introduction

failed to analyze the approach and mechanism of how corporate culture plays its role. This book measures corporate integrity culture with corporate violations three years before and after M&A and demonstrates the important role of innovation ability affecting integrity culture on the value of mixed ownership-oriented M&A of SOEs through empirical tests, which helps better understand the role and path of corporate culture in M&A. Third, in existing research on contributory factors of corporate M&A value, trust mechanism and innovation ability are independent and seldom discussed as a whole. This study finds that trust mechanism can better enhance innovation capabilities after M&A and promote the creation of corporate value. This trust mechanism comes from integrity culture inside enterprises rather than the encompassing interests of external stakeholders, which helps solve post-merger puzzle in the mix ownership-oriented M&A of Chinese SOEs in this study.

Chapter 2

Literature Review on Chinese SOEs’ Mix Ownership-Oriented M&A

Previous five waves of global M&A and China’s five-stage M&A reflect various motivations in M&A. The sixth wave of M&A emphasizes strategic aspect and core technology transfer, but empirical data show that M&A can hardly create corporate value, or may even reduce it. In the sixth wave of M&A and the process of mixedownership reform, it is urgent to offer theoretical solutions on how Chinese SOEs should conduct M&A and post merger integration to realize motivations of strategic M&A and create corporate value. M&A is an effective way to expand enterprises and realize growth strategies, but it is after all different from internal growth. With the break of organizational boundaries and changes in external environment, organizational behaviors and actions of stakeholders that are closely related to people have a profound impact on enterprises’ efficiency in integrating internal innovation capabilities. Research in recent years has shown that the efficiency and effect of innovation capability integration play a key role in value creation through M&A, and that trust affects the efficiency and effect of conversion from open innovation to independent innovation brought about by M&A. In the trust mechanism of enterprises, changes in organizational climate and integration brought about by corporate culture, especially integrity culture, directly affect the “input-output” function of innovation and corporate value creation. Promoting the development of mixed-ownership economy and mixed-ownership reform in SOEs has been the focus of China’s economic sector in recent years. By participating in mixed ownership-oriented M&A, Chinese SOEs can not only realize their motivations of strategic M&A, but also attract non-public capital, which will exert a profound impact on their value creation. This chapter focuses on the development of the state-owned economy, mixed-ownership reform of SOEs, trust and corporate value, innovation and corporate value, and motivation of M&A and post merger integration to review relevant literature, discuss the path and mechanism of value creation of Chinese SOEs in mixed ownership-oriented M&A, and then present main research questions of this book.

© Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_2

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2 Literature Review on Chinese SOEs’ Mix Ownership-Oriented M&A

2.1 Summary of Research on the Development of the State-owned Economy and Mixed-ownership System 2.1.1 Research on the Development of the State-owned Economy The state-owned economy is an important part of China’s market economy and occupies a leading position in its economic development. In recent years, as the economy develops rapidly and SOEs conduct strategic reorganization, the stateowned economy has shown high quality growth at a rapid speed. This study mainly focuses on the following aspects:

2.1.1.1

(1)

Research on Effects of the Development of the State-owned Economy

Positive Effects of the Development of the State-owned Economy Some scholars believe that the state-owned economy can “crowd in” and “drive forward” the national economy, in which “crowd in” means the state-owned economy can promote the growth of private investment by reducing enterprise costs and attracting foreign investment, while “drive forward” means that the state-owned economy can promote the growth of the national economy. In terms of “drive forward” effect, Easterly and Rebelo (1993) found that the development of the state-owned economy plays a significant role on the development of the national economy, and contributes greater to the growth of the national economy. As for “crowd in” effect, Aschauer (1989) found that with the increase of public investment from the government, the rate of return on private capital continues to raise, thereby promoting the desire for private investment and increasing the efficiency of capital utilization. Therefore, government capital produces a crowd-in effect on private capital. Fisher and Turnovsky (1998) analyzed the dynamic impacts of public investment on private capital, and hold that the state-owned economy has a “crowd-in effect”. Public investment helps stimulate foreign investment and improve investment environment, thus increasing national revenue and promoting private investment. Cavallo and Daude (2011) studied public investment in 116 developing countries and found that government investment can increase fiscal revenue by promoting the efficiency of private investment, but it will be affected by institutional factors. Government investment usually shows a “crowd out” effect in countries and regions with imperfect systems and “crowd in” effect in countries and regions with sound systems.

Chinese scholars have also conducted in-depth research on the “crowd in” and “drive forward” effects of the state-owned economy. Regarding “drive forward”

2.1 Summary of Research on the Development …

25

effect, Wang (2013) empirically explored the investment effect of the state-owned economy based on the growth of non-state-owned economic investment and industries. They found that in some industries (such as printing industry and tobacco manufacturing industry), the state-owned economy can significantly increase investment in the non-state-owned economy and enhance economic growth. Jing and Mo (2019) found through empirical research that China’s market mechanism is yet to be improved. The state-owned economy works as a “stabilizer”. Regions with better state-owned economy enjoys good overall economic situation, that is, the stateowned economy has had a significant positive effect on regional economic development. Li and Wang (2015) explored the impact of different ownership structures on the economic convergence of provinces and regions and the impact of stateowned and non-state-owned economies on the economic gap between provinces and regions mainly with economic gravity method. They found that China’s state-owned economy has always promoted the shift of its industrial focus to the west, which helps narrow the economic gap between eastern coastal regions and western regions. In particular, regarding research on the “crowd in” effect of the state-owned economy, Yin and Lu (2008) employed VAR and VECM models and found that although public investment has a “crowd out” effect on private capital investment in the short term, it can promote the increase of private capital investment in the long run. There is a dynamic balance between private capital investment and public investment. Cao and Tian (2020) explored the relationship between government capital and private investment based on data from China’s prefecture-level cities in three northeastern provinces, and found that government investment has “crowded in” more private capital by increasing infrastructure investment and improving market environment, thereby boosting regional economic growth. (2)

Possible Negative Effects of Purely Developing the State-owned Economy Western scholars believe that the state-owned economy has “empty ownership”, which distorts “principle-agent” mechanism and corporate governance structure, and easily makes investment decisions deviate from the goal of maximizing profits (Bai et al. 1997). Conyon and Murphy (2000) believe that interests related with managers such as return on control rights (including on-thejob consumption) and promotion are closely related to the output scale of a company, which greatly stimulates the irrational behavior of managers of state-owned economic sector to expand company scale. There exists resource misallocation in some state-owned economic departments. Hsieh and Klenow (2009) comparatively analyzed the degree of resource misallocation among manufacturing companies in China, India, and the US, and found that there is a huge difference in capital and labor between Chinese and Indian companies. If resource misallocation is eliminated, the total factor productivity of enterprises will be greatly increased (Islam et al. 2006; Brandt et al. 2012). Song et al. (2011) conducted a comparative analysis on the production efficiency of state-owned and private enterprises, and found that the ROA of SOEs is significantly lower than that of non-SOEs (Islam et al. 2006). Brandt and Zhu (2000) comparatively studied the output contribution and total factor productivity of

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2 Literature Review on Chinese SOEs’ Mix Ownership-Oriented M&A

state-owned and private enterprises, and found that the output contribution and total factor productivity of private enterprises are superior to those of SOEs (Hsieh and Klenow 2009). Chinese scholars have also conducted research on the poor layout and unreasonable structure of the state-owned economy, and explored possible negative effects brought by purely developing the state-owned economy. Based on urban economics, Wang et al. (2014) conducted an empirical research to measure the degree of government regulation over the economy and society with the proportion of state-owned economy, and found that an excessive proportion of state-owned economy produce negative effects on the number of residents in large cities and is not conducive to the agglomeration of large cities. Qiu (2015) empirically studied the relationship between the proportion of state-owned economy, foreign direct investment, and innovation capability, and found that the spillover of R&D capital brought about by foreign direct investment can significantly enhance China’s innovation, but too large proportion of state-owned economy will inhibit the degree of innovation promotion by foreign direct investment. Wu et al. (2015) empirically explored the impact of ownership structure on economic operations based on data from provincial industrial departments of China, and found that decrease in the proportion of the state-owned economy and increase in the proportion of the non-public economy will reduce the proportion of regional deposits and loans in deposits, promote the efficiency of capital utilization and increase the growth rate of the provincial economy. Besides, the reduction of the proportion of state-owned economy will increase the proportion of exports and FDI in GDP, thereby facilitating the stable operation of the national economy. Zhang and Cao (2015) studied China’s commercial banks in cities and empirically analyzed the prudent behavior of commercial banks in daily operating activities in terms of the state-owned economy, local government and government fiscal revenue and expenditure. The results show that the higher the proportion of the regional state-owned economy, the more risk-based commercial banks may consider their borrowing plans, and the idea of “advancement of national economy and retreat of private economy” will appear, which is not conducive to the development of the private economy. Li (2016) studied the negative effects of excessive development of the state-owned economy on the private economy based on the development of the private economy, and found that in regulated industries, with the development and growth of the state-owned economy, the private economy and private entrepreneurs are gradually being marginalized. Sun (2016) believes that in the reform of the stateowned economy, adjustment of its structure and layout at macroeconomic level and shareholding reform of SOEs at micro enterprise level have had a significant impact on employees of SOEs. After the reform of the state-owned economy, employees are faced with possibility of being laid off and have lower status. It requires common efforts of the academia and entrepreneurs to study how to make employees more competitive in competitive neutrality and market mechanism.

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2.1.1.2

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The State-owned Economy and the Private Economy

Regarding the relationship between the state-owned economy and the private economy, there are two main views in existing research. The first is that the stateowned economy and the private economy is opposite, that is, the rapid development of the private economy will lead to the withdrawal of state-owned economy and the loss of state-owned capital. The second view is that state-owned and private economies are not mutually exclusive, which develop based on integration, which brings the growth speed and quality of the national economy to a new level. Most scholars in China believe that China’s state-owned and privately-owned economies are developing in an integrated manner. Wang and Zuo (2019) hold that in the initial stage of socialism with Chinese characteristics, the state-owned economy covers an extensive range, including economy, public welfare and other types. The state-owned economy and the private economy develop cooperatively, which results in complete industrial chains. What’s more, the state-owned economy’s investment in public products and social welfare escorts the stable development of the private economy. Under the new normal of economy, common development of the stateowned and private economies must be maintained. Hong et al. (2018) explored the interactive relationship between the state-owned economy and the private economy based on symbiosis theory in biology and theoretical model of group symbiosis evolution. With provincial panel data, they conducted a static and dynamic empirical study of their symbiosis. They found that the reciprocity of China’s state-owned and private economy is asymmetric, and that this non-equilibrium reciprocity appears in their symbiosis. Gao (2013) dialectically studied the relationship between the state-owned economy and the private economy from the macro, middle, and micro perspectives. He found that the two have a unified and opposite dialectical relationship, and believes that proper transformation of the state-owned and private economies is an important issue facing China’s economic development. Some scholars have found that if the state-owned economy covers a too broad range, it will reduce the space for private enterprises to survive and develop, compete with the private economy for profits, and even drag down the growth of the private economy. Tang (2016) believes that under current economic situation, most SOEs have relatively low competitiveness. If we strongly support SOEs to become “larger and stronger” or even monopolize certain industries, it may cause high-efficiency private enterprises to withdraw from these industries, so low-efficiency SOEs will “squeeze” the survival and development space of private enterprises. Xu (2007) holds that the fundamental purpose for government departments to operate assets is to maintain social stability, ensure adequate supply of social public materials, and improve social welfare, rather than make profit. If they participate in profit-seeking, it will inevitably result in competition with private enterprises for profit.

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2 Literature Review on Chinese SOEs’ Mix Ownership-Oriented M&A

Reform of the State-owned Economy

Since the twentieth century, the reform path and effect of the state-owned economy have been a hot topic in economics. In the meanwhile, some countries (such as the former Soviet Union, China, Ukraine) have gradually completed the transition from a planned economy to a market economy, providing a wealth of materials for the study of the path and effectiveness of reform of the state-owned economy. Foreign scholars’ research on the reform path of the state-owned economy mainly appeared at the end of the twentieth century, and included two theoretical viewpoints: property rights reform and market competition. Krueger (1990), a scholar who supports property rights reform, believes that state-owned property rights exert a negative impact on the production, operation and management of enterprises. SOEs tend to hire employees with political background or connections, rather than employees with real management experience and abilities. Property rights reform can help them fundamentally improve their management performance and efficiency. Shleifer and Vishny (1998) proposed that intervention from government departments causes the operation and management of SOEs to deviate from established efficiency and development goals, and increase their operating costs. Therefore, proponents of property rights reform believe that property rights are a core factor that affects the operating efficiency of enterprises, and that the property rights of enterprises need to be reformed in reform of the state-owned economy. Vickers and Yarrow (1991) who support market competition believe that the inefficiency of business operations has nothing to do with the nature of property rights, and that there are still “principleagent” and corporate governance problems in private enterprises. Johnson et al. (2000) pointed out that among private capital invested companies, there exists private transfer of corporate wealth mainly conducted through transferring benefits. Therefore, reformers advocating market competition believe that market competition is a core factor that affects the efficiency of business operations, and supports perfecting the market competition mechanism in the reform of the state-owned economy to improve business performance. Foreign scholars’ research on the effects of reform of the state-owned economy is mainly conducted by comparing differences in corporate performance before and after the reform. Megginson et al. (1994) compared the performance of SOEs in 18 countries before and after privatization and found that property rights reform significantly improves the profitability and operating performance of enterprises. However, La Porta and Lopezdesilanes (1999) conducted empirical research on Mexican SOEs that have implemented privatization reform, and found that the property rights reform of enterprises caused large-scale layoffs and salary cuts, which harmed the interests of original employees. Bai et al. (2000) found that the reform of property rights of SOEs will incur certain social costs, and that the reduction of employees and lower salaries may lead to social instability. Regarding the effects reform on market competition mechanism, Martin and Parker (1997) found that after being privatized, SOEs in competitive industries witnessed significantly improved corporate performance, but those in monopolistic industries didn’t embrace significantly improved

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performance. Djankov and Murrell (2002) conducted a study on countries having transformed from a planned economy to a market economy, and found that market competition produces important positive effects on national economic reforms. China’s reform of the state-owned economy began in the 1970s, whose path has been studied by many domestic scholars. Zhang (1993) pointed out that in order to improve their governance capabilities, SOEs must carry out property rights reform. Lin and Li (1997) believe that the inefficiency of SOEs results from incomplete market competition system. The focus of reform of the state-owned economy should be helping enterprises create market systems and mechanisms so that they can pursue economic performance in accordance with the characteristics of rational economic man. Economic performance should be the most true and effective information for an enterprise. Hao and Chen (2011) believe that China’s current reform of the state-owned economy should focus on breaking through key links of the value chain, promoting industrial division, optimizing property rights chain, improving and perfecting companies’ internal governance structure, deepening the reform of monopoly industries, and establishing and improving management system for stateowned capital. Ding (2018) proposed that the basic goal of China’s reform of the state-owned economy under the new economic normal should be fully realizing the organic combination of state-owned and market economy, and exploring specific ideas and research countermeasures in the new stage. Based on the realistic background of the new normal, Guo (2019) proposed that adhering to the correct reform goals, correctly handling the relationship between government departments and the market, and promoting the development of the relationship between the government and enterprises will help comprehensively deepen reform of the state-owned economy. Regarding domestic research on the results of reform of the state-owned economy, Hu et al. (2006) believe that China’s SOEs has achieved great results in property rights reform, which has increased their sales revenue and profit, reduced their operating costs, thereby improving production and operation performance and total factor productivity. Wang (2011) pointed out that after the reform of the state-owned economy, its proportion in China’s national economy has been dropping, the mixed economy has continued to develop, the reform of SOEs’ shareholding system and equity diversification has been continuously deepened, corporate governance structure and internal governance mechanism have been improved, and the supervision and management system of state-owned assets has been perfected. Ju (2018) reviewed and analyzed the reform process of individual Chinese SOEs for more than 30 years. In the establishment of a modern enterprise system, various new and old systems continue to play games and finally reach a equilibrium, which boosts constant development of China’s state-owned economy and result in ever higher production and operation efficiency of SOEs. However, Li (2006) found that although the total factor productivity of SOEs has continued to increase since the reform of the state-owned economy, their profit pattern is not optimistic, and some SOEs have even suffered losses. Since the beginning of this century, the reform to optimize and adjust the stateowned economy has gradually entered the stage of “strategic adjustment”. China’s

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economy has gradually stabilized. Deepening reform of the state-owned economy plays an important role in stabilizing China’s macro economy (Zhan and Fang 2012). Li (2014) believes that strategy and structural adjustment in the state-owned economy depends on its functional positioning. In this process, the advancement or retreat of the state-owned economy is determined by its functions. Zhang (2016) believes that large debt stocks, almost stagnant private investment, and severe labor productivity growth are factors that hinder the medium and long-term growth of China’s economy. SOEs mainly obtain profits and gains from monopoly and large-scale investment. Therefore, in fact, the return on investment of SOEs is lower than that of private enterprises. In view of the development of the state-owned economy, reorganizing state-owned equity and assets will become an important part of economic reform. Institutionally, reorganization can greatly alleviate the financing difficulties, restricted market access and too high industry access barriers that private enterprises have been confronted with.

2.1.2 Research on Mixed Economy The mixed economy is not an independent form of ownership economy, but the combination of public economic elements and private economic elements. Its development helps SOEs play a proactive role in China’s macroeconomic regulation and control and make up for market failures. Marxist scholars such as Marx, Engels and Lenin have conducted in-depth research on mixed ownership. In Das Kapital, Marx expounded forms of realizing joint-stock system, a mixed ownership economy, and regarded it as a process of self-denial of capitalism. Engels believed that agricultural cooperatives should be developed, private ownership and collective ownership should be integrated, and the strong social foundation of public ownership and the subjective initiative of private capital should be brought into full play. Based on the actual situation in Russia, Lenin proposed the coexistence of multiple ownership systems such as peasant economy and private capitalism. He advocated vigorously developing cooperatives and helping Eastern countries with small peasant economy as the mainstay to transit to socialist development. Gupta (2005) believes that the development of a mixed-ownership economy and the implementation of mixed-ownership reforms within enterprises can promote their innovation, enhance their core competitiveness, and improve their performance (Liu et al. 2015). Drawing on Western theories on mixed economy and Marxist scholars’ research on mixed ownership, based on its basic national conditions and realistic development background, China has gradually formed a path of mixed economy with Chinese characteristics. At the Third Plenary Session of the 14th CPC Central Committee, the concept of mixed economy was clearly put forward for the first time. At the Fourth Plenary Session of the 15th CPC Central Committee, the advantages of mixed economy were affirmed and shareholding reform was believed to be the key direction of future reform of SOEs, which will promote the continued growth of national economy. At the Fourth Plenary Session of the 19th CPC Central Committee, it

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was clearly stated that it is necessary to actively explore multiple forms of public ownership and develop a mixed-ownership economy. This shows that, regardless of the CPC Central Committee, government departments at all levels, or enterprises, their understanding of the importance of developing a mixed-ownership economy has continued to deepen with the advancement of reforms. Various policies proposed also provide a solid theoretical basis for the development of mixed economy in China. After nearly 30 years of rapid development, China has gradually formed a vertical economic structure on the whole with state-owned economic entities living upstream and private economic entities living downstream. Ye and Liu (2019) empirically tested the internal logic and mechanism of the mixed ownership reform of upstream SOEs to promote the development of downstream private economy, and proposed that in China’s vertical economic layout, the state-owned economy and the private economy complement each other’s advantages. Optimizing economic layout and deepening the reform of SOEs will help promote the common development of stateowned and private economies. He (2014) believes that to develop a mixed-ownership economy, units concerned must give full play to the leading role of the state-owned economy in the direction and mode of development. Zhou (2014) believes that the fundamental purpose of developing a mixed-ownership economy is not to weaken the dominant position of public ownership, but to enlarge the function of the stateowned economy, so that the state-owned economy can better play its role, thereby better build socialism with Chinese characteristics. Actively developing a mixed ownership economy is the best and only way to promote the vitality and influence of the state-owned economy under the new economic normal. Liu et al. (2016) believe that while developing a mixed-ownership economy, it is necessary to sort out the relationship among the government, the market, and SOEs, which are by no means a simple mechanical combination. Currently, developing a mixed-ownership economy and carrying out mixed-ownership reform are key and difficult issues in the reform of SOEs. Yinshi (2015) summarized relevant theoretical bases and practice of mixed ownership economic systems at home and abroad, and proposed that SOEs can be grouped based on the degree of competition in the industry. Targeted reforms should be carried out in accordance with the characteristics of an industry. Conflicts between public interest and corporate interest should be balanced. Against the background of China’s new economic normal, Ji (2019) analyzed the value of developing mixed economy, and pointed out that it can help SOEs optimize property rights, encourage them to spontaneously establish market systems and mechanisms, and fully stimulate the vitality of private and state-owned capital. However, China’s mixed-ownership reform is still facing some problems, such as contradictions and problems arising in the reform, and choose of appropriate reform approaches and methods in a targeted manner, so as to yield better results.

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2.1.3 Summary The state-owned economy is an important part of the market economy and occupies a leading position in the development of China’s national economy. Most scholars believe it can boost private investment and increase fiscal revenue by promoting foreign investment and reducing corporate costs, and produce “crowd in” and “drive forward” effects. However, others have found that due to problems such as “empty ownership” and weak profit-seeking motives, excessive development of the stateowned economy will have a “crowd out” effect on the private economy (that is, reducing the investment of private capital), which leads to the misallocation of resources in state-owned sectors. Mixed ownership is the micro realization of China’s basic economic system. It can not only regulate the state-owned economy from a macro perspective, make up for market failures, but also facilitate the private economy to enhance rational allocation of resources. In response to “advancement of national economy and retreat of private economy”, most scholars believe that the state-owned and private economies can achieve inclusive development in an asymmetric and mutually beneficial symbiotic development relationship. However, the mixed ownership reform of the state-owned economy still faces difficulties and challenges, such as how to properly handle the relationship between the government and the market, how to give full play to the complementary role of state-owned and private capital, and how to help companies choose suitable reform approaches and methods in a targeted manner. This requires China to make continuous strategic adjustments based on actual conditions while developing a mixed-ownership economy.

2.2 A Summary of Research on Mixed Ownership-oriented Reform of SOEs Since the concept of “mixed ownership” was clearly proposed at the 15th CPC National Congress, China’s economic structure has transformed from a single ownership economic structure, to the coexistence of multiple ownership economies, and then to a mixed ownership economy (Li 2014). To solve the inefficiency of SOEs in production and operation, China did not follow Western countries to privatize SOEs, but cautiously faced risks and uncertainties that may exist in ownership reform. After experiencing several key stages including decentralization and profit transfer, household contract responsibility system and state-owned assets supervision, China has gradually entered the stage of large-scale, stable and orderly ownership reform (Hu 2018; Yang and Li 2018). The main ways for SOEs to participate in mixed ownership reform are investing in or merging non-SOEs, introducing non-state investors through issuing stocks or increasing paid-in capital, developing employee stock ownership plans, conducting government social capital cooperation (PPP), and converting into

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preferred shares to participate in the reform of mixed ownership of private enterprises with the establishment of investment and operating companies.

2.2.1 SOEs Invest in or Merge/Reorganize Non-SOEs Merging private enterprises is an important means for SOEs to carry out mixed ownership reform, and also the most realistic and reliable method for private enterprises to obtain the advantages of state-owned capitals (Han and Feng 2014), which can optimize the efficiency of resource allocation and realize the substitution of superior enterprises to inferior ones. This meets the requirements of the “new normal” of economic development and complements the advantages of micro enterprises (Chen 2017). Alexandre and Charreaux (2004) investigated privatized SOEs in France, and did not find that mixed ownership reform has a significant effect on the dynamic and static operating efficiency of SOEs. However, they found that the degree of mixed ownership reform’s promotion of the operating performance of SOEs are significantly affected by such factors as companies’ background, governance level, and development strategy. Jefferson (2017) examined the reform approaches and methods of Chinese SOEs from 1987 to 2007 and found that merger and reorganization between SOEs and private enterprises can deepen the reform of mixed ownership, significantly improve the operating efficiency of SOEs and improve the operating performance of enterprises. Bai et al. (2009) believe that although the mixed ownership-oriented reform of China’s state-owned industrial enterprises has not had a great impact on the employees of SOEs, it has increased the sales revenue of SOEs and improved the productivity of employees, and will produce positive impacts on SOEs for a long period of time. Zhang et al. (2020) studied the mixed ownership-oriented M&A of SOEs in China, and found that mixed-ownership M&A can improve the operating performance of SOEs and enhance their innovation by affecting the macro environment of regions and industries where SOEs are located. Case study is adopted in most domestic research on SOEs’ investment or M&A and reorganization of non-SOEs. By analyzing the process of cross-ownership M&A of specific SOEs, the function path and economic consequences of mixed ownership were explored. First, from the macroeconomic level, SOEs have improved overall social welfare through investing in or merging non-SOEs. Based on social welfare, Chen (2017) believes that under Cournot competition or Stackberg competition model, when the efficiency of corporate M&A is high, SOEs adopt cross-ownership M&A to achieve mixed ownership reforms, which is more conducive to improving social welfare. In the context of Bertrand price competition, regardless of the efficiency of M&A, cross-ownership M&A of SOEs is the best way to improve social welfare. Secondly, cross-ownership M&A of SOEs can improve internal control and governance, promote innovation capabilities, and improve business performance and total factor productivity. Regarding SOEs’ improvement of internal control and corporate governance, Tong and Yang (2015) analyzed the mixed ownership reform of central enterprise China National Building Materials Group Corporation. They

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found through strategic M&A and reorganization and transition of managers, the group company regulated its governance system and achieved rapid growth in operating income, thereby achieving a win-win situation with private enterprises. Shen et al. (2019) studied Yunnan Baiyao’s path of mixed ownership reform. After the company implemented mixed ownership reform, it became a listed company jointly controlled by state-owned capital and private capital. Its business activities no longer need to be approved by the government, which has promoted its operational management efficiency and helped it establish a more market-oriented corporate governance and decision-making mechanism. In terms of promoting innovation capabilities, Wang (2016) studied the three M&A of local SOE Grandblue Environment, and found that cross-ownership M&A has significantly improved its innovation capabilities and market performance, and helped it create market value and realize strategic goals for innovation-driven development. In terms of improving business management performance and total factor productivity, Zhu and Chen (2020) explore the economic consequences of the three mixed ownership reforms of SOEs as a whole, the introduction of strategic investors, and the development of employee stock ownership plans. They found that the three models have improved the total factor productivity of SOEs.

2.2.2 SOEs Increase Capital and Shares to Introduce Non-public Investors In addition to cross-ownership M&A, increasing capital and expanding shares to introduce non-public investors is an important way for SOEs to participate in mixedownership reform, which greatly affects the overall management performance, resource allocation and utilization efficiency, investment efficiency, internal control and corporate governance of SOEs.

2.2.2.1

Performance

Backx et al. (2002) compared the performance of state-owned, private, and mixedownership aviation companies, and found that the performance of private airlines was better than that of state-owned airlines, while the performance of mixed-ownership aviation companies lies in between. Megginson et al. (1994) explored SOEs that were privatized through public issuance of stocks, and found that after introducing private capital, they witnessed continued increase in sales revenue and investment expenditures, improved operating efficiency, and created more jobs without compromising social employment security. Dsouza et al. (2005) conducted a study on SOEs in developed countries that implemented SIP (share issuing privatization) and found that after introducing private capital through issuing stocks, they embraced greatly improved profitability, operating performance, and operating efficiency. Lin and Tan

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(1999) believe that the main reason for the poor overall management performance of SOEs is that they have undertaken too many long-term policy burdens, while mixed ownership reform helps them effectively reduce those burdens, thereby improving operations, management and performance. Chinese scholars Hao and Gong (2017) explored the impacts of private shareholders on business performance and management and their mechanism of action, finding that the participation of private shareholders can improve the management performance of SOEs and improve the sensitivity of the salary of managers of SOEs to their operating performance. Ma et al. (2015) studied the impact of mixed entities on enterprises’ management and performance. They believe the diversity of mixed entities can only enhance business performance in a good institutional environment, and that the in-depth nature of the mixed entity and business performance are in an inverted U-shaped relationship. Due to the uniqueness of ownership, SOEs usually need to bear part of policy burdens in social and economic development (such as hiring employees, providing employee benefits, investing in industries that do not have advantages), which increases their operating cost and damages their value and the interests of small and medium shareholders (Liao and Shen 2014). Lin and Li (2004) believe that by conducting mixed ownership reform, SOEs bear reduced policy burdens and thereby embrace higher business efficiency and better performance, which are truer in monopolistic industries (Chen and Tang 2014; Ye 2015; Zhang et al. 2016). Zhu and Chen (2020) analyzed the economic consequences of listing of SOEs through mixed ownership reform, introduction of strategic investors, and adoption of employee stock ownership plans. They found that all the three models have improved the total factor productivity of SOEs, and that capital play the most significant role in promoting business performance by introducing strategic investors. Regarding how SOEs should arrange control rights in the mixed ownership reform to maximize corporate performance, Liu et al. (2018) believe that while launching mixed ownership reform, SOEs can enjoy better performance by appropriately increasing the proportion of non-state-owned shareholders in the top five shareholders and the number of non-state-owned directors.

2.2.2.2

Efficiency of Resource Allocation

Regarding resource misallocation that may exist in some SOEs, Hsieh and Klenow (2009) examined Chinese and Indian manufacturing companies, and found that if resource misallocation is eliminated, companies’ total factor productivity can be greatly improved (Brandt et al. 2012). Wei et al. (2005) used samples of SOEs that participated in the mixed reform in China from 1991 to 2001 for empirical research, and found that mixed reform improved the asset allocation and utilization efficiency of enterprises, thereby helping them increase market value. The empirical study of Hsieh and Song (2016) reveal that the growth of private enterprises has significantly promoted the growth of national economy, but the privatization of SOEs

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has a limited effect on the efficiency of enterprise resource allocation and national economic growth. Chinese scholar Huang (2014) analyzed the advantages of SOEs in conducting mixed ownership reform and difficulties faced by them theoretically, and proposed that mixed ownership reform can help them improve the efficiency of resource allocation and break the monopoly of state-owned capital in some industries. Xu (2016) believes that SOEs’ participation in mixed-ownership reform can amplify the function and role of state-owned capital, and promote the rational and fair flow of various elements in the market mechanism to promote SOEs to improve the efficiency of resource allocation. Qi et al. (2019) explored the degree of mixed ownership reform of SOEs and found that the introduction of non-state-owned investors can improve their efficiency of resource allocation, which is more obvious in regions with high government governance levels and SOEs with low asset-liability levels. Liu et al. (2018) believe that the introduction of non-public capital by SOEs can give full play to the relative resource advantages of state-owned capital and non-state-owned capital, improve the efficiency of resource allocation, and ensure the income and safety of state-owned capital.

2.2.2.3

Investment Efficiency

In listed companies where private shareholders are not controlling shareholders, the greater the proportion of private shareholders, the less controlling shareholders will encroach on the legitimate interests of small and medium-sized investors, and the higher the companies’ investment efficiency (Berkman et al. 2009). Due to information asymmetry and agency problems, some SOEs are confronted with low investment efficiency (Myers and Majluf 1984). By introducing non-state-owned investment capital, SOEs have significantly improved information transparency, alleviated information asymmetry and “principle-agent” problem, and thus improve their investment efficiency. Boubakri et al. (2011) conducted a study on enterprises in 27 emerging countries and found that SOEs embrace higher business efficiency and investment efficiency after conducting mixed ownership reform, thereby have better performance. Chen et al. (2014) analyzed data on 64 SOEs and found that private investors and foreign investors significantly improved their investment efficiency. Zhang et al. (2015) conducted an empirical study on SOEs that have implemented SIP (share issuing privatization) and found that their remaining state-owned shares or political connections of managers hinder the improvement of their investment efficiency, but the combined effect of the above two factors alleviated the inefficiency of investment efficiency caused by a single factor. Yang and Li (2018) found that mixed ownership-oriented reform of SOEs can alleviate their low investment efficiency in an uncertain environment, and that this “correction” effect is more obvious in areas with poor property rights systems. Mixed ownership-oriented reform has improved the operating efficiency of SOEs. Li et al. (2017) studied SOEs that introduced non-public capital for mixed ownership-oriented reform during 2009–2013.

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They found that introducing non-public capital can significantly promote the investment efficiency of SOEs, but the increased degree of equity balance of SOEs after the reform weakened their investment efficiency. Ling and Xia (2019) examined SOEs’ changes in investment efficiency and corporate value before and after mixed ownership-oriented reform with PSM-DID, and found that the reform promoted their capital investment efficiency and realized the creation of corporate value. Compared with SOEs in central and western inland areas, those in eastern coastal areas receive better effect in the reform.

2.2.2.4

Corporate Governance

Within an enterprise, if the ownership of the largest shareholder and the second largest shareholder are different, it can reduce collusion among shareholders and improve corporate governance (Maury and Pajuste 2005). Introducing private capital for mixed ownership reforms affects the corporate governance of SOEs to some extent. Shleifer and Vishny (1997) believe that the diversification of property rights in enterprise will help improve corporate governance and performance, and can reduce moral hazards caused by “principle-agent” (Gomes and Novaes 2001). Megginson and Netter (2001) found that introducing non-state shareholders can help SOEs form a relatively complete management incentive and restraint mechanism, reduce the first type of agency behavior, and improve their internal control and corporate governance. Gupta (2005) studied Indian SOEs and found that the mixed ownership-oriented reform of SOEs can improve corporate governance, thereby promoting increase in sales revenue and labor growth rate. Hao and Wang (2015) took SOE Wuhan Department Store Group Co. Ltd. Which has conducted mixed ownership-oriented reform as an example to study the role of its second largest shareholder on balancing the power of controlling shareholders (stateowned shareholders). They found that private shareholders restrict the company’s controlling shareholders by winning board seats and introducing related shareholders, thereby improving company performance, helping its small and medium shareholders win more rights and voices, improving the quality of its decision-making, restraining the self-interested behavior of state-owned shareholders. Liu et al. (2016) focused on internal control and found through empirical research that non-state shareholders can enhance the internal control of SOEs by participating in high-level governance, which only exists in local SOEs and competitive SOEs, however. Zeng et al. (2017) studied SOEs from 2008 to 2013 and found that the introduction of non-state shareholders in SOEs can improve the quality of accounting information disclosed by enterprises, check and balance state-owned shareholders and insiders, and improve the executive compensation contract system and incentive mechanism, thereby improving the management performance and internal governance of SOEs (Cai et al. 2018). Based on the background of mixed ownership-oriented reform of SOEs, Wang et al. (2019) found that the proportion of state-owned equity and the level of corporate

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governance present an inverted U-shaped relationship. SOEs with a deeper degree of privatization have a higher level of corporate governance.

2.2.3 SOEs Launch Employee Stock Ownership Plan Developing employee stock ownership plan is one of the key ways for SOEs to carry out mixed ownership-oriented reform. It can enhance the initiative and enthusiasm of employees in production and management, improve their work efficiency, and improve democracy and external supervision mechanism within SOEs, thereby improving their operation and management performance (Zhang 2016). Hu et al. (2006) found that most small and medium-sized SOEs carry out mixed ownershiporiented reform through launching employee stock ownership, while large SOEs are privatized by introducing non-public capital investment. Compared with fully privatized SOEs, some privatized SOEs have higher production and operation efficiency and better operating performance. Employee stock ownership plan was first proposed by Kelso, who analyzed the sources of employee income from labor and capital, and proposed to motivate employees via employee stock ownership. Morck et al. (1988) believe that when the proportion of shares held by managers in a company reaches a certain level, the interests of managers will be similar to the interests of shareholders and other stakeholders (such as employees), which will help reduce management Moral hazard and self-interested behavior. Kumbhakar and Dunbar (1993) found that developing employee stock ownership plan can help SOEs improve total factor productivity and increase their employees’ output per capita (Jones and Kato 1995; Sesil et al. 2002). In addition, the implementation of employee stock ownership plan can also improve corporate governance, improve information disclosure system, and reduce risks faced by companies during operation (Ginglinger et al. 2011; Bova et al. 2015). Chinese scholars have explored the economic consequences of mixed ownershiporiented reform mainly in terms of social welfare, employee motivation, corporate performance, and total factor productivity. Regarding social welfare, Chen (2017) found that compared with employee stock ownership plan, management stock ownership plan of SOEs is more helpful to improving social welfare based on the Cournot competition model and the Starberg model. As for employee enthusiasm, Li et al. (2019) took the mixed ownership-oriented reform of SOE China Unicom as an example, and found that China Unicom carried out the reform by introducing strategic investor investment, developing core management and technical personnel shareholding plans, etc., which effectively motivated the enthusiasm of its employees and exerted the leverage effect of state-owned capital, thereby improved its operating performance and innovation capabilities. Liu and Fu (2015) believe that conducting mixed ownership-oriented reform through launching employee stock ownership plan and equity incentives can link SOEs’ business management performance and long-term sustainable development with the interests of executives and employees, and contribute to the optimization of equity capital structure and the

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balance of mutual interests among state-owned, private capital, employees, and senior managers. In terms of corporate performance, Pan (2019) conducted a research on the path and effects of SOE WZ Group in mixed ownership-oriented reform and found that the group adopted asset securitization, introduced strategic investors and directly launched employee stock ownership plan, which has increased the valueadded and value-preserving rate of state-owned capital, strengthened the liquidity of state-owned capital, and improved its short-term market performance. Wang et al. (2017) found through empirical study that when SOEs announced the launch of employee stock ownership plan, their market performance improved significantly, and that the higher the level of employee education, the more obvious the role of employee stock ownership plans in promoting corporate performance. In terms of total factor productivity, Zhu and Chen (2020) explored the economic consequences of listing through mixed ownership-oriented reform, the introduction of strategic investors, and the development of employee stock ownership plans. As a result, the total factor productivity of SOEs was improved. Technology and labor factors play the most significant role in promoting the management performance of SOEs while carrying out mixed ownership reform via employee stock ownership plan. However, Wang (2015) pointed out that China’s SOEs still face problems with formalization and short-term incentives for the implementation of employee stock ownership plan. Government departments should formulate corresponding policies and provide legal support in this regard.

2.2.4 Government Social Capital Cooperation (PPP) Model PPP model originated from highway infrastructure investment plan in Europe in the eighteenth century. It is an important way to introduce private capital into public services and conduct market-oriented reform through product supply, being designed to effectively solve lack of financial resources against the background of economic depression and promote the development of public-private partnerships. Peirson and Mcbride (1996) hold PPP is a long-term contract between public and private sectors. The private sector represents the government to construct social infrastructure and provides services to the public. Savas (2000) pointed out that in a nonnarrow sense, PPP also includes various arrangements between the government and individuals to provide goods or services, including franchise rights and government subsidies enjoyed by private enterprises due to their participation in constructing public products. Regarding value creation in PPP projects, Hart (2003) focuses on theory of incomplete contracts, believing that under PPP model, social capital can gain benefits and reduce operating costs, so the government can encourage investment of social capital in this way. Siemiatycki (2013) believes that government departments and the private sector can rely on appropriate incentives, reasonable and appropriate arrangements for the risks and benefits of performance to enhance value created by PPP projects from the perspective of finance and public interest. Love et al. (2015) evaluated the

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performance of PPP projects from input, process, output and results, and believed that PPP projects can help companies create value. Currently, there are two definitions of PPP in China, namely PPP in a broad sense and PPP in a narrow sense. From a broad perspective, PPP includes BOT, BOOT and other methods (Wang and Ke 2008). Government department holds shares in a project company (SPVS) specially set up for PPP project, which aims to strengthen its control over the project, protect public interest, share risks and benefits. The PPP model is a way of cooperation and financing between the government and the private sector. It is an important means to promote the long-term and sustainable development of the national economy under new economic normal and also an important way to effectively promote infrastructure investment and project construction in public services. Regarding the implementation of PPP projects in China, Wang and He (1998) summarized the basic operation of three BOT projects that have been implemented. They believe that advantages of BOT projects include introducing advanced and mature management experience, reducing constraints on government budget and financial burdens. However, BOT projects have unsound legal environment and lack professional talents. Liu (2005) elaborated on PPP based on government management and financing methods, compared the specific practices of PPP projects in the UK and China in public services, and proposed that while developing PPP projects, China should improve relevant policies and regulations, promote the transformation of the functions of government departments, and resolve disputes arising from contract performance with legal and economic means. In the choice of PPP model, Yang (2015) proposed to introduce social capital to participate in the investment and construction of public libraries, which is a beneficial and innovative attempt to explore the model. Sun Bin et al. (2016) summarized risks and reasons in PPP projects, and put forward a specific implementation strategy to ensure the transparent management and supervision of investment returns, aiming to explore departmental models and clarify government functions and operating mechanisms. PPP projects can help companies reduce financing costs and improve the efficiency of resource allocation. Chen (2014) believes that PPP model has significantly improved the efficiency of public resource allocation. Ma (2019) holds that PPP makes project investment entities more diversified, allows the sharing the risk of project failure, and reduces financing costs. While conducting PPP, state-owned and private capital give full play to their respective advantages, which enhances work efficiency. Xu et al. (2019) found that PPP project investment has a significant market value creation effect, which is more significant when relevant industries and place of project registration are inconsistent with place of company registration.

2.2.5 Summary Mixed ownership-oriented reform is a breakthrough in China’s economic reform. SOEs undergo the reform through investment or mergers and reorganizations with

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private enterprises, capital increase and share expansion, introduction of non-state capital investment, employee stock ownership plans, PPP model, etc. Many scholars have explored the economic consequences of this reform. By conducting mixed ownership-oriented reform, SOEs can increase the overall welfare of society from the macroeconomic level, and promote the efficiency of resource allocation and investment efficiency, enhance internal control and governance, and improve the information disclosure system, so as to improve their total factor productivity and management performance from a micro level.

2.3 Summary of Research on Trust and Corporate Value 2.3.1 Research on “Trust” in Different Fields In the 1950s, scholars at home and abroad began to explore trust in psychology. Experimental psychologists found that there is a psychological mechanism in the human brain that specifically serves the relationship between people and people. Society is a combination of economic, political, and cultural relations intertwined among human beings. Therefore, research on trust was gradually extended from psychology to sociology. Since the 1970s, trust has been widely used in research on psychology and organizational behavior.

2.3.1.1

Psychology

Deustch (1958) examined interpersonal trust through prisoner’s dilemma, a thought experiment. He believed that trust is a human response to a specific situation. The degree of trust between two parties in a communication will change with the change of specific situation. When a person has trust in something and sets a certain expectation, if the actual result matches the expectation, trust will have an expectation effect. But if the actual result is contrary to expectation, it will have a negative impact on his psychology. This impact is far greater than the positive psychological impact of actual result and expectation. Once people lose trust in something thing, it is difficult to repair their trust. Trust building and trust destruction are asymmetric. Focusing on interpersonal trust, Hosmer (1995) found that trust is a kind of expectation that individuals have on the reliability of others. When they choose to trust others, they also face the risk of being hurt by others’ behaviors. Therefore, interpersonal trust is a kind of conditional expectations closely related to the life experiences of individuals. Colquitt et al. (2012) studied the trust relationship between people in an organizational environment, and found that trust is a stable personality characteristic shown in the process of individuals’ integration into the organization and related learning. Interpersonal trust can be divided into rationality and emotion. Ala and Lisa (2020) studied the trust relationship between customers and suppliers, and believed that both

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parties need to establish trust in interpersonal relationships, continuous supply, etc. to achieve long-term cooperation. Among domestic research on trust in the field of psychology, Yang et al. (2008) proposed that rationality and emotion are the two most critical dimensions in interpersonal trust relationship. In human social relationships, trust is a product of social system established on the basis of legal norms and ethics. Yao (2010) believes that trust is a choice behavior. Diversity of labor force and organizational environment are important factors that affect changes in organizational trust. Trust can reduce operating uncertainties and costs, improve management efficiency, and promote cooperation among members of an organization. Wu et al. (2016) investigated into government trust and believed that trust comes from cultural psychology and system performance. Authoritarian values and government response will have a significant positive impact on the trust of central and local governments. Zhou et al. (2006) examined data from online transaction, and believed that the reputation of sellers will affect the price of commodities and the purchase volume of buyers. In a market without government intervention, reputation still plays a proactive role. Zhong et al. (2016) looked into dairy farmer cooperatives and believed trust can improve the product quality and management performance of cooperatives, that trust among members can promote the rational allocation of resources and information sharing, and that institutional trust can encourage and restrict the behavior of members.

2.3.1.2

Sociology

With the deepening of human cognition of economic, political, cultural and other relations, the study of trust relations has gradually become a hot spot of academic research in sociology. Luhmann (1982) believes that trust is a simplification mechanism that can simplify complex society. This mechanism plays an important role in the changes of social structure and institutions by dividing all complex and uncertain affairs into trustworthy and untrustworthy affairs. Luhmann (1993) explored the mechanism of interpersonal trust and institutional trust, and believed that interpersonal trust is mainly based on emotional connection in interpersonal communication, and that institutional trust mainly relies on the restraints of legal system. Interpersonal trust and institutional trust constitute social trust mechanism. Luhmann and Albrow (2013) revealed and proved the self-creation and autonomy of the law. They believed that in the process of self-creation, the law is not determined by the top-down hierarchy, but created in adjacent networks, like trust network in moral system. La Porta et al. (1996) proposed that trust is established on the basis of frankness and cooperation expectations among members of an organization, and that cooperation expectations are established on the basis that all members within the organization recognize and accept this norm. Rahn and Transue (1998) proposed that trust comes from religious culture and customs, and that trust shown by individuals often has social and cultural characteristics. Chen et al. (2020) established the evaluation system and

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analysis model of user trust level in online communities, which can reflect the trust relationship between users. In domestic research on trust in the field of sociology, Zhu (2009) believes that trust has multiple connotations in psychology, culture and society. Trust in individual psychological events is an important source of individual security, including motivation and attitude. It, as social capital, is a kind of culture. The appearance of trust is an inevitable result of the development of history and culture. Wang et al. (2014) established a trust relationship prediction model from a sociological perspective, summarized and sorted out theories of social hierarchy and homogeneity, and confirmed the existence of above theories in social network. Lu and Zhu (2016) looked into doctor-patient relationship. They believe that the establishment of a benign trust relationship between the doctor and the patient should be carried out at interpersonal, inter-group, and cultural levels. At interpersonal level, we need to improve communication skills of doctors and patients. At inter-group level, it is necessary to improve and perfect the interaction between doctors and patients. At cultural level, it is necessary to cultivate medical concepts and vigorously develop medical education. Luo et al. (2017) analyzed data after the Wenchuan earthquake and found that individuals and communities with good cooperative relations had more ways to solve problems they face. After obtaining materials from all sectors of society and government departments, they showed higher efficiency of resource utilization, which enhances trust in primary government departments and reduces the trust gap between high level and primary level government departments.

2.3.1.3

Economics

Research on trust in economics is mainly based on the assumption that “social beings are all rational economic man”, believing that trust decision-making is a cooperative attitude based on individuals’ expectations of their own interests. If individuals’ interests are realized, mutual trust between them will increase; if not realized, the trust will be weakened. Sako and Helper (1998) believe that trust is an expectation that exists between two parties in a transaction, in which an individual believes that the counterparty will act following his expectations. Arrow (1974) proposed that trust is a kind of social capital and a lubricant that promotes the performance of incomplete contracts. It can reduce the cost of supervision and punishment for parties to a transaction. If the scope and methods of supervision and punishment are expanded, the degree of demand for trust between the parties will be reduced. Knack and Keefer (1997) conducted a questionnaire survey on 29 economies to explore the extent to which social costs explain economic performance. They found that in countries and regions with high incomes or high levels of education, the degree of mutual trust and awareness of norms among citizens is stronger. La Porta et al. (1996) believe that trust is a key influencing factor for unfamiliar economic entities to conduct transactions and cooperation, which can improve the management performance of large organizations. Christophe et al. (2020) compared and analyzed

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people’s trust in artificial technology and similar system technology in the context of the sharing economy, and found that people tend to believe sharing platforms are similar to human technology. In the field of economics, Chinese scholars mostly conduct research on trust based on the problems existing in China’s economic development. Li and Shi (2014) explored trust crisis in food safety, and believed that when there is information asymmetry in the entire industry, there may be a safety trust crisis in food. That is, due to information asymmetry between food producers and consumers, high-quality products-oriented companies provide low-quality products when facing companies that compete with low-quality products, which triggers trust crisis in the food industry. Xie and Shi (2016) explored the mechanism for establishing consumer trust in the context of China’s sharing economy and social development based on traditional trust theory. The study revealed that with economic growth and social development, suppliers cannot meet consumers’ information needs merely by providing product information, but need to share other information. The personal characteristics of the sharing subject are the key factors affecting consumer trust. Xiang and Deng (2018) explored trust crisis in the economic market. They believe that trust is, in essence, a concept that transcends economics, and on this basis established a framework for theoretical analysis based on cognitive rational behavior and cognitive game.

2.3.1.4

Organizational Behavior Studies

With the progress of economy and the development of enterprises, studies on trust relationship have gradually become a hot topic in the field of organizational behavior. During periods of initial small peasant economy and commodity economy, organizations were merely transaction entities in the market, with simple structures and forms. With the growth of the economy and the development of enterprises, they gradually evolved into a hierarchical structure, with key features such as centralization and decentralization. Then with the development of M&A and strategic alliances, organizations gradually crossed the boundaries of legal persons and existed in the network. From the perspective of network organizations (such as supply chains), Das and Teng (2001) proposed that organizational trust between networks is generated on the basis of contractual agreements, and that the control and restraint mechanism of trust is the driving force for the effective operation of organizational networks (Miles and Greed 1995). In their study of corporate strategic alliances, Barney and Hansen (1994) believe that it is far from insufficient to understand the process of establishing trust alone, and that only by further studying the continuous effectiveness and strengthening effect of trust can we explain the mechanism of long-term cooperation and mutual benefit between strategic alliances (Roy 2012). Kelman and Hong (2015) explored reasons for increase and decrease in the degree of trust between leaders and employees in enterprises with ASA (attraction-selection-attrition) model, and

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concluded that research on trust has went beyond research on interpersonal relations of individuals, and that trust is only the most important in social relations. As for domestic research on trust in the field of organizational behavior, Wang and Zhang (2016) conducted research on the degree of trust between superiors and subordinates in organizational management, and proposed that subordinates’ perception of trust in superiors is an important type of trust, which can be divided into superiors’ perception of dependence and information disclosure on subordinates. The greater the degree of reliance perceived by subordinates from superiors, the greater the work pressure of subordinates. Wang and Pan (2012) studied teachers and found that transformational leadership can reduce the degree of silence of teachers by enhancing trust in them. Ma and Wang (2014) studied mutual trust between employees and superiors within organizations based on two-way trust, and found that the level of trust of superiors to subordinates can significantly affect the work performance of subordinates through psychological safety, and that sense of trust can enhance subordinates’ gratitude, thereby improving their work performance.

2.3.2 Research on the Relationship Between “Trust” and Corporate Value Since the 1990s, with the widespread of research on trust in various industries and fields and the rapid development of enterprises, scholars have begun to explore the impact of internal trust of microeconomic individuals on the creation of corporate value. Barney and Hansen (1994) found that whether it is a corporate body or a network organization, when its internal trust is high, its vitality and competitiveness may be stronger (Sako and Helper 1998). Besides, this kind of trust within enterprises will also be transformed into organizational behavior, which will affect the behavior of individuals within them, even on their managers. Portes (2014) launched empirical studies and found that regional social capital affects the investment model of companies, and that companies in regions with high levels of trust tend to have higher investment efficiency. Specifically, the impact of trust on corporate value creation is mainly manifested in cost control, facilitation of cooperation, and improvement of organizational performance.

2.3.2.1

Cost Control

Within organizations, the most important role of trust is to reduce transaction costs. Different from costs in external transaction, internal transaction costs of enterprises are more diversified, which may be manifested as differences in the cooperation efficiency of production factors. Within enterprises, trust mainly exists in the form of informal systems, which exerts certain impacts on supervision and management costs in formal systems. Weber and Mayer (2014) proposed that elements of trust

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within organizations may exist in their every production and operation activity. Trust and formal systems are negatively correlated. When companies have low levels of trust, they need to establish more formal rules and increase the cost of supervision. When they embrace high internal trust, there will be reduced complexity of organization environment and reduced costs of implementing formal systems against the background of information asymmetry. Arrow (1974) defined trust as the lubricant of corporate organizational relationships, and proposed that in organizations with trust, economic transactions are always smooth, without too many emergencies that hinder their development. Regarding domestic research on credit and cost control, Liu et al. (2009) believe that different level of trust in different regions affects the way companies sign contracts. The lower the level of trust in a region, the higher the cost of signing contracts for companies in that region. The main reason herein is that due to the use of commercial credit methods such as prepayment, companies bear higher sales expenses. Feng et al. (2016) found through empirical research that good performance of social responsibility can help companies establish a good business credit relationship with upstream sellers, and reduce operating costs through interest-free financing, which, however, may be affected by their market competitiveness. Mu and Cui (2011) simulated the transaction process of enterprises. They found that a high degree of trust can slow down companies’ coordination and encroachment, and improve their cost management in value chain. When companies on a unified value chain no longer trust each other, the benefit incentive mechanism of the value chain will lose its incentive effect.

2.3.2.2

Facilitation of Cooperation

In the external and internal communication of enterprises, trust is the prerequisite for cooperation. Cooperation promotes the combination and utilization efficiency of production factors for enterprises. Input of production factors help enterprises create value. Balliet and Van Lange (2013) proposed that trust is an important factor in the internal and external cooperation of enterprises. Initial trust is generated on the basis of optimistic expectations of the object of trust. In cooperation, if expected and actual results are consistent, trust of parties in cooperation will increase, their trust mechanism will be consolidated, and the parties will conduct further cooperation. If expected and actual results are inconsistent, trust of parties in cooperation will decrease, original long-term cooperation may change into short-term cooperation, or the parties will no longer cooperate. Therefore, in the social background that features increasingly complex organizational environment and increasing uncertainties, we divide matters into the believable and the unbelievable following the principle of dualization of trust, so as to effectively establish cooperative approach in a complex environment. In this process, trust is the basis and prerequisite for cooperation. According to modern theories on enterprise resources, scarce resources held by enterprises are their core competitiveness

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and unique competitive advantages. Cooperation between organizations can promote the free flow of resources and make up for shortcomings in resources, which is an important way for organizations to obtain resources. The level of trust between organizations has significant impacts on cooperation between organizations. Trust can improve the efficiency of organizational cooperation, shorten the time for creating corporate value, and help companies win opportunities. It is a unique advantage of companies in coping with environmental uncertainties. There is also a trust relationship within enterprises. The style, behavior, and mode of team cooperation of superiors affect the degree of trust within enterprises. Psychological contract established based on trust can further enhance employees’ sense of belonging to enterprises. Employees may join enterprises for the purpose of getting paid, while enterprises hire employees for the purpose of realizing benefits. A preliminary trust is created between the two parties, which promotes cooperation between them. In the cooperation between enterprises and employees, between managers and subordinates, the management style of managers and the cooperative relationship of teams’ impact trust within enterprises. By improving trust within enterprises, fulfilling the psychological contract, and establishing internal cooperation, enterprises create value. In trusted organizations, cooperation and joint efforts between individuals, teams, and managers and employees will create far more results than non-trusted organizations (Ahern et al. 2015). Chinese scholar Jiang (2016) explored the trust and cooperation of enterprises in supply chain by establishing a Bootstrap structural equation model. They found that the ability and good faith between enterprises in supply chain promote the stability of their cooperation, and that trust and the stability of cooperation between companies are in an inverted U-shaped relationship. Focusing on the perspective of social exchanges, Du et al. (2014) believe that the initial trust of owners has a positive impact on the perception of construction contractors, which can promote cooperation between them. Xu and Yang (2017) conducted a survey of 286 Chinese companies and found that mutual trust between companies can improve their management and innovation performance by enhancing equity and contractual cooperation.

2.3.2.3

Improvement of Organizational Performance

Chiang and Hsieh (2012) found that within organizations, trust mechanism can promote organizational citizenship behaviors of members (such as enhancing employees’ loyalty and sense of responsibility, improving the efficiency of implementing formal systems, and handling work with citizen ethics behaviors), reduce internal conflicts, and promote the allocation and utilization of organizational resources, thereby improving their business performance and creating more value. Organ (1988) proposed that organizational citizenship behavior has an accumulative effect. When citizenship behavior forms a team climate, new employees will actively integrate into this climate, which will further promote the accumulation of organizational citizenship behavior. Therefore, trust can improve employees’ work efficiency

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through organizational citizenship behavior. In business activities, enterprises with a high degree of trust perform better in production, operation and organizational image. Cooperation between enterprises is established on the basis of expected interests, where there is still competition. Due to trust asymmetry, parties to cooperation may have opportunism and egoism, which will damage their cooperative relationship. Trust impels companies to establish effective business communication and information sharing mechanisms, enhance their long-term strategic partnership with partners, and promote their effective use of resources, thereby helping them improve operating performance. Among domestic research on trust and organizational performance, Cao et al. (2008) took enterprises in South China as main research samples, and concluded that trust can significantly improve enterprises’ business performance and promote knowledge sharing among employees. Su et al. (2017) found that trust can significantly promote enterprises’ internal and inter- organizational operating performance, which is most effective for associated enterprises and least effective for task enterprises, and that the role of trust in promoting business performance is significantly affected by the vertical distance between trusted parties. Huang et al. (2013) conducted a research on vertical alliance automobile companies and found that mutual trust among companies in alliance can reduce performance risk, but differences in trust significantly increase performance risk.

2.3.3 Summary In recent years, trust has gradually become a hot research topic in psychology and organizational behavior. Many scholars have discussed trust from perspectives of interpersonal communication, social systems, etc., by taking into consideration socioeconomic backgrounds like doctor-patient relationship and sharing economy. With the deepening of research on trust and the development of enterprises, scholars gradually shifted their attention to the relationship between trust and value creation. Whether within or between enterprises, increased trust can reduce corporate costs, promote cooperation and alliances within teams, and improve corporate performance, thereby helping enterprises create value. However, little research discusses mixed ownership-oriented M&A of SOEs. The focus of this book is the influence of internal trust and inter-organizational trust on value creation after mixed ownership-oriented M&A.

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2.4 Summary of Research on Innovation and Corporate Value 2.4.1 Research on the Connotation of Innovation Innovation is the process of changing, renewing or creating a new product to obtain higher economic or social benefits. In essence, it is the process of materializing innovative thinking /transforming ideals into reality. Studies on innovation originated in economics. Schumpeter (1934) first defined innovation and theorized research on it, believing that “innovation” is the process of implanting new production factors and generating new economic benefits. He emphasized the importance of reform in production technology and method in economic and social life, and believed that innovation is endogenous in the process of production and operation, that is, innovation is a change that occurs within enterprises rather than something applied externally. While running SAPPHO project, Walsh et al. (1988) summarized Schumpeter’s innovation theory and extracted Schumpeter’s model I, which was then sorted by economists to propose Schumpeter’s Model II. Schumpeter’s model I holds that entrepreneurs play a leading role in achieving innovation by allocating and integrating production factors, and regard innovation technology and invention results as exogenous variables. Schumpeter’s model II regards companies’ technologies and inventive activities as endogenous variables, and believes that their innovation activities are mainly carried out by their R&D department. Enterprises form a self-reinforcing cycle in the process of innovation and R&D, and enhance their competitiveness and competitive advantages via innovative R&D activities. Both of Schumpeter’s models emphasize the importance of technological factors in corporate innovation. Therefore, later scholars collectively referred to the two models as “technology-driven models”. Hobday (2005) comprehensively and systematically analyzed the development of innovation models from an organizational perspective, and constructed a fifthgeneration innovation model. He believes in the fifth-generation model, innovation is a networked activity designed to help integrate competitors, product suppliers and distributors into a larger system. (Rothwell 1994). The fifth-generation innovation model fully emphasizes networking and integration, and focuses on extensive and systematic cooperation, including cooperation among enterprises and competitors, product suppliers, and customers. So far, scholars’ research on the connotation of innovation has gradually shifted from single and closed research to networked and systematic research, from achieving innovation by using the internal strength of enterprises to integrating external resources. With the development of economic globalization and technology, it is difficult for an enterprise to have all the resources needed for innovation, or to face risks of failure on innovation alone. Therefore, enterprises pay more attention to cooperation with other organizations to obtain innovative resources and share the risk of innovation failure. The “closed innovation” model is being replaced by the “open innovation” model. Chesbrough (2003) found some

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established companies known for innovation did not really benefit from innovation, for which there are two main reasons. The first is that a large number of innovative research results are stored within enterprises and cannot be effectively transformed into corporate value by commercialization. The second is that those companies are not good at cooperating with others and fail to follow similar research results of other companies, leading to a waste of corporate innovation resources. Chesbrough (2003) first proposed the concept of open innovation based on the integration of enterprise boundaries, and believed that when enterprises continue to engage in new businesses or apply new technologies, they need to appropriately and creatively apply internal and external resources, produce new products and provide services in a unique and innovative way. In modern enterprises’ open innovation activities, innovation is a non-linear process of rational and effective integration of internal and external resources. Based on China’s unique political and social background, Chen (1994) first put forward the view that China should adhere to “independent innovation” in economic development, as China merely relied on technology introduction and imitation, and faced problems in national economy. Independent innovation mainly aims at creating independent products and brands, and obtaining advantages for sustainable competition. It takes value creation as the ultimate orientation, and encourages companies to combine their core technologies, intellectual property rights and all available resources to form competitiveness in system, mechanism and techniques (Zheng et al. 2008). Cai et al. (2018) believe that multi-agent entrepreneurs help promote the transformation and development of discoverability and creativity, and that the development of opportunity sets plays an important role in their transformation.

2.4.2 Research on the Connotation of Innovation Capability Innovation is a key factor for companies to achieve long-term and sustainable development and long-term success (Schepers et al. 1999). Companies need to obtain competitive advantages and core competitiveness through a series of innovation interactions, thereby achieve long-term development. The success of companies essentially depends on their internal innovation capabilities (Gurisatti et al. 1997). Innovation capability of enterprises is not only the result of innovation activities, but also the basis for them to carry out innovative activities efficiently, which has a significant impact on their performance (Mone et al. 1998). Definitions of innovation ability mainly fall into two kinds: process view of innovation ability and content view of innovation ability. Scholars advocating process view believe that innovation ability is embedded in the whole process of creativity formation, development and utilization, and value realization. Adams et al. (2006) hold that innovation ability is the ability of enterprises to form new ideas and commercialize them, which is affected by many factors such as internal resources and the management level of senior executives. Companies with strong innovation ability often have higher organization and coordination capabilities. Chinese scholars Wei

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and Xu (1995) explored the specific components and measurement methods of innovation ability. They proposed that enterprise innovation ability is the overall function of enterprises that consists of product and process innovation ability, and measured it from six stages: confirming opportunities, forming ideas, solving problems, getting answers, developing abilities, applying them, and spreading them. Li (2001) pointed out that innovation ability is the ability of enterprises to rationally use and allocate human resources, improve enterprise knowledge and related capabilities, and continuously update existing technology and productivity based on the explicit or potential needs of market customers. Innovation ability is the ability of enterprises to integrate internal and external scarce resources. By analyzing different stages of innovation, Wu et al. (2009) classified independent innovation ability into original innovation ability, integrated innovation ability, and secondary innovation ability. The advantage of original innovation ability is that enterprises can produce their unique technological inventions and innovations through independent development and design. Integrated innovation ability is the ability of enterprises to connect existing innovation resources via organizational boundaries, to achieve the inclusiveness and integration of different elements, to integrate innovative elements and improve innovation efficiency. Core technology of secondary innovation comes from outside organizational boundaries. On the basis of introducing technologies, companies imitate and innovate products by purchasing or other means (Xu et al. 2013). Scholars advocating content view divide innovation ability into innovation ability in the narrow sense and innovation ability in the broad sense. In a narrow sense, innovation ability includes technological innovation capability only. It refers to the ability of enterprises to effectively absorb, utilize and improve existing technologies, and on this basis, to create skills and knowledge required for production and development of new technologies (Lall 1992; Koc and Ceylan 2007). In a broad sense, non-technical factors are an important part of innovation ability. Amir and Lev (1996) found that in the endogenous growth model of enterprises, if the capital of endogenous organization is considered, the production function of technological input will change. Tierney and Farmer (2002) believe that entrepreneurial orientation, technical capabilities, and financial resources are the core capabilities of innovative enterprises, which are mainly formed and accumulated within enterprises. In addition to theoretical research, Lee et al. (2014) also conducts empirical research. Taking the growth rate of industrial sales revenue as the dependent variable, and the three types of core capabilities of enterprises as independent variables, they conducted cross-sectional data regression. Empirical results showed that all of the three core capabilities of enterprises have a significant impact on their innovation performance. Rohrbeck et al. (2009) advocate that ecological innovation system is the fundamental driving force for enterprises to achieve long-term and sustainable development. While conducting organizational innovation, enterprises need to consider not only their internal innovation elements, but also their role and function in the ecological network, and to realize corporate innovation in under a balanced ecology (Acemoglu and Cao 2015). Stieglitz and Heine (2007) argue that innovation ability is the basis for enterprises’ innovation strategy, which may exist in their production process, business process, technological innovation, product marketing, human

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resource management, internal resource allocation and utilization. Corporate innovation capability is a collection of organizational characteristics that promote and support innovation strategies, including vision and strategy, organizational structure, technology management, corporate culture and so on (Lawson and Samson 2001; Jiao, et al. 2008; Cao, et al. 2009).

2.4.3 Research on the Relationship Between Innovation Ability and Corporate Value The development of the times brings changes in the connotation and structure of innovation. Therefore, scholars have begun to study the relationship between innovation ability and corporate value creation, and believe that innovation factors affecting corporate value mainly include R&D expenses, intellectual capital, intangible asset investment, and technological innovation. Binswanger et al. (1978) found that the difference between companies’ market value and value of book assets is strongly correlated with their advertising expenses and R&D investment. Hirschey and Weygandt (1985) proved by empirical research that the intensity of corporate R&D expenditure is closely related to Tobin’s Q value. Chauvin and Hirschey (1993) empirically explored the relationship between intangible assets formed by activities like corporate R&D innovation, media promotion and corporate operating performance. They revealed that the more intangible assets formed by enterprises in R&D innovation, media promotion and similar activities, the better their capital market performance and the greater their market value. Megna and Klock (1993) used Tobin’s Q value as a measure of the value of companies’ intangible assets, and explored the value correlation between R&D and innovation investment and patent output. The results show that Tobin’s Q value is positively correlated with R&D and innovation investment and patent output, but the correlation is not significant. Lev and Sougiannis (1996) explored whether accounting surplus in enterprises’ financial report fully reflects their income from innovation and R&D expenditure, and estimated the value of their investments R&D and innovation based on the financial report. The results show that investing $1 in innovation can help companies create about $2 in profits, and help them create $5 of market value on average. Aboody and Lev (1998) explored the impacts of R&D expenses and the amount of capitalized software development costs on value creation based on the perspective of the capitalization of R&D expenses and software development costs, and found that information on the capitalization of R&D expenses can help enterprises create value. Johnson (1999) pointed out that enterprises’ market value is mainly affected by financial and intellectual capital. Financial capital contributes to enterprises’ creation of tangible value, while intellectual capital contributes to their creation of intangible value. In current era of knowledge economy, the contribution of intellectual capital is usually greater than that of financial capital in corporate market value creation, and intellectual capital is the main source of corporate value

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creation. Barth et al. (2001) used investment in innovation R&D and advertising expenses as proxy variables to measure the value of companies’ future intangible assets. The empirical results show that listed companies with a large amount of intangible assets are usually the focus of research by securities analysts. It is because generally speaking, companies holding large intangible assets have huge potentials for profit growth and great space for market value appreciation. Narvekar and Jain (2006) found that organizational, human and relationship capital affect the level of corporate innovation and business performance. Huang and Wang (2008) believe that in addition to book value, intellectual capital can also provide information about the incremental value of companies. In the context of a knowledge economy, companies should pay attention to information on asset value and intellectual capital in financial statements to better reflect corporate value. In China’s research on innovation capability and corporate value, well-known scholar Tang (2003) believes that intangible assets held by companies contribute to the creation of their corporate value. Enterprises can analyze and judge their corporate value based on the quality and quantity of their intangible assets. In daily production and business activities, enterprises create intangible assets by depleting tangible assets, thereby increasing their value. Wang Huacheng et al. (2005) explored the contribution of intangible assets held by Chinese companies to their production and operation performance, and discussed the usefulness and value relevance of disclosed information on intangible assets. The empirical results show that intangible assets contribute to the future operation of enterprises, and that disclosed information on intangible assets is useful and value-related. Yang and Li (2006) examined the influence of brand awareness and corporate culture on the creation of corporate market value. Wei and Zhang (2006) empirically explored factors that affect the value of Chinese high-tech enterprises, and found that tangible book assets, innovation and R&D investment, and production and operation capabilities have great impacts on their value; intangible book assets are not value-related; there is a negative correlation between advertising expenditures and corporate value. They proposed good management capabilities and effective integration of internal and external resources can help companies create value. Wang (2007) put forward that in addition to financial factors, the value of high-tech enterprises is also affected by non-financial factors such as companies’ innovation capabilities, resource allocation and integration capabilities, and corporate governance system and structure.

2.4.4 Summary Innovation is the process of changing, renewing or creating a new product to obtain higher economic or social benefits. Research on it originated in the field of economics. On the basis of Schumpeter’s innovation theory, scholars at home and abroad gradually proposed technology promotion model, the fifth-generation innovation model, and the concept of “independent innovation”. In the shift of research from single

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closed innovation to open innovation, they emphasized the mechanism of resource integration and cooperation in developing enterprise innovation capabilities. In recent years, economic globalization has gradually become the new normal. Scholars have gradually focused their research on micro-enterprises, embedded innovation research into the research of micro-enterprises, and mainly studied enterprise innovation capability, and innovation and enterprise value creation. Among studies related to corporate innovation capabilities, domestic and foreign scholars believe that corporate innovation ability plays an important role in promoting the growth of companies’ value and increasing their competitive advantages. They put forward two viewpoints: process view of innovation ability and content view of innovation ability. Process view believes that enterprise innovation ability is a kind of ability embedded in the whole process of the formation, development and utilization of enterprise creativity and value realization, while content view believes technical elements (such as technological innovation capabilities) and non-technical elements (such as financial resources, resource allocation and integration capabilities) constitute enterprises’ innovation ability. In studies on innovation and corporate value creation, many scholars at home and abroad have discussed the impact of innovation factors (such as R&D investment, intangible assets, and advertising expenditure) on corporate value creation, but no conclusion has been achieved. Most studies have found that innovation factors have a significant role in promoting corporate value creation, but a few have found that certain innovation factors (such as intangible assets, patent rights) have no significant relationship with firm value. In recent years, in light of the background of constant development of science and technology, many scholars conducted research on the relationship between technological innovation capabilities and corporate value, results of which are highly transferable. However, few scholars studied mixed ownership-oriented M&A of Chinese SOEs. This book highlights the influence of integrating enterprise innovation capability and innovation capability on the value creation of SOEs after mixed ownership-oriented M&A.

2.5 Summary of Research on Motivations of M&A and Post Merger Integration 2.5.1 Research on Motivations of M&A The fundamental goal of enterprises is to seek development and create benefits. Vertical or horizontal M&A, as an important way for extending enterprise development, are concrete manifestations of the goal. Corporate M&A is a demonstration of corporate behavior, and motivation is the fundamental driving force of corporate behavior. Therefore, before studying corporate M&A behavior, we must analyze motivations of M&A. M&A is a joint decision made by corporate shareholders, managers and other stakeholders. It is a concrete manifestation of the motivations

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of corporate stakeholders. For example, in corporate M&A, the main motivation of shareholders is to maximize wealth and shareholder returns, that of managers is to maximize salary rewards, and that of the government is to seek a balance between monopoly and market competition. According to “rational economic man” hypothesis, all stakeholders of enterprises conducting M&A hope that they can embrace maximized interests by M&A, and that M&A is the result of an interest game among stakeholders. According to differences in the interest motives of stakeholders, existing research has delivered results of motivations of M&A from a variety of perspectives.

2.5.1.1

Theory of Market for Corporate Control

Manne (1965) believed that if companies have low management efficiency, their operating performance will deteriorate, stock price will fall, number of stock transactions will decrease, and investors’ attention to them will decrease. However, when the control of them is transferred to a new shareholder, the new shareholder will send a new management to take over them. Companies will embrace improved operation and management efficiency, better performance, and higher stock price. Therefore, when companies have low management efficiency and cannot create value for shareholders, transactions in market for external control will be more active. Since transfer of control rights can improve companies’ operational and management efficiency and increase their stock price, M&A based on such transfer are favored by the capital market. Small and medium shareholders can obtain information about companies’ improving management efficiency and rising stock price after every transfer, which is helpful to the realization of their interests. (Mueller 2012). However, Manne (1965) did not make it clear whether control right is the power of the enterprise in controlling managers or the power of direct receiver. Therefore, Jensen and Ruback (1983) explicitly proposed that the sign of transfer of corporate control is that new shareholders have the power to control the resources of the acquired company, including the power to control its human resources. After M&A is completed, shareholders of the acquiring firm can control the resources of the acquired firm by entering its board of directors. Board of directors of the acquired firm transfers the control of the acquired firm to the management of the acquiring firm through authorization, who will control the resources of the acquired firm by controlling or taking over its management. In addition, Jensen and Ruback (1983) believe that in the market transaction of transferring control rights, since the shareholders of parties to M&A lack the expertise and experience to operate companies, the motivation for shareholders to conduct M&A is to hire a professional management team and maximize company’s stock price. Therefore, market for corporate control rights is a market where professional management teams continue to compete in order to obtain the resource management power of the target company. After taking over the target company, the newly hired manager will create corporate value and shareholder wealth for the entire group, that is, the shareholders of original acquiring firm.

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The theory of market for corporate control believes that companies can increase their share price by improving their management efficiency, that is, they can satisfy the interests of different types of stakeholders by increasing corporate value. Rosman and Hart (1986) divided contractual control rights into specific and residual control rights. They believe that specific control rights were transferred to the management through authorization and contract, while residual control rights are owned by shareholders. The motive of the acquiring firm’s shareholders is to maximize the target firm’s stock price and residual equity, that of the acquiring firm’s management is to obtain the power to control the scarce resources of the target firm, and that of the target firm’s shareholders is to maximize the consideration of M&A transaction. Therefore, by taking over the target firm, replacing its senior management, improving its operation and management efficiency, and improving the efficiency of input and output of production factors, M&A helps companies create value, thereby satisfying the motives of the stakeholders of all parties to it and realizing their interest appeals. However, there is a sequence for the realization of motivations of M&A. In M&A, shareholders of the target firm first realize their motivation, followed by the management of the acquiring firm who have the power to control the resources of the target firm, and by shareholders of the acquiring firm who embrace maximized stock price and remaining equity. This process is inseparable from the trust, cooperation and support of stakeholders. Otherwise, it will be difficult for all stakeholders to achieve an effective balance of interests from the transfer of market for control rights (Acharya et al. 2013).

2.5.1.2

Synergy Theory

M&A synergies include financial, operational and management synergies. Financial synergy refers to invest self-owned low-cost funds of the acquiring firm into highreturn projects to improve capital utilization and allocation efficiency, that is, to invest low-cost corporate funds in unrelated companies to reduce corporate risks and market risks of net cash flow recovery from M&A. After M&A, the target firm will be recorded in the merger report of the acquiring firm based on appraised market value on the date of acquisition, which will increase the acquiring firm’s total assets and collateral assets, reduce debt financing and other external financing costs, and improve the solvency of enterprises. For example, acquiring firms establish an exclusive fund pool to gather all funds of the group company, and improves the efficiency of fund utilization and allocation by taking advantage of time difference between project recovery and investment funds. Operational synergy refers to the use and integration of the supply chain and marketing network of parties to M&A to improve product utility, reduce operating costs, and increase overall revenue. Based on the industrial attribute of acquiring firms, M&A can be divided into vertical M&A and horizontal M&A. Horizontal M&A can expand companies’ market size, reduce their sales costs and advertising expenditures, while vertical M&A can effectively reduce the cost of production and product sales of parties to it which are in the

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same value chain, and form a complete value chain system. Corporate M&A with a main goal of improving product utility function require both parties to it to fully integrate each other’s innovation capabilities and competitive advantages, integrate production processes, and reduce losses and transaction costs in production and operation (Payan and Svensson 2007). Management synergy has been explained above in the theory of control transfer, whose main role is to help companies improve management efficiency and corporate performance. Acquiring firms can export their management capabilities to target firms by changing target firms’ management or setting system specifications and personnel evaluation system, thus improve their management efficiency (Cowen 2012). M&A with a motivation of seeking synergies is theoretically flawless. However, because synergies do not occur within enterprises, but are formed through M&A, trust and cooperation of parties and stakeholders to M&A are required in every link of organizational grafting. Besides, the mutual transfer of core capabilities of parties to M&A is not achieved in one go. Therefore, it is difficult for the synergies to be truly effective. What’s more, since M&A premium has been paid before synergies appear, synergy effect means not only “1 + 1 > 2”, but also a manifestation that post merger incremental income is greater than premium cost in transaction price. Only in this way, it is possible to achieve an effective balance of motivations of stakeholders in M&A.

2.5.1.3

Under Valuation Theory

Holderness and Sheehan (1985) hold that when the market value of the acquired firm does not fully reflect its potential value, but the acquiring firm knows the true value due to certain information advantages, the acquiring firm will acquire a large number of shares of undervalued companies in the secondary market to achieve M&A. In the context of rapid technological changes and certain volatility in stock prices, the acquiring firm can understand the potential value of the target firm based on its own technological advantages or industry characteristics, it facilitates value creation by acquiring companies whose market value is underestimated, integrating the resources of both companies, and launching open innovation implantation, thereby increasing the target firm’s share price. Researchers of myopic institutions theory Ingley and Van der Walt (2004) suggested that due to the heterogeneity of market investors, different investors have different estimates of the value of the same target firm. Institutional investors emphasize short-term post merger performance. Therefore, the value of companies that require long-term investment to obtain income or returns is always underestimated, but such companies are the target firms of investors with free cash flow. Tobin (1969) proposed the Tobin Q theory. If a company’s Tobin Q ratio is 0.7, the target firm’s M&A premium is 20%, and the acquiring firm’s purchase price is 0.7 × 1.2 = 0.84, which is 84% of the target firm’s replacement cost. The cost of M&A is lower than that of replacement. The acquirer will acquire the target firm. Therefore, underestimation of the target firm’s market value is the main motivation

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for corporate M&A. Graebner (2009), researcher of information asymmetry, found that due to the incomplete efficiency of the market and the asymmetry of information, whether in developed or emerging countries, the market price of stocks generally only reflects public information. However, the powerful management of large companies can participate in the formulation and discussion of key systems and policies, and obtain potential information of certain target firms and information on their future development. Such information cannot be reflected in the capital market, and even cannot be obtained by target firms. Once large companies find that target firms’ market value is lower than their actual value or believe that target firms have considerable potential for future development, they may acquire target firms. Different from researchers of myopia and information asymmetry, Roll (1986) first proposed the “conceit hypothesis”, suggesting that executives of acquiring firms may overestimate their capabilities, knowledge and experience when making M&A decisions, and believe they can foresee M&A value, that is, their estimation of the value of the target firm is more accurate than that of the public market, which will result in their payment of excessively high acquisition premium. As there is a large deviation between the actual value of the target firm and the estimated value of the acquiring firm’s senior management, the acquiring firm fails to obtain expected M&A value, and M&A actually reduces the value of the acquiring firm (Heaton 2002; Malmendier and Tate 2008). Malmendier and Tate (2008) found that overconfident managers with rich M&A experience tend to l carry out M&A because they overestimate their ability to create value for their employer. When enterprises have abundant free cash flow and managers think the value of the target firm is severely undervalued by the stock market, overconfident managers tend to conduct M&A following the principle of prioritized financing. Compared with the irrational investment behavior of managers, the market is effective and rational. The capital market will respond to M&A carried out by the acquiring firm’s management due to overconfidence, and witness decline in its market value (Hirshleifer et al. al. 2012). The theory overconfidence of managers is based on the assumption that capital market is effective. Current stock price P0 in the stock market truly and fairly reflects the value of companies. Stock price fluctuates around companies’ value. Due to the heterogeneity of investors, different investors have their own judgments about companies’ stock price, believing stock price is higher or lower than P0 . Overconfident managers believe that stock price should be higher than P0 . As a result, management of acquiring firms pay too high M&A premium (Malmendier and Tate 2008).

2.5.1.4

Theory of Wealth Transfer

Theory of wealth transfer believes that M&A does not create value, but just redistributes existing stock value. The interest realization mechanism of stakeholders is not an effective equilibrium. In M&A, acquiring firms just obtain benefits from other stakeholders, and do not create corporate value.

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Weston et al. (1998) believe that tax shield effect in M&A means the transfer of benefits from government departments to acquiring firms. Enterprises enjoy tax incentives and tax relief policies in M&A such as tax-free restructuring and debt restructuring. Acquiring firms can create benefits through tax incentives. In M&A, the assets of target firms enter post-merger enterprises after asset evaluation. The fair value of target firms is reflected in financial statements. Acquiring firms embrace rapidly increasing assets, have a greater tax base, increased depreciation deduction, and enjoy obvious tax deduction effect. In addition, enterprises in the mature stage can grow into long-term enterprises through M&A, and replace capital gains tax with corporate income tax to realize wealth transfer. Stigler (1950), a proponent of market power theory, pointed out that M&A can raise companies’ market position, reduce industry competition, and help companies become industry leaders, control or influence product price, and obtain higher returns. With the adoption and implementation of the Sherman Antitrust Act in 1950, companies with a high market share will be subject to supervision and review by regulators in view of industry monopoly and competition if they carry out horizontal M&A. Based on this, scholars including Pautler (2003) believe that gaining high market power is no longer the main influencing factor of corporate M&A. In addition, market power theory believes that wealth is transferred from consumers to product suppliers, and that industry and corporate competitors also benefit from freeriding. However, Eckbo (1983) empirically studied the stock performance of market competitors of in horizontal M&A, the result of which did not support market power hypothesis. Regarding wealth transfer effect between creditors and shareholders, Cox et al. (1979) explored wealth transfer effect of M&A with Black–Scholes model. To put it simply, a European call option is a right to buy and sell. The holder can purchase underlying assets at an agreed price at a specific time in the future. Shareholders’ rights are residual claims. property claims of creditors usually take precedence over 2 √+σ /2)/T , d2 = that of shareholders.c = S N (d1 ) − X e−r t N (d2 ), d1 = ln(S/ X )+(r σ T √ d1 − σ T , where S is the market value of the acquiring firm, X is the funds needed to repay the debt, r is the risk-free interest rate,b is the volatility of asset returns, and T is the period for debt repayment. According to assumptions in B-S model, if the volatility of corporate asset returns increases, the value of options will also raise. Acquiring firms pay the consideration to acquire target firms. There is a possibility of failure in M&A. However, the consideration of M&A needs to be paid before conducting M&A. Therefore, acquiring firms will witness increased volatility of asset income and room for further improvement in their equity value. However, creditors may face higher risk of income, but their income will not increase. That is, because creditors obtain established interest rate, the value of the debt of acquired firms will decrease, and M&A will promote wealth redistribution between enterprise owners and creditors. (Song et al. 2014). Wealth transfer effect between target firms and acquiring firms. Greenmail is an anti-takeover strategy in which target firms repurchase stocks held by external hostile takers through a certain stock premium, and expel them by means of direct

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economic benefits. It may lead to looting of a large amount of wealth of target firms. Acquirers purchase target firms’ stocks at a high price, but target firms repurchase them at a higher price. The management of target firms expects increased corporate value through reforming internal processes and improving management efficiency. However, it is very difficult to increase the value of target firms through reforms or efficiency improvements to exceed the premium paid by M&A. The motivation of Greenmail stock repurchase is to transfer wealth, but it may cause the wealth of target firms to be transferred to acquiring firms. Acquiring firms would lay off employees of target firms and reduce management costs to improve operating performance after acquiring them. However, it may be difficult to achieve sustained performance improvement through layoffs alone. Gertz and Baptista (1995) found that only 7% of large companies that witness improved performance through M&A improve it through layoffs. Walker and Marr (2001) believe that in post merger integration, layoffs are more likely to cause conflicts of interest between target firms and acquiring firms. Although layoffs can reduce the cost of acquired firms in the short term, it may lead to rising internal transaction costs in the long run due to conflicts between target firms and acquiring firms, which makes it difficult for acquiring firms to realize wealth transfer. Wealth transfer effect among shareholders of acquiring firms: principal-agent problem. Berle and Means (1932) pointed out that the inconsistency of interests between owners and managers is the main reason for principal-agent problem, especially in companies with dispersed equity. Because of high execution costs, it is often difficult for shareholders to control the behavior of managers. In fact, managers own the control of companies. Principal-agent problem in M&A is caused by the inconsistency of profit creation functions of stakeholders. In corporate M&A, shareholders hope to diversify risks and obtain benefits through diversified investments, so that they bear small risks while realizing benefits. Human capital specific investment of managers leads to concentrated profits and risks in enterprises. Managers hope to diversify personal risks and obtain rich and stable personal benefits via M&A. Since shareholder wealth is an increasing function of corporate profits, while managerial compensation is closely related to corporate assets and development speed. Managers may be happy to achieve rapid growth in corporate assets and scale through M&A. Jensen (1986) explored corporate M&A from the perspective of free cash flow. He argued that since shareholders do not have specified skills to manage companies, corporate management can bargain with shareholders based on their specified skills. Berger and Ofek (1995) believe that the management can realize performance growth by controlling enterprises’ resources. Firstly, if the free cash flow of enterprises is allocated to shareholders in the form of cash dividends, the management will lose control of resources. Secondly, if the management is allocating cash dividends now, but face the need for external financing in the future, they may pay high debt financing costs and have to collateralize their own assets, and therefore be unwilling to pay dividends based on refinancing considerations for corporate development. Thirdly, management compensation is positively correlated with enterprises’ scale growth. Therefore, no matter from the perspective of power, risk, or management compensation, managers tend to carry out M&A. Principal-agent problem in M&A not only

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realizes the transfer of wealth from shareholders to managers. Managers, as representatives of acquirers, tend to choose M&A. Strengthening expected synergies of M&A and improving management efficiency will enable the management to relax control over the pricing of M&A during negotiations with target firms and their shareholders, which result in the flow of wealth from the owners of acquiring firms to owners of target firms. Chinese scholars have also conducted a lot of studies on motivations of M&A. Su and Liu (2013) compared papers on M&A by Chinese and western scholars during 2006–2011, and found that all of them focused on explaining the motivation of M&A with resource-based theories. Western scholars emphasized the use of resource advantages like management capabilities and brand names in M&A, while Chinese scholars highlighted the use of intellectual property rights, marketing channels and other resource advantages. Song and Xie (2013) studied the motives of corporate stakeholders in M&A such as government departments, shareholders, and management in terms of internal drive, incentives, and expectations based on relevant psychology theories. They believe the main motivation for shareholders to participate in M&A is to realize enterprise’ development strategies (such as cost leadership strategy) and optimize their value chain, that for the management’s participation in M&A is to expand enterprise scale, and that for the government’s participation in M&A is to strengthen local enterprises, enhance capabilities of sustainable regional development and economic competitiveness, and achieve specific development goals. Li et al. (2011) analyzed Coca-Cola’s acquisition of Huiyuan Juice and found that horizontal M&A is mainly based on “efficiency theory”. Companies expect that financial and operational synergies produced in M&A are main motivations for horizontal M&A, which has triggered more intense competition in upstream and downstream markets. Wei and Duan (2017) studied Wanda’s 6 M&A transactions and found that its management got involved in M&A mainly due to overconfidence and self-interest. Such transactions do not improve companies’ business management and performance, but instead promote the further deterioration of their sales revenue, make them hold debts much higher than the industry average, and face greater financial risks. To sum up, this study finds that theoretical explanations of motivations of corporate M&A mainly fall into four types: market for corporate control theory, synergy theory, under valuation theory, and wealth transfer theory. Focusing on mixed ownershiporiented M&A of SOEs and the fundamental purpose of promoting China to optimize industries and economic structure, this study defines the research scope of M&A within market for corporate control theory, which believes that M&A can improve companies’ business conditions and help them create value, and summarizes these theories with strategic motivation theory. In the strategic M&A of SOEs with mixed ownership, the fundamental purpose of most transactions is to help acquiring firms obtain the knowledge and innovation capabilities of target firms. The realization of these motives is closely linked with post merger integration theory.

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2.5.2 Research on Post Merger Integration Empirical data of previous five rounds of M&A show that the effectiveness of paost merger integration is a decisive factor in determining the value created by M&A. Myers et al. (1998) found that M&A hardly helps companies create value, which is mainly due to excessive payment of premiums for M&A and difficulties in post merger integration. Anticipation of post merger integration should run through the three stages of M&A, which directly affects pricing in M&A. Before M&A, stakeholders mostly consider how to overcome negative externalities (such as increase product sales and save corporate costs), but ignore integration of resources between parties to M&A. However, the success of M&A lies in not only simple addition of both parties’ production factors or increase in their value brought about by target firms, but more importantly, in the integration of resources to achieve strategic motivation and create value. In recent years, more researches discussed post merger integration. They established analysis diagram of motivation of M&A and performance after M&A, analyzed post merger integration from the aspects of company structure, personnel, products, processes and technology, and formed different theoretical schools based on different perspectives.

2.5.2.1

Research on Post Merger Integration Based on Strategic Management

Research on post merger integration in strategic management mainly focuses on the impact of the matching of strategic resources between parties to M&A and the impact of strategic M&A on the creation of corporate value in post-merger execution. At the level of corporate strategy, vertical and horizontal M&A of industrial chain or supply chain help companies realize their goals and form core competitiveness due to the synergies of economies of scale and scope created by related M&A, and the transfer of core technologies between related industries, which are difficult to be imitated by other organizations (Mahoney and Pandian 1992). At the level of business strategy, the resources and capabilities of target firms can enhance and supplement acquiring firms, like providing new market channels. Strategic M&A motives are easy to realize in execution. Even if organizational environment changes, the appeal of interest of parties to M&A facilitates integration (Park 2013). At the level of functional strategy, open innovation helps parties to M&A acquire the opportunity to acquire R&D capabilities of the other party. At the level of business operation strategy, acquiring firms’ reputation and brand help the target firms quickly open up the market, promote the probability of successful integration, and enhance corporate value (Lee et al. 2014). Therefore, strategic matching is a key factor in the value creation of M&A, and the scope of resource integration after M&A depends on the degree of adaptation of the two companies’ strategic resources. Inappropriate resource integration will cause ill allocation of good resources. The process of resource integration is the execution and control of motivation of strategic merger. Strategic resource matching

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will reduce the difficulty of strategic execution. Post merger integration focuses on how to match strategic resources and help companies create value.

2.5.2.2

Research on Post Merger Integration Based on Organizational Behavior

Organizational behavior mainly explores the impact of the degree of organizational culture fit between acquiring firms and target firms (Datta 1991) and the acquisition experience of acquiring firms’ management (Haleblian and Finkelstein 1999) on value creation, such as cultural adaptability, similarity in management characteristics, quantity and quality of communication, and organizational environment. Before M&A, both acquiring firms and target firms depended on internal growth. After M&A, they became “a mother firm and a son firm”. As the position of target firms in the organization changes, their employees gradually feel untrusted, their culture is integrated into that of acquiring firms, and employees feel in a disadvantaged position. Emotional resistance will affect trust and cooperation within the organization, resulting in a decline in organizational efficiency and difficulties in creating corporate value (Van Dick 2001). Post merger integration is the overall arrangement of production factors such as assets, personnel, operating mechanism and governance management made by acquiring firms after acquiring control of target firms. Joseph and Marks (1990) believe that the integration of people is more important than the integration of things. Improving employees’ sense of organizational citizenship and group belonging is more conducive to the promotion of resource transfer between organizations and the sharing of technology and core competitiveness. In M&A, organizational behavior is a concentrated expression of people’s thoughts and behaviors. If parties to M&A have established trust, their organizational behaviors will tend to be consistent, organizational behaviors and corporate culture will be better integrated, the organizational environment in which synergies play a role is similar to that of endogenous companies, and M&A can help companies create value (Hogg and Terry 2000).

2.5.2.3

Research on Post Merger Integration Based on Decision-making Process

Traditional views regard M&A performance as the matching function of the strategy and organization between the two companies. However, in practice, although the strategy matches the organization, there are many cases where M&A still fails, which has aroused widespread concern and questioning by scholars. M&A can be divided into three stages: before M&A, during M&A and after M&A. Research on the process of M&A can give a new perspective on how the motivation of M&A that exists beforehand can be transformed into corporate value after M&A. Fulop et al. (2002) believe that M&A process itself is an important latent variable that determines

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value creation, which affects value creation together with the matching of strategy and organization. The decision-making process in M&A starts with the formation of motivations of strategic M&A and ends with the creation of corporate value after M&A. Jemison and Sitkin (1986) discuss obstacles to the creation of corporate value in M&A. First, the division of labor of acquiring firms lead to its segmented evaluation of target firms, which led to the lack of a comprehensive understanding of target firms. Second, for the management of acquiring firms, M&A is a new task for employees. The wish of ending the task as soon as possible makes transaction process hasty. Third, M&A transaction emphasizes strategic resource matching and negative externalities, in which secondary issues are temporarily shelved. However, there are many specific issues to be resolved in post merger integration. If they are not properly resolved, the trust of parties to M&A will be reduced and organizational conflicts will arise. Fourth, acquiring firms will adopt a compulsory integration strategy based on the pressure to recover M&A premium as soon as possible, which may cause misjudgments on the compatibility and method of strategy and organization, thereby affecting the value creation of acquired firms (Gomes et al. 2013). Erel et al. (2012) divide corporate M&A into five stages: formulate M&A strategy and determine the target firm; inspect the target firm, determine M&A consideration, negotiate transactions; carry out adaptability assessment, judge the degree of fit between the acquiring firm and the target firm in terms of strategy and culture; supervise integration, check its effect, adjust integration plan if necessary; integrate M&A information, and handover work with business departments.

2.5.2.4

Research on Post Merger Integration Based on Knowledge Management

Rastogi (2000), a supporter of knowledge-based theory, believes that knowledge is the source of corporate competitiveness. Knowledge obtained through learning and independent innovation is the foundation for companies to achieve long-term and sustainable growth. Accumulating knowledge is the key to obtaining long-term excess returns. As the sixth wave of M&A is characterized by transfer of core competitiveness such as technology, technology M&A will also become a main type of M&A. Compared with independent R&D and innovation, open innovation in M&A is an effective means for companies to quickly internalize external knowledge, but the integration of corporate knowledge is a difficult issue (Chesbrough et al. 2006). On aspect is the integration of explicit knowledge. Demirov (2002) divides explicit knowledge into knowledge about the technical process of parties to M&A to solve problems, knowledge about market potential of products, the ability and experience of staff. Corresponding four strategies of knowledge integration have been formed, including absorption, substitution, symbiosis and aggregation. Two organizations need to communicate face-to-face while learning each other’s knowledge. The process of communication is affected by organizational structure and corporate culture. The efficiency of knowledge integration is closely related to enterprises’

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management model and management philosophy (Lakshman 2011). Another aspect is the integration of tacit knowledge. Tacit knowledge is complex empirical knowledge that is difficult to imitate in human brain or organization. The sharing of tacit knowledge after M&A is completed through tidentification, sharing, communication and integration. In the four stages, technical support, organizational system guarantee, institutional constraints and incentives, and corporate culture integration are the supporting systems for sharing tacit knowledge. Undoubtedly, knowledge integration is beneficial to the creation of corporate value, but to remove obstacles to knowledge integration and strengthen conditions for promotion, trust, cooperation and win–win mechanisms are indispensable (Weber et al. 2012).

2.5.2.5

Research on Post Merger Integration Based on Core Competence

Core competence is accumulated and formed during the growth process of enterprises. Enterprise’s coordinate, manage and organically integrate scattered technology and skills to form unique competitive advantages and core competitiveness. Haspeslagh and Jemison (1991) first applied core competence theory to corporate M&A. They believe that the transfer of core competence is the most critical factor in creating corporate value through M&A. Cultural integration, good organizational fit, and organizational adaptation are key conditions to the transfer of core competence. Core capacity building is the core proposition of strategic management. The relationship between production factors forms resources, and the internal connection between resources promotes the formation of capabilities. Accordingly, the construction, continuous building and strengthening of core capabilities require support by elements such as resources, technology and knowledge. The relationship between the elements must be reflected through functional activities such as production, procurement, R&D, and sales. Only through the integration and strengthening of core capabilities, elements and functional activities can we truly realize the creation of corporate value through M&A (Galpin 2014). Chinese scholars have also conducted research on post merger integration in different fields and from different perspectives. Zhou and Li (2008) believe that the degree of employee resistance to M&A, companies’ ability to integrate resources, the payment method of merger consideration, and the proportion of acquired companies significantly affect value creation via M&A. Wu et al. (2008) hold that when overconfident managers know how to learn, the positive or negative performance of M&A market is determined by managers’ overconfidence effect and the strength of the learning effect. M&A by overconfident managers can help companies create value. Yu and Wang (2008) believe that when the acquired firm has more knowledge accumulation than the acquiring firm, or forms complementary advantages with knowledge accumulation, the acquirer has the ability to integrate the innovation capabilities of the target company and promote external innovation mechanisms. The

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knowledge and core capabilities of the acquirer and the target company are effectively integrated, and M&A can help companies create value. Wei (2001) believes that resource integration and management after M&A refers to the transfer and application of voluntary resource capabilities of parties to M&A, being the most essential source and important guarantee for value creation via M&A. Qiu (2006) believes that the management of core competence in M&A is a process. Enterprises need to manage and integrate their core competences before, during and after M&A.

2.5.3 Summary M&A is a demonstration of corporate behavior, and motivation is the fundamental driving force of corporate behavior. Existing research on the motivations of corporate M&A mainly includes market for corporate control theory, synergy theory, under valuation theory, and wealth transfer theory. The corporate control market theory believes that companies can improve their capital by improving and increasing the efficiency of operation and management, i.e., satisfy the interests of different types of stakeholders by increasing enterprise value. Synergy theory believes that the main reason for stakeholders to carry out M&A is to achieve financial synergy, improve the efficiency of capital utilization and allocation, and reduce the cost of operation and management, thereby help companies achieve profits. Under valuation theory believes that acquirers tend to acquire companies whose market value is underestimated. Through M&A, post merger integration, and open innovation, the value of acquired companies is increased, thereby increasing the capital and stock price of acquired companies. Wealth transfer theory believes that M&A do not help companies create value, but only redistribute the value of existing stocks. In M&A, one party obtains benefits from other stakeholders. M&A process can be divided into three stages: before, during and after M&A. The effect of post merger integration is the key factor that determines whether the M&A creates value for companies. According to the different research perspectives, related research on post merger integration can be divided into research on strategic management, organizational behavior, decision-making process, knowledge management, and core competence. Research on post merger integration based on strategic management focuses on the impact of strategic motives and strategic integration of resources on the value creation of companies. Research on post merger integration based on organizational behavior mainly focuses on the corporate culture and management mergers of both parties, and the impact of experience on the value creation of companies. Research on post merger integration based on the decisionmaking process focuses on the impact of management’s decision-making in the three stages of M&A on the value creation of companies. Research on post merger integration based on knowledge management highlights the value of companies’ knowledge (such as technology and innovation). Research on post merger integration based on core competence mainly focuses on the impact of the core competitiveness (such as

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innovation capabilities and resource integration capabilities) owned by companies on value creation.

2.6 Literature Review This chapter combs and reviews relevant domestic and foreign literature on the development of the state-owned economy, SOEs’ mixed ownership reform, trust and corporate value, innovation and corporate value, M&A motivation and post merger integration. The research framework is shown in Fig. 2.1.

Fig. 2.1 Research framework of literature review

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The state-owned economy is an important part of the market economy. Research has found that it can increase private investment and increase fiscal revenue by promoting foreign investment and reducing corporate costs. However, some scholars believe that due to problems such as “empty ownership” and weak profit-seeking motive, excessive development of the state-owned economy will reduce the investment of private capital, and result in low operating efficiency. The development of a mixed-ownership economy can not only give full play to the positive effects of the state-owned economy in macro-control and make up for market failures, but also give full play to the important role of the private economy in promoting the rational allocation of resources. However, there are still challenges in China’s mixed-ownership economic reform, which requires the government to continuously make strategic adjustments based on actual conditions. Mixed ownership reform is the focus of China’s current economic activities. SOEs can implement mixed ownership through investment or M&A of non-SOEs, capital increase and share expansion, introduction of non-state-owned capital, employee stock ownership plans, government and social capital cooperation (PPP), etc. Regarding the economic consequences of the mixed ownership reform of SOEs, from the macroeconomic level, the participation of SOEs in the mixed-ownership reform can increase the overall welfare of the society. From the micro-enterprise level, their participation can improve enterprises’ efficiency of resource allocation and investment, level of internal control and governance, information disclosure system, and level of enterprise innovation, so as to improve their total factor productivity and management performance. Trust research involves many academic fields such as psychology and organizational behavior. Many scholars have explored the issue of trust from the perspectives of interpersonal communication and social systems, combined with the current doctor-patient relationship, sharing economy and other specific socioeconomic backgrounds. With the deepening of trust research and the development of enterprises, scholars have gradually paid attention to the relationship between trust and enterprise value creation. Whether within a company or between organizations, the increase in trust can reduce corporate costs, promote cooperation and alliances within teams and between organizations, and improve corporate performance, thereby helping firms create value. Innovation is the process of changing, renewing or creating a new product to obtain higher economic or social benefits. Innovation research originally originated in the field of economics. With the globalization of the economy and the development of enterprises, scholars at home and abroad have gradually focused their specific research objects on micro-enterprises, focusing on enterprise innovation capability, innovation and enterprise value creation. Domestic and foreign scholars believe that corporate innovation capabilities play an important role in promoting corporate value growth and enhancing corporate competitive advantages. In the research on innovation and corporate value creation, not a conclusion has been achieved. Most studies have found that innovation factors have a significant role in promoting corporate value creation, but a few studies have found that certain innovation factors (such as intangible assets, patent rights) have no significant relationship with corporate value.

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Existing research on the motivations of corporate M&A mainly includes four types of corporate control market theory, synergy theory, value underestimation theory, and wealth transfer theory. Market for corporate control theory believes that companies can increase value satisfaction by improving management efficiency to meet the interests of different types of stakeholders. Synergy theory believes that the main reason for stakeholders to conduct M&A is to achieve financial synergy and improve capital utilization and allocation efficiency. Under valuation theory believes that acquirers tend to merge companies whose market value is underestimated, and increase the value of target firms through M&A and open innovation. Wealth transfer theory believes that M&A do not help companies create value. In the process of value creation after M&A, the effect of post merger integration plays an important role. Based on different research perspectives, related research on post merger integration can be divided into research on strategic management, organizational behavior, decision-making process, knowledge management, and core competence. In general, existing literature mainly examines the relationship between SOEs’ mixed ownership-oriented M&A and value creation, and the impact of trust and innovation on value. Few documents have in-depth research on the expansion of organizational boundaries brought about by their M&A. Stakeholder trust, internal trust culture, increase in innovation capabilities brought about by M&A, as well as its impact on the value creation of SOEs, and specific action paths are the focus of this book.

Chapter 3

Theoretical Basis of Trust and Innovation Mechanism in M&A of China’s SOEs

State-owned sector and mixed economy theory, new institutional economics theory, strategic M&A theory, contract economics theory, information economics theory, informal institutional theory, corporate capability theory, trust theory and innovation theory together constitute the theoretical basis of this article. Public ownership plays a dominant role in the development of China’s national economy, and mixed ownership is an important means to realize China’s basic economic system, which provides an opportunity for the reform, transformation and upgrading of SOEs. This article will take reform of SOEs as an entry point to explore the value created by M&A of SOEs by following the theoretical basis of state-owned sector and mixed economy. In essence, the M&A of SOEs is strategic M&A taken by SOEs to achieve specific development strategies and value increase of the enterprises, and the ultimate goal is to obtain core competitiveness. Innovation capability is an integral part of the core competitiveness of an enterprise, which determines that the SOEs M&As are inseparable from the theory of enterprise capabilities. New institutional economics is a theory that focuses on the study of transaction costs and the structure and arrangement of the system itself. The integration of corporate culture and the choice of organizational forms after M&A require the guidance of new institutional economics. Informal institutions put emphasis on the research on environmental, cognitive and cultural sphere, and have great impacts on the free flow of man-related production factors in the organization, and the efficiency and business performance of the organization. The guiding role of informal institutions in resources integration and value creation after M&A cannot be ignored. Human exchange activities, the development of enterprises and society are inseparable from trust. Innovation can be the core competitiveness of enterprises, and the integration of trust and innovation in SOEs’ M&A cannot succeed without the guidance of innovation theory and trust theory. Designing trust and innovation mechanisms under incomplete contract theory can explore the specific influencing path and effects of trust and innovation on the value created by the M&A of SOEs.

© Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_3

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3.1 Related Theories on State-Owned Sector and Mixed Economy The market economy consists of public sector and non-public sector. The stateowned sector and the private sector are key components of the public and non-public sector respectively. The mixed economy is a mixture of both the public and nonpublic sector, and the theory of mixed economy is a deepening of the coexistence of multiple economic components. Actually, the existence and development of stateowned sector, private sector, and mixed economy have always been the hotspots of theoretical researches of Marxist scholars and Western economists.

3.1.1 The State-Owned Sector The state-owned sector is an important part of the socialist public-owned economy, and it is compatible with the development of socialized mass production. Besides, the state-owned sector plays a leading role in the development of national economy, and it can guide the healthy development of the national economy and regulate the situation of economic operation.

3.1.1.1

Main Viewpoints of Marxism

Before showing the advantages of the public sector, Marx first analyzed the limitations of the capitalist private economy, combined with the social productivity and level of development, and established a public economic system. With the establishment of public-owned economy, social production, distribution and operation methods will undergo tremendous changes, and the production of commodities will be organized and arranged by the society in a unified manner. Marx and Engels believed that the state needed to undertake certain social and public management functions. The state-owned sector is an important tool for social relation transformation in the transition from capitalism to socialism. The proletariat needs to gradually control important areas such as railway transportation and national banks after becoming the leading class of the country. With a deepened understanding of the public sector, combined with the traditional theories of ownership and the background of socialist development, Marx and Engels put forward the theory of state ownership, regarded it as a manifestation of ownership, and believed that state ownership possessed no class nature and could not be considered as a key indicator of social forms. It is held by theories on state-owned sector that state ownership first appeared in societies of private ownership, and will be advanced and improved with the progress of the society and the development of productivity and increasingly meticulous socialized division of labor. Subsequently,

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by drawing the understanding and concrete practice of socialism, Lenin further deepened the theory of state-owned sector and put forward the theory of socialist stateowned sector. Lenin realized that Marx and Engels’ discussion of state ownership and state-owned sector was built upon mature socialism, which was actually not suitable for Russia, a country in the primary stage of socialism with relatively backward economy, society and culture. Lenin was convinced that it was necessary to build economic development policy upon the social production level to advance the state-owned sector and the society, and that the lifeline of the country’s economy must be in the hands of state-owned sector.

3.1.1.2

Main Viewpoints of Western Economics

There has been great controversy in Western political and academic circles over the necessity of government intervention in national economy. And the existence and development path of state-owned sector has always been a hot issue in Western academic circles. The earliest discussion of state-owned sector in the West originated from Adam Smith. He was aware of the limitations of the market economy and private capital investment, though he did not clearly define the state-owned sector or public goods. Mueller divided the functions of the government into “functions that the government must perform” and “functions that the government can choose to perform”. He held that the “functions that the government must perform” referred to functions closely related to the concept of “government”; and the functions that the government can choose to perform were equally important. Mueller believed in the wide scope of government functions, and discussed more concretely and realistically the important role of government intervention in economic development. The major economic crisis in the West at the beginning of the twentieth century fully exposed the blindness and spontaneity of market mechanism, and proved the necessity of government intervention. Keynes analyzed the limitations of market economy and believed that the functions of government departments should be expanded and their intervention in the market should be enhanced. At the same time, many Western economists regarded nationalization as an important way of macroeconomic control and a make-up for market failures. Although the state-owned sector has been questioned and controversial in Western countries, state-owned sector is still developed and the government intervention is strengthened in Western capitalist countries.

3.1.2 The Private Sector The non-public sector refers to all economic forms other than the public sector, which is an important component of the non-public sector. The development of private sector can fully stimulate the vitality of the state-owned sector, improve the structure of ownership system, and promote the development of national economy.

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Marx divided the forms of ownership into public ownership and private ownership, and argued that the ownership of the means of production would continue to change with the development of productivity and social forms. Looking through the six stages of social development, Marx concluded that the private sector had occupied a dominant position in the slave society, feudal society, and capitalist society; and the public sector would occupy a dominant position in the primitive society, socialist society, and communist society. Engels was convinced that if the development of human society was outlined by changes in the form of ownership only, then it would experience changes from public ownership to non-public ownership and then public ownership again; and the communist society could not be formed overnight, nor the transition of human society from non-public ownership to public ownership in a short period. Marxist scholars believe that private ownership will not disappear in a short period of time, and will stay in the society for quite a long time because the relationship between production and development was determined by the level of productivity.

3.1.3 The Mixed Economy The mixed economy is a mixture of the non-public and public-owned sector, and a complex composed of a series of interconnected and restricted systems, structures, and organizations under the established background of the basic economic system. The theory of mixed economy is a further deepening of the theory of coexistence of multiple economic components, which offers an opportunity for the reform and transformation of SOEs and plays an important role in economic development.

3.1.3.1

Main Viewpoints of Marxism

Ownership ideology takes an important position in the study of Marxism and has great influences on the formation of other social relations. Marxist scholars including Marx, Engels and Lenin have conducted in-depth research into the thought of mixed ownership. In Das Kapital, Marx elaborated on the joint-stock system and the forms to realize mixed economy, and regarded it as a process of self-denial of capitalism. He was certain that the development of mixed economy was the necessary patch for the transformation from capitalist society to socialist society. Engels hold that agricultural cooperatives should be developed to bring together the private sector and the collective sector under collective ownership, and give full rein to the strong social foundation of public ownership and the dynamics of private capital. Engels gave a high evaluation of the mixed economy. Based on the actual situation in Russia, Lenin proposed the coexistence of multiple forms of ownership such as peasant economy and private capitalism, as well as vigorous development of cooperatives to help Eastern countries with small peasant economies as the mainstay to transition to the socialist stage. Lenin put forward the

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concept of collective sector under collective ownership for the first time, encouraged the development of cooperatives to help oriental countries dominated by smallpeasant economy to transit to the socialist phrase. Lenin put forward the concept of collective ownership economy for the first time, and believed that the capitalist methods could be employed to fully develop socialism. The development of a mixed economy would have great policy, theoretical and practical significance in the initial stage of socialist construction due to the backward productivity and production relations. It can be seen that although Marxist scholars have included many viewpoints of mixed ownership in their theories although they have not explicitly put forward the concept of “mixed ownership”.

3.1.3.2

Main Viewpoints of Western Economics

Mixed economy had appeared in the Western market as early as the nineteenth century. However, it failed to draw people’s attention due to the mainstream advocacy of “less intervention” or “non-intervention” in the whole society and small government departments. The Western economies experienced the Great Depression1 after the twentieth century, which fully exposed the blindness and spontaneity of market mechanism and proved the necessity of government intervention, and began to shift from laissez-faire market management to market intervention and expanded the scale and scope of management of the public sectors. Under such backdrop, Keynes (1936) put forward the theory of mixed economy for the first time, believing that expanded government functions, strengthened government intervention in the market and cooperation between state-owned capital and private capital would be the most practical approach for the Western societies to survive the economic crisis and solve unemployment issues. Samuelson (1961) further explored market economy and mixed economy in Economics. He believed that the modern market economy, comprised of both the “private sector” and the “public sector”, was a mixed economic system featured by the joint control of state administrations and private agencies and the coexistence of competition and monopoly, and that mixed economy had become the economic development model of most Western capitalist countries. Samuelson (1961) also pointed out that market economy should rely on the price mechanism of the market and the government policies to solve the problems it faced, and that market alone could not promote national economic growth since government policies were also required. According to theories on mixed economy, the existing economic models of Western capitalist countries are “public–private mixed economies”, that is, in addition to capitalist economies, there are also public economies in Western capitalist countries. Therefore, the trend of economic development in capitalist countries is featured by a transition from individualistic economy to mixed economy with social welfare at the center. State governors should employ macroeconomic regulations reasonable 1

Great Depression refers to the global economic recession between 1929 and 1933. It is the longest, most influential and severe economic recession in the twentieth century.

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to make up for the deficiencies of the private sector and overcome the problems occurred in social development such as unemployment and economic stagnation. In a mixed economy, the interaction and connection between the public sector and the private sector are achieved through the omni-directional and multi-channel flow of production factors and income. For instance, the government collects taxes and fees from enterprises and the public and issues public bonds so that monetary funds are transferred from the private sector to the public sector; on the other side, the government grants subsidies to enterprises and conducts infrastructure constructions and other transfer expenditures so that monetary funds are transferred from the public sector to the private sector. The government purchases goods and services through fiscal expenditure so that the goods and services are transferred from the private sector to government departments; while the private sector obtains medical, educational and other services provided by the public sector by paying taxes. Furthermore, the public sector can help private enterprises to gain certain competitiveness through investment, thereby accomplishing the integration of the state-owned and private sectors within the enterprises. It is in the interaction between the public and private sectors, and the mutual transactions and flow of currency, products and services that a unified market economic system is formed. And the complex transactions and connections between the public and the private sector are mostly realized through the public sector’s procurements in the product and factor markets based on the Principle of Equivalence. And the government departments and financial departments should perform their functions on the basis of market economy.

3.1.4 Theories of Mixed Economy with Chinese Characteristics By drawing on Western mixed economic theory and researches on mixed ownership by Marxist scholars such as Marx and Engels, and China’s basic national conditions and the development background, theories of mixed economy with Chinese characteristics gradually comes into form. The Third Plenary Session of the 18th Central Committee of the Communist Party of China put forward a new policy of reform and opening up with economic construction as the focus of its work, which marked the prelude to China’s economic system reform. In response to the low operating efficiency and insufficient creativity of SOEs under the planned economic system, a series of guidelines and policies has been formulated to develop the stateowned sector and the national economy and to improve the management efficiency of SOEs. In 1992, Deng Xiaoping creatively discussed the relationship between planned economy and market economy. Believing that market economy could also be adopted in socialist countries, he incorporated private sector into China’s economic system, which had laid the theoretical foundation for the development of mixed economy and mixed ownership reform.

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The 13th National Congress of the Communist Party of China proposed to fully encourage the development of individual, private and other sectors of the economy. The Third Plenary Session of the 14th Central Committee of the Communist Party of China explicitly put forward the concept of mixed economy for the first time. The Fourth Plenary Session of the 15th Central Committee of the Communist Party of China highly appreciated the advantages of mixed economy and proposed to promote the shareholding reform of SOEs and the growth of national economy. Later, the Fourth Plenary Session of the 18th Central Committee of the Communist Party of China proposed that mixed economy was the main form of realizing our country’s microeconomic system, and raised the importance of mixed economy in our economic system. It can be seen that mixed economy has always drawn the attention of the Central Committee of the Party. And our understanding of mixed economy has also deepened with the continuous advancement of reforms. The various policies put forward have provided a solid foundation for the development of mixed economy in our country.

3.1.5 Summary State-owned sector is an important part of the socialist public-owned economy, and it is compatible with the development of socialized mass production. Both Marxist scholars and Western economists have discussed the forms of existence and importance of the state-owned sector and the private sector. With the development of the economy, Marxist scholars have studied the idea of mixed ownership, and have included huge number of views on “mixed ownership” in their theories, although they have not clearly put forward the concept of “mixed ownership”. Under the backdrop of economic depression and expanded government intervention, Western economists put forward the theory of mixed economy, and believed that the market price mechanism and government policy regulations should be combined to maintain economic stability, promote economic growth, and solve the problems arising in the social development such as unemployment. In a mixed economy, there are complex and diverse relationships and interactions between the public and the private sector, thus forming a unified market economy. Drawing on relevant researches of overseas scholars on mixed economy, theories of mixed economy with Chinese characteristics gradually comes into existence, and has been deepened through various reforms. Based on this, this article will take the theory of state-owned sector and mixed economy as the main hitting point to explore the impact of the M&As on and the role trust and innovation mechanism in the value created by the stated-owned enterprise.

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3.2 Theory of New Institutional Economics New institutional economics is an important economic theory established and developed on the basis of neo-classical economics which studies the rational allocation of resources based on the established structure and institutions; the difference is that new institutional economics introduces the concept of transaction costs, focuses on the study of institutions and structures themselves in analyzing the relationship between institutional structure and resource allocation. The theory of new institutional economics has driven the transition from classical economics researches assuming zero transaction cost to more realistic researches incorporating transaction costs. And it is mainly comprised of transaction cost theory, property rights theory, enterprise theory and institutional change theory.

3.2.1 Transaction Cost Theory Transaction Cost Theory is the basis of Theory of Modern Property Ownership. In 1937, Ronald Coase first defined the concept of transaction costs, holding that transaction costs mainly include costs arising from the definition and enforcement of institutions (contracts) and the definition and transfer of property rights. Coase (1937) initially realized the scarcity of transaction activities and considered it as the root cause of transaction costs, and applied transactions as the basic unit in the study of institutional economics. Williamson (1973, 1979) further dug into the transaction cost theory systematically, and divided transaction costs into pre-transaction costs (such as the cost of agreement preparation and drafting) and post-transaction costs (such as the cost of contract cancellation). It was held by William that transaction costs could be really high due to information asymmetry, bounded rationality, opportunism and other issues. In order to reduce transaction costs, companies have begun to expand their boundaries and replace the uneconomic behaviors of external transactions by constructing internal trading markets. However, the extent of transaction costs reduction can be limited since the internal transaction process (such as production and management) of the enterprise also generates transaction costs. Although transaction costs cannot be eliminated indefinitely, they can be reduced through advanced technologies and institutional arrangements. Barzel (1997) believed that the fundamental reason for transaction costs lies in the multiple attributes of commodities, and defined transaction costs as the cost of property rights acquisition and transfer. Taking from the research findings of foreign scholars, Zhang (1987) clarified the scope of transaction costs, and believed that transaction costs are all costs except from the costs generated by material transportation and production, including negotiation costs and supervision costs. Yang (2004) made clear the boundary between the market and the enterprise, clearly distinguished the market and the enterprise from the labor and the transaction of intermediate products, holding that enterprise mainly use the labor market to replace the intermediate product market. Shen and Zhang (2013)

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summarized the connotations and specific measurement methods of transaction costs, and believed that the of transaction cost theory could serve as important guidance for China’s economic transformation and reform.

3.2.2 Property Rights Theory The Property Rights System serves as the basis of the market system and other institutional arrangements. Western economist Coase (1959) first put forward the concept of property rights and incorporated property rights into the study of economics, thus forming the earliest modern property rights theory. Coase believed that property rights were rights stipulated by law, when external transaction costs did not exist, the definition of property rights and voluntary transactions constitute the necessary and sufficient conditions for effective allocation of resources; when there were external transaction costs, the property rights system would affect resource allocation and resource utilization efficiency, and a clearly-defined property rights system could reduce external transaction costs and facilitate the optimal allocation of resources in free market transactions. Whether in the enterprise system or the market system, a clearly-defined property right system is essential for effective resource allocation. Demsetz (1974) analyzed property rights from the perspective of externality and economic efficiency, and believed that the boundaries of property rights should be clarified. Barzel (1974) analyzed property rights based on the attributes of assets and commodities and found that property rights were relative and progressive, and the actual ownership was in economic rather than in legal form. Based on the incompleteness of contracts, Hart (1990) was convinced that investors could only be encouraged to make investment if they were allowed to be owners of the enterprise and enjoy residual claims.

3.2.3 Corporate Governance Theory The Transaction Cost Theory of new political economics centers on the study of relationship between the enterprise and the market; while the enterprise theory focuses on the study of the internal organization and structure of the enterprise. An enterprise is an organization that conducts business operation, produces and provides products and services for a specific purpose, with the ultimate goal of maximizing corporate wealth and owner’s equity. Due to complex problems caused by information asymmetry and bounded rationality in the market, market transactions can be very costly. In order to reduce transaction costs, enterprises are established as a new approach for market transactions, and the establishment and existence of enterprises is driven by transaction costs saving. In market economic activities, resources allocation efficiency is affected by the price mechanism; while in the business management activities of

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enterprises, the effective allocation of resources depends on the “commands” of the higher-level departments. The boundary between an enterprise and the market—the scale of an enterprise—is fundamentally determined by the level of production technology of the enterprise. Due to transaction costs in the production, operation and management of enterprises, the boundaries of enterprises cannot expand indefinitely. As a bounded rational economic person, enterprises will choose the appropriate organizational form according to the level of transaction costs. And the size of enterprises is limited to the cost of labor division through enterprises, which should be equal to the cost of labor division through the market.

3.2.4 Institutional Change Theory The Institution Change Theory was put forward by economists represented by North (1990) on the basis of property rights theory and ideology theory. It was held by North that although technical innovation pushed forward the social and economic development, long-term and sustainable economic growth and stable social development could not be achieved if people had no intention of institutional innovation and change, or fail to build a series of institutions (such as the property rights system) to consolidate the achievements of technical innovation in a timely manner. Institutions played a decisive role in the economic growth of the country and the stable development of the society. Institutional change is a response to the imbalance supply and demand in the existing system. Fundamentally, it is a process of replacing the inefficient system with a more efficient new system. Institutional change usually experiences three stages: stagnation, innovation and equilibrium. Institutional change is triggered by the conflicts between the relative stability of the system, the uncertainty of the environment, and man’s pursuit of interests. In short, when the expected returns of a system exceed the expected costs, there are possibilities of innovation in the institution.

3.2.5 Summary The concept of transaction cost was introduced into the new institutional economics to explore the relationship between institutional structure and resource allocation. Representative theories include “Transaction Cost Theory”, “Property Rights Theory”, “Enterprise Theory”, and “Institutional Change Theory”. Based on this, this article will study the merger and acquisition activities of SOEs (SOEs) subdivided in the theory of new institutional economics. Compared with private enterprises, SOEs will receive more policy support from the government, with insufficient pursuit for profits and motivation for innovation, thus leading to relatively low operating efficiency. In response to the inefficient production and operation of certain SOEs,

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promotion of mixed economy and reform of SOEs have become the focus of our economic work in recent years. SOEs participating in M&A can introduce private capital, improve operational and management performance, improve internal control and governance structure, and realize the complementary advantages of state-owned and private capital, thereby impacting the value created by the enterprises. The mutual trust between the acquirer (SOE) and the target company (private enterprise) helps to achieve the complementation of enterprises with different ownership, and further promotes the operational and management performance of the acquirer.

3.3 Theory of Strategic M&A Strategy can be interpreted as a war strategy, which refers to the tactics of analyzing the war on a long-term and phased basis by taken into consideration the overall situation. Strategy, including operations, investment, M&A and other aspects, is of great significance to the survival and development of an enterprise. Built upon the resource-based enterprise theory, strategic M&A are economic activities adopted by enterprises to achieve their specific development strategies (Weston and Chung 1983), and the important ways for enterprises to secure sustainable development and enhance the competitive advantages.

3.3.1 Motivations of Strategic M&A The major motivations of strategic M&A are to create value and wealth through expanded enterprise scale, M&A synergies, improved technical innovation capabilities and sustained competitive advantages. From the formation of M&A motivations to value appreciation, enterprises usually go through the pre-merger, interim and post-merger stage. Prior to merger and acquisition events, enterprises formulate acquisition plans and evaluate acquisition risks; in the interim stage of M&A, enterprises pay M&A consideration and hire professional institutions; and in the postmerger stage, enterprises evaluate the M&A performance and integrate the internal resources. Different stakeholders (such as shareholders, appraisal agencies, suppliers in the M&As) are involved in each stage of M&A, and different stakeholders have different motivations for M&A. According to the influence of the participants in the M&A activities, main participants in the M&As can be divided into M&A parties (parties to the M&As) and stakeholders (suppliers, creditors, etc.). In strategic M&A, both parties involved in it and the stakeholders expect to increase corporate value through it and further their own interests. Therefore, achieving the scale effect and M&A synergy, and increase the corporate value are the most essential motivations of strategic M&A. Shareholders are the owners of enterprise property rights, however, they are lack of necessary knowledge and skills to manage the enterprise under a modern corporate governance system and in the

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process of business development, therefore they will entrust executives to take care of the production, operation and management of the enterprise, and contrive a series of measures (for instance target salary and equity incentives) to encourage and restrain the executives to maximize the corporate wealth and owner’s equity. Therefore, in strategic M&A, shareholders want to get higher returns with as little risk as possible, avoid paying excessive M&A premiums, and achieve rapid growth of corporate value and owners’ equity. Different from the profit function of enterprise shareholders, executives acquire benefits mainly through remunerations and incentives, which are often an increasing function of the size of the enterprise. Therefore, the executives tend to expand the scale, enrich the business scope and diversify the operation risks of the enterprise through M&A for better remunerations and diluted risks in management. Creditors, whose focuses are on the company’s assets available for pledge, operating cash flow and debt repayment capacity, have no direct impact on the company’s M&A. Therefore, creditors expect the enterprise to have more sufficient profits and cash flow, and better capacity to repay debts on time after the M&A events. Creditors also supervise the operation and management of the post-merger enterprise through contracts and other methods, urging M&A to create value for the enterprise in order to protect their rights and recover the principal and interest on time. In M&A activities, customers expect the post-merger enterprise to provide better products and services, and more personalized products that can meet their demands; while the suppliers hope that the post-merger enterprise can fulfill the contract provisions and obligations, make payments on time, and establish long-term transaction relations and increase the proportion of sales. In this view, the demands of both customers and suppliers promote the value creation of the acquirer.

3.3.2 Economic Consequences of Strategic M&A In the process of business operation and development, the free flow of tangible and intangible resources helps the enterprise to gradually form unique resources and capabilities that can become its core competitiveness. Based on their own unique resources and advantages, the acquirer and the target company choose M&A as the way to achieve their strategic goals by promoting the resource allocation and utilization efficiency, achieving synergy of internal resources, and finally increase the value of the acquirer. First of all, the fundamental reasons for strategic M&A root in the realization of enterprise-specific business development strategies through M&A. By integrating and sharing each other’s unique knowledge, resources, and technical innovation capabilities, sustainable development of both companies and superimposed economic effects can be achieved through the scale economy and synergies, optimized industrial chains and long-term strategic alliances. Second, strategic M&A is realized through the enhanced enterprise competitive advantages. The enterprise’s competitive advantages and strategic development goals will continue to change with the passage of time and changes in the external environment. Therefore, enterprises can reintegrate and adjust internal and external knowledge and resources through

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strategic M&A to form new competitiveness and achieve long-term and sustainable development. Third, strategic M&A and wealth transfer M&A are two different types of enterprise M&A classified according to the M&A motivations. There are multiple classifications of enterprise M&A. For example, there are horizontal, vertical and mixed M&As according to industrial attributes of the acquirer; and strategic M&A and wealth transfer M&A according to the motivation of M&A. Wealth transfer M&A is a relatively pure distribution of corporate value, showing the dynamic process of interest grabbing and plundering, and resource encroachment of stakeholders in it. On the contrary, strategic M&A mainly presents the process of value maximization, corporate value and advantages sharing, and realization of economies of scale and synergies.

3.3.3 Risks of Strategic M&A Various risks are involved in the three stages of strategic M&A. The risks in the early stage of M&A mainly lie in investment decision-making, system and law. The risks in the interim stage of M&A mainly come from the payment of appropriate M&A considerations and selection of financing channels. And the risks in the later stage of M&A mainly result from the integration of enterprise resources and cultural systems. Acquirers should direct their attention to risks posed by the industry and corporate culture in M&A, for instance, full understanding of the industry background, operational risks, and employee responsibility and values of the target company.

3.3.4 Summary It is inevitable that enterprises seek to expand their scale and achieve specific business strategies through strategic M&A under the market mechanism. And in fact, enterprises are developed through a series of M&A. Enterprises can generate synergies through M&A, obtain advanced technology and productivity, and enhance competitive advantages, thereby achieving corporate value creation and stakeholders’ interests. M&A fall into strategic M&A and wealth transfer M&A. Since the fundamental M&A motivation of SOEs is to increase corporate value and achieve synergy, the M&A of SOEs belong to strategic M&A, which are filled with risks. Therefore, both parties to the M&A events should reasonably evaluate the risks and pay attention to the uncertain factors in the M&A so as to minimize the risks involved. Based on this, this article explores strategic M&A of SOEs, and analyzes the specific role of trust mechanism and innovation mechanism in the performance of SOEs after strategic M&A.

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3.4 Theory of Contract Economics In an economic situation with information asymmetry, contract economics focuses on the study of how to promote fairness in transactions through effective contract arrangements. In micro-economic activities, businesses need to sign contracts. A series of contracts signed between the enterprise and the trading partner incorporate them in the contract network, for instance, the contract between the enterprise and the executives and employees, the contract between the enterprise and the capital investors such as shareholders and debtors, and the contract between the enterprise and suppliers and customers. In a complete contract network, in addition to the parties to the contract, there is also the environment for contract performance such as the capital market. In the law system, such contracts are complete in content and the legal forces can be verified under any circumstance. Inspired by the characteristics of the system and the economic functions of contracts, researchers of microeconomics define contracts, which are mainly incomplete contract, as micro-systems of transaction in essence.

3.4.1 Incomplete Contract Theory Contracts studied in economics generally refer to “incomplete contracts”, which are contracts that cannot include all contingencies before the execution. Incomplete contracts exist for many reasons. Above all, the parties to the contracts are bounded rational in their behaviors. In the complex real world, the contracting parties start the decision-making with rationality, but they often fail to foresee all the contingencies due to their bounded rationality. In this view, omission of clauses in the contract seems inevitable, and it is also difficult to include all the possible contingencies in the contract in descriptions recognized by both parties even if such contingencies have been anticipated by the contracting parties (Hart and Moore 1990). Secondly, there are transaction costs in signing a contract. When the contracting parties sign the contract, predicting future events and writing the corresponding measures into the contract will also incur transaction costs. Therefore, the contracting parties tend to omit part of the content when signing the contract, and will discuss and negotiate when the events actually occur in the future. Thirdly, relevant variables of the third party cannot be verified (Hart and Moore 1990). The formal contract signed by the contracting parties are legal contracts supplemented with psychological attributes, as a result, the content and terms contained in the contract are clear and definite to both contracting parties; however, for the third party who is not a participant of the contract signing process and lacks in-depth understanding of the performance environment, it’s impossible to observe all the contract terms. And fourth, the default party may not be liable for compensation in case of violations due to the imperfect and complete credit system. Incomplete contracts will increase transaction costs in the process of contract performance and elicit inefficient performance of the contract.

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The establishment and improvement of the credit system requires the constraints and guidance of both formal and informal systems. According to information economics theory, there is a “principal-agent” relationship between the principal and the agent, and a series of contracts have been signed between the two parties. Due to information asymmetry between the two parties to the contract, the principal should design incentive contracts and restrain the agent’s behavior to reduce moral hazards. In addition, since the contract signed between the agent and the principal is an incomplete contract, a series of agency problems will be generated in the economic activities of the enterprise, such as the infringement of the legitimate interests of shareholders by the senior executives.

3.4.2 Design of Incentive Contract Regarding the choice of systems and mechanisms in the case of incomplete contracts, the incomplete contract theory falls into two branches. The first is the Transaction Cost Economics represented by Williamson, which believes that the contracting parties should compare the differences between the ex-ante and ex-post transaction costs under different realities and governance structures to choose the most costeffective institutional arrangement. The second is the new Property Rights Theory represented by Hart, which insists that a certain mechanism should be established to fully protect the investment incentives before contract execution to achieve suboptimal social welfare effects. Transaction Cost Economics and new Property Rights Theory both regard bounded rationality and opportunism as the main causes of incomplete contracts, but the focus of analysis differs. Transaction cost economics focuses on the adaptive governance of contracts after the execution, while Property Rights Theory focuses on the study of ex-ante investment incentive and protection mechanisms. To address the problem of non-performance or incomplete performance of contracts and the imperfect legal system, Telser (1980) and Klein and Leffler (1981) conducted researches on self-enforcing agreements. Both parties to the self-enforcing agreement do not want to sign a contract with the other party who may breach the contract, and the punishment imposed by self-enforcing agreement upon the unilateral defaulter is but termination of contract. As a result, potential defaulters will compare the benefits of performing the contract with the costs of breaching the contract, which determines that the benefits for performance of self-enforcing agreement that can be signed in the very beginning must out-weight the costs of breaching the agreement. Signing a self-enforcing agreement is a way for both parties to maintain long-term business relationship. The reliability of the parties to a transaction comes from the measurement of benefits gained from the performance of the contract and costs incurred by the breach of the contract, rather than the moralities of both parties. When one party discovers that the other party has violated the terms of the contract, it will turn to the most extreme but effective way of permanently terminating

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the contract. Therefore, the self-enforcing agreement is strongly binding. The opposite of a self-enforcing agreement is the third-party performance agreement, which stipulates that when one party violates the terms of the contract, the other party can request a previously agreed third party to make settlements or judgments.

3.4.3 Summary Contract economics lay emphasis on the study of how to promote fairness in transactions through effective contract arrangements under information asymmetry. Due to information asymmetry between the contracting parties, modern contract economics theories have gone through two stages of “Principle-Agent” Contract Theory and Incomplete Contract Theory. In addition, some scholars have studied the self-enforcing agreement and third-party performance agreement in the relational contracts. From the formation of M&A motivations to the completion of post merger integration, both parties to the merger will sign various incomplete contracts, such as “valuation adjustment mechanism (VAM)”.2 In the process of reaching and signing various incomplete contracts in M&A, stakeholders will focus not only on the rights endowed by the incomplete contracts, but also the powers in the execution of the contracts which affect the investors’ return. The stakeholders will use the powers in the contract to obtain more benefits. For example, with regard to the ownership and control rights of shareholders, Hart (1995) believed that the role of shareholders in corporate investment decision-making should be emphasized to reinforced their ownership and control rights and restrain the moral hazards of the agents (executives). Under such circumstances, this article will design a trust and innovation mechanism based on theories of incomplete contract, integrate trust mechanism into the research of innovation capability improvement paths of the acquirer, and enrich and deepen the researcher’s comprehension of M&A motivations, post merger integration and improvement of innovation capabilities of the acquirer to understand the impact of trust and innovation mechanism on the value created by the M&As.

3.5 Information Economics Theory Economics mainly explores the behaviors and laws of human society in the process of production and exchange. And information is the most basic element in the 2

The Valuation Adjustment Mechanism (VAM) is an agreement between the acquirer and the target company when they reach an M&A agreement under possible uncertainties in the future. The acquirer can exercise its rights in case of agreed conditions; while the target company may exercise its right if the agreed conditions do not occur. Therefore, VAM is actually a form of option, can be used to protect the interests of the acquirer to tackle incomplete contracts signed in the case of information asymmetry through meticulous design.

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production and exchange process. With the economic globalization, the importance of information collection and application in economic activities continues to rise. Starting with the asymmetry of information distribution, micro information economics rethinks and researches a series of viewpoints put forward by traditional economics based on the assumption of complete information, and probes deeply into the equilibrium of competition and principal-agent relationship, risks and uncertainties, and adverse selections and moral hazards derived from the value of information to deepen the scholars’ understanding of micro-economic activities. In 1961, Stigler creatively raised issues such as the value of information, the cost of information acquisition, and the market failure caused by incomplete information.

3.5.1 Information Asymmetry Theory Due to information asymmetry, the party with advantageous information can usually obtain more benefits in market transactions; while the party with disadvantageous information will realize that the other party is using its advantageous information to manipulate the transaction and will take corresponding actions as countermeasures. At this point, the market price mechanism is no longer efficient and cannot even facilitate a transaction satisfactory to both parties. In consideration of the time of occurrence, asymmetric information can be divided into ex ante asymmetric information and ex post asymmetric information. Ex ante asymmetric information refers to the asymmetric information exists before the contract is signed, such as the credit status of the borrower before the loan and the physical condition of the insured before the insurance application, and will tiger adverse selection which makes the purchaser choose the undesired products in the market. For example, in the used-car market, car sellers have more information about the car than the car buyers, while the car buyers only know the average price in the car market, which creates the “lemon market” problem. Premium cars gradually withdraw from the market and eventually left only inferior cars. Ex-ante asymmetric information refers to the asymmetric information that is present after the contract is signed. For example, the employee’s level of efforts after the labor contract is signed can give rise to moral hazards. The Ex-ante asymmetric information exists when one party to the transaction cannot supervise the behaviors of the other party, for example, the policy holders may change their behaviors after being insured, which increases the risk of compensation of the insurance companies.

3.5.2 Signal Theory For the problem of adverse selection, Spence (1973) put forward the “signal theory”, which encouraged the party with advantageous information to actively disclose the information, for instance, applicants showing relevant certificates of education and

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capability, car sellers providing customers with maintenance guarantees, products sold by the company establishing a certain brand awareness, etc. The purpose of “signaling” is to distinguish superior products from inferior products, and the cost of “signaling” of superior products should be higher than that of inferior products, while the benefits should be much greater. “Signaling” is a game between the owners of superior and inferior products in the situation of incomplete information, and “Nash Equilibrium” is finally achieved through the game. Information economics theory holds that incentive mechanisms can be adopted with regard to moral hazards, that is, contracts can be signed to restrict the behaviors of the party with more information.

3.5.3 “Principal-Agent” Theory In response to the information asymmetry in property rights system, Mirrlees (1974) proposed the “principal-agent” theory. The principal is the participant with more information in the market, while the agent is just the opposite. The “principal-agent” theory helps the principal to resolve moral hazards after the agent signs a contract from the perspective of incentive mechanism design, and the agent also reduces its risks through the terms of the contract. The best incentive mechanism not only serves as an incentive, but also mitigates the risks of the agent. Generally speaking, the efforts spared by the agent are in positive correlation with the incentives it receives. The principal should try to ensure equal returns for the agent who has spared same efforts in different jobs, and give the agent appropriate incentives based on its short-term and long-term performance. In consideration of the optimal incentive and constraint mechanism, game theory researcher John C. Harsanyi (1976) designed the Bayesian Nash equilibrium model to study the “prisoner’s dilemma” situation and explored how to enable agents to tell the truth. However, in an environment of asymmetric information, choices, decisions and behavioral consequences do not have a one-to-one correspondence. Decision enablers seek to maximum their interests, while they may not necessarily achieve the Pareto Optimality in terms of final economic consequences. Therefore, economic entity has only bounded rationality, which determines that each participant in economic activities makes decisions following rational principles and generates perhaps irrational economic consequences, and the decisions made by a group of rational participants may also be irrational. Based on that, the information economics takes the interaction between individuals as the starting point for research and analysis and solves the inapplicability of price mechanism in the context of information asymmetry by designing a “non-price” system through a series of theories on mechanisms.

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3.5.4 Summary From the perspective of the asymmetry of information, information economics theory studies the principal-agent relationship, adverse selection and moral hazards that exist in reality, and put forward “signal theory” and incentive mechanisms as the solution for information asymmetry. In the three stages of M&A, all stakeholders will encounter information asymmetry, and will make decisions with bounded rationality based on the changes of external environment. Thus, the economic consequences of such decisions may not necessarily achieve Pareto Optimality. However, through information disclosure mechanism (e.g., listed companies disclose annual reports and major transactions), reputation mechanism (evaluation of public platforms, company’s reputation), corporate value sharing mechanism (dividends, executives shareholding), the information asymmetry arising in M&A can be moderated, and the trust relationship between SOE and the target company will be boosted to facilitate smooth conclusion of M&A and appropriate determination of merger considerations. The design and research of trust and innovation mechanism in the M&A of SOEs cannot do without the guidance of information economics.

3.6 Informal Institution Theory The informal institutional theory deals with an extensive scope of research topics, involving many schools of thought such as classical economics and institutional economics. North made the point that even in the most developed societies, the extent to which formal rules restrict the behavior of socioeconomic individuals was limited, and socioeconomic individuals were mainly affected by informal systems. Veblen pointed out that formal systems such as laws and economic systems in the society were proposed and established on the basis of informal systems, and the role of formal systems was affected and restricted by informal systems.

3.6.1 Institutional Environment Institutional environment refers to the code of conduct spontaneously formed and widely accepted by human beings in the process of interaction, including customs and laws and regulations related to politics and culture. As a macroscopic influencing factor, institutional environment has great impact on the behavior of micro-economic entities. Many scholars place informal institutions into the context of institutional environment for research. Williamson believed that corporate governance was carried out in an institutional environment, and corporate governance and operating performance would change with changes in the institutional environment. And Williamson thought that the external environment of corporate management was comprised of

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both formal institutions (such as property rights) and informal institutions (such as social conventions). North believed that the same formal institution would generate different effects under different social backgrounds due to the role of informal institution. Compared with formal institutions, informal institutions are much widely applied, and factors of informal institution are more common in the institutional environment. A good informal institutional background can improve the corporate governance and increase the corporate value; an honest external institutional environment will facilitate the disclosure of corporate accounting information and audit supervision.

3.6.2 Corporate Culture Corporate culture is a vital component of informal institution. From the perspective of knowledge transformation, organizational capital falls into major categories including information, process, and culture. Organizational capital based on corporate culture is formed through the relationship brought forth by the endogenous and interactive growth of manpower capital, which is fundamentally originated from the belief and spirit of entrepreneurs at the start-up stage (Xu et al. 2002). Corporate culture is the common values shared by the organization (Kreps 1990). It has the characteristics of organizational behavior and can be used to educate new members of the enterprise. Corporate culture can be regarded as a coordination and integration mechanism in the transformation of manpower capital into organizational capital, coordinating the rational allocation of resources in the corporate organizational structures and promoting the full and effective conversion of employees’ knowledge, experience and skills into organizational capital. Corporate culture will have a direct impact on the transfer of personal knowledge and experience to the organization, that is, it will affect the wealth accumulation of the organization. Corporate culture can act as a catalyst which promotes the gathering of man-related production factors (such as labor) to the organization, and the efficient utilization and rational allocation of internal resources; however, it may also be a separating agent, when there are huge gaps between man-related production factors and the culture of the organization, as employee and knowledge will flow out from the organization. In addition, corporate culture is embodied in the organizational behavior, and excellent corporate culture can guide the behavior of leaders and employees, increase the employees’ capability and desire to serve and contribute to the enterprise, and continuously lead the employees to innovate and improve work efficiency. Different from organization capital based on information and process, the essence and core of organization capital based on corporate culture is manifested in the value orientation and organizational behavior of the enterprise. Values are created through the transfer and diffusion of all types of knowledge generated in the organization between individuals and the organization, and various organizational capitals are formed in such process of transfer and diffusion that requires the cooperation of employees. Therefore, the key to create value through organizational capital based

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on corporate culture is to promote the rational allocation of resources, stimulate the formation of a good organizational environment, atmosphere or mechanism and encourage the fully exploitation of employee’s knowledge and skills to transform into organizational capital. In general terms, organizational capital based on corporate cultural exists in the enterprises in the form of capital stock. When information and knowledge are mutually attracted to the capital stock in the process of transmission and diffusion, the capital stock will continue to increase, and vice versa. Compared with organizational capital based on information and process, organizational capital based on corporate culture is more difficult to change and has a long-lasting effect on the development of enterprises, which hinders the growth in business performance (Xu et al. 2002). The internal and external environment of an organization is complex and changeable. Enterprises need to innovate constantly to maintain its core competitiveness and competitive advantages. And innovation is not only about technical transformation using existing resources, but also about the introduction of resources in an open manner and the creation of resources through independent innovation and capital stock integration. In the process of innovation, organizational capital based on corporate cultural enables enterprises to discover, explore and aggregate internal and external knowledge and helps enterprises to gain knowledge, skills and information required for innovation through informal systems, all of which finally transform into innovation capabilities. In such case, the culture of integrity plays a vital part since it improves the efficiency of cooperation among various production factors within the enterprise, and improves enterprise performance by forming relational capital in the process of transactions. Within an enterprise, the corporate value of integrity can encourage members to establish mutual trust in interpersonal relationships, create a good organizational environment, and improve the operational efficiency of the enterprise; and in the relationship with external stakeholders, the corporate value of integrity can help the enterprise to establish a good social image, and reduce losses of opportunities and profit caused by trust asymmetry, thereby reducing transaction costs.

3.6.3 Summary The research scope of informal institutional theory is extensive, involving many schools of thought such as classical economics and institutional economics. And institutional environment will exert great impact on the operation and management of enterprises since they are carried out in a specific institutional environment. Organizational capital based on corporate cultural can promote the free flow of man-related production factors, enable the establishment of a good environment, and improve the organizational efficiency. As an important component of organizational capital based on corporate cultural, integrity is crucial to the operational efficiency, value creation and innovation of the enterprise. M&A are one of the main paths for enterprises to achieve growth-oriented strategic goals. M&A, as an intermediate link between the

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corporate organizational capital and the new organizational environment, determine the value creation for the enterprise. And in post merger integration, the informal institutional environment of the acquirer can affect its performance by influencing the transaction costs and integration efficiency. Moreover, the corporate culture of the acquirer can be updated and improved through organizational structure adjustment and work flow improvement. As the medium for M&A and the stock capital of both parties, the corporate values and behavior patterns of integrity will cut down information asymmetry caused by trust issues between the M&A parties, and increase the values created by the M&As through improved resource integration and innovation capabilities.

3.7 Enterprise Capability Theory Enterprise Capability Theory uses “capability” as the basic tool for research and analysis, and studies the fundamental reasons why enterprises gain long-term competitive advantages and excess returns from the value correlation and non-imitability of internal capabilities and resources of enterprises. It is the foundation of research and empirical analysis of a series of theories in modern strategic management. Penrose (1959) gave a more comprehensive and in-depth exposition of corporate capability theory, and believed that the intrinsic growth theory should be adopted to analyze corporate capabilities. The accumulation of corporate knowledge is achieved via long-term internalization, and the accumulation of new knowledge is done through the transformation of relevant knowledge into procedural and targeted knowledge. Nelson and Winter (1982) affirmed the significance of corporate capabilities in enterprise management and development, and endowed companies possessing different types of intellectual capital with different names. The main viewpoints of enterprise capability theory include: (1)

(2)

(3)

(4)

Capability is the key resource or asset of enterprises. It is the intellectual capital that can be perceived by human beings, and can help its owners to solve various difficulties and problems in real life. An enterprise is an assembly of various organizational capabilities. It seems to be an entity composed of various types of tangible and intangible resources, but in essence, it represents capabilities contained in various production factors. And the importance and value of resources owned by an enterprise depends on the capabilities behind. The capabilities of an enterprise, which are usually featured by path dependence, long-term accumulation and inimitability, can determine the core competitiveness, operational and management performance and benefits of the enterprise, and enable the enterprise to gain long-term competitive advantages. The capabilities of an enterprise appear in a dynamic and unbalanced state and change with the change of external environment and internal conditions, therefore the enterprise’s phased development goals will be adjusted accordingly so

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that excess returns can be gained under the premise that the enterprise’s capabilities are accumulated, cultivated, improved and applied continuously. To be specific, the capability theory mainly includes “Enterprise Resource Theory” (Wernerfelt 1984), “Core Competence Theory” (Hamel and Prahalad, 1990), “Dynamic Capabilities-based Entrepreneurial Theory” (Teece et al. 1997), and “Knowledge-based Theory” (Demsetz 1988), etc.

3.7.1 Enterprise Resource Theory Enterprise resource theory assumes that the resources held by enterprises have imperfect mobility and heterogeneity, tries to explore the driving forces of enterprise growth and development inside of enterprises, and explains the differences in competitive advantages between different enterprises using the unique and scarce internal resources possessed by the enterprise. This theory believes that enterprises are composed of various resources, including tangible and intangible resources. Resources, which cannot flow freely and are difficult to replicate among different enterprises, gradually turn into the unique competitive advantages of the enterprise. To maintain sustainable competitive advantages, the resources of enterprises must satisfy the following four conditions: (1) (2) (3) (4)

Resources possessed by the enterprise must be valuable, that is, such resources can improve the efficiency of the enterprise and create values for the enterprise; Resources owned by the enterprise must be scarce, that is, such resources are only possessed by a few enterprises; Resources enjoyed by the enterprise must be imperfectly imitable, that is, such resources are unlikely to be obtained by other enterprises through imitation; Resources held by the enterprise must not be completely replaced, that is, those resources do not have “strategic equivalents”.

Inter-organizational coordination enables enterprises to obtain more resources, since knowledge can only play its role through contracts and joint actions, and only effective resource allocation and protection can generate better performance. Enterprise Resource Theory considers that the competitive advantages of an enterprise come from effective allocation of resources rather than rational decision-making, while enterprise resources are accumulated over a very long period.

3.7.2 Core Competence Theory Hame and Prahalad (1990) first put forward and defined “core competence”, and considered core competences as the unique capabilities of enterprises and the source of enterprises’ competitive advantages. Core Competence Theory posits that enterprises are composed of competences, and sustainable competitiveness are formed

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through individual accumulation and sustained market development capability. The main points of Core Competence Theory go as follows: (1)

(2)

(3)

(4)

The core competence of an enterprise is not the level of science and technology in general sense, but an interdependent knowledge system that represents the overall capabilities of the enterprise and create value for consumers. The core competence of an enterprise includes the capability to develop differentiated products and organize and coordinate various elements for production and value conversion, both of which contribute to the improvement of enterprise economic efficiency. The core competence of an enterprise derives from the previous experiences, rather than market transactions. The strength of core competence depends on the coordination and organic integration of enterprise resources. The difference in core competence of an enterprise determines the difference in its operational efficiency, as well as the heterogeneous profitability of the enterprise. Enterprise capabilities and efficiency differ due to the different composition and capability of employees and organizational structures in the production and operation process, which are finally manifested in the difference in enterprise income.

3.7.3 Dynamic Capability-Based Entrepreneurial Theory The Dynamic Capability-based Entrepreneurial Theory supposes that enterprises are at risks of losing their core competitive advantages due to resistance to changes while gaining core capabilities. The point is that enterprises must quickly adapt to environmental changes, and constantly update and develop their own capabilities. Dynamic enterprise capability is the enterprise’s the ability to build, integrate and reconfigure internal and external resources (Teece 1997). The Dynamic Capabilitybased Entrepreneurial Theory holds that the capability to change the development status of an enterprise is essentially technical knowledge, and the process of which is one of new knowledge pursuit and absorption and finally a new knowledge system establishment. Dynamic capabilities are the enterprise’s capability to maintain or change its competitive advantages.

3.7.4 Knowledge-Based Theory The Knowledge-based Theory assumes that knowledge is the foundation of enterprise production input and value realization, regards enterprise as a conglomerate of productive knowledge and capabilities, and explains the source of enterprise competitive advantages from the perspective of knowledge. Enterprise knowledge falls into managerial expertise, institutional knowledge and technical expertise, which are transmissible, proprietary stratified and available. The Knowledge-based Theory

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considers knowledge as the fundamental source of corporate profits and value addition, and that the creation and storage of knowledge are inseparable from employees who are the main carrier of corporate knowledge dissemination.

3.7.5 Summary The Enterprise Capability Theory uses “capability” as the basic tool to probe into the fundamental reasons of enterprise competitive advantages acquisition from the perspectives of enterprise capability and resource value relevance. It believes that the boundaries and value creation capabilities are determined by enterprise capabilities which are adjusted dynamically as time changes. Specifically, the enterprise capability theory includes the Enterprise Resources Theory, Core Competence Theory, Dynamic Capability-based Entrepreneurial Theory, and Knowledge-based Theory, and the main evolution process is shown in Fig. 3.1. SOEs can obtain scarce resources and capabilities, managerial and technical expertise and innovation capabilities of the target company through M&A, however, they need to own the “dynamic power” of resource integration and relocation to truly create value for the enterprise. In contrast to endogenous growth of the enterprise, innovation capabilities are formed in the environment of expanded organizational boundaries, and are subject to the trust mechanism in M&A. Under such circumstance, this article will explore the ways and specific paths how trust mechanism and improved innovation capability of SOEs impact the value created by the M&A.

Fig. 3.1 Evolution of enterprise capability theory

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3.8 Trust Theory Simmel first proposed the Trust Theory in 1900, and believed that trust was indispensable in material exchanges in the contemporary society, and that trust was closely bounded up with the operation of human society. After the eighteenth century, many disciplines (such as sociology and organizational behavior) have conducted in-depth researches on trust. The study of trust was originally applied to the study of psychology to explore the influence of trust on interpersonal relationships. Deustch (1958) conducted an experiment on prisoner’s dilemma, and believed that trust was man’s response to a specific situation and the degree of trust between two parties would change with the change of specific situation. In the research on trust in management science, Rotter (1967) defined trust as an expectancy held by an individuals or group on the basis of relationship between the two parties, which were required to act in accordance with the text or contract agreed upon in advance. Most scholars hold that trust can be classified into direct trust and indirect trust. Direct trust usually comes from the subject’s recognition and belief in a certain attribute possessed or manifested by the trusted, which corresponds to Trust Source Theory; while indirect trust usually stems from the evaluation of a third party or the recommendation of others, corresponding to Trust Transfer Theory. With deepened researches on the subjects in trust theory and the increasing complex business environment, some scholars have made in-depth study of Organizational Trust Theory targeting at the specific subject—“organization”. Thus, this section will sort Trust Theory from three parts: Trust Source Theory, Trust Transfer Theory and Organizational Trust Theory.

3.8.1 Trust Source Theory The source of trust is the decisive factor that generates trust, and represents the subject’s perception of the attributes possessed or manifested by the trusted, hence it is the focus and hotspot of trust research. In the study of trust influencing factors, Ganesan (1994) believed that the subject would pay more attention to the goodwill and reliability of the trusted due to uncertainties and risks in the trading environment; some scholars was convinced that trust relationship was affected by the motivation of the trusted and its ability to effectuate the motivation. Saraoglu (1999) incorporated ten factors such as practicality, integrity, and fairness into the study of trust influencing factors. Drawing on the previous studies, Mayer (1995) proposed an integration model of trust that was widely accepted and adopted. He believed that goodwill, ability and integrity were key factors influencing trust, namely the three dimensions of trust measurement, and pointed out the time changing factors of trust, which insisted that competence and integrity had a quicker impact on trust, while goodwill evolved more slowly. He introduced risk factors into trust prediction. In the integration model of

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trust, goodwill serves as the foundation for trust formation, which means that the trusted thinks from the perspective of the subject, rather than putting the subject at risk out of “self-interest”; capability is the main factor that influences trust as the trusted needs sufficient competence and technology to satisfy the demands of the subject, and trust will increase with the increase in capabilities of the trusted; integrity is the key component of trust and is manifested in that the trusted is willing to disclose the most about the true situation to the subject without concealing or deception.

3.8.2 Trust Transmission Theory The Trust Transmission Theory mainly studies the indirect trust generated by the subject to the trusted, and deeply explores the process of trust transfer among multiple parties. In real life, the subject not only directly trusts the trusted by identifying with a certain attribute possessed or manifested by the trusted, but also draws on and considers the opinions of third parties to reduce the perceived risk of uncertainty when interacting with the trusted. Stewarts believed that when a subject believed that the current environment was trustworthy, other subjects in the environment would also be affected and indirectly trust the trusted in the current environment. In addition, trust transfer is a key factor affecting people’s judgement on whether a strange party is trustworthy in a strange environment.

3.8.3 Organizational Trust Theory With the deepened research in subjects and the increasingly complex business environment, scholars have begun to explore the trust within and between the organizations. At present, there are three viewpoints concerning organizational trust: System Theory, Interpersonal Theory and Combined Theory. System Theory believes that organizational trust is the trust generated between employees and the organization, and employees will identify with the policies formulated and promulgated by the organization after a comprehensive evaluation (Robert 1993); Interpersonal Theory believes that organizational trust is generated between employees within the organization, and is the employee’s trust in colleagues and superiors (Podsakoff 1993); while the Combined Theory takes into consideration the trust between employees and the organization and the trust among employees (Nyhan 1999). Regarding the structure of organization theory, Nyhan (1999) divided organizational trust into interpersonal trust and system trust according to the characteristics of the trusted in the organization; Mc Cauley (1992) divided organizational trust into horizontal trust and vertical trust according to the direction of trust. The former refers to the trust between employees, while the later the trust between employees and their superiors.

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There are three main factors influencing organizational trust. The first is individual factor. To be specific, the individual factor includes the characteristics of the subject and the trusted and demographic elements; the second is organizational factor. Rahim believed that organizational climate was the main factor influencing organizational trust, and the more harmonious the atmosphere between employees, the higher the degree of organizational trust. Gillespie and Dietz (2009) considered organizational structure and organizational culture as the main factors influencing organizational trust; and the third is management style. Kouzes believed that strict organizational leadership would endanger organizational trust, and equal and harmonious organizational leadership could enhance communications between employees, thereby improving the organizational trust.

3.8.4 Summary Scholars have explored trust in the fields of psychology, management and organizational behavior. And trust has been divided into direct trust and indirect trust according to the source of trust, which corresponds to Trust Source Theory and Trust Transfer Theory respectively. With the deepening of researches on subjects and the increasingly complex business environment faced by the enterprises, some scholars have explored the classification, influencing factors and economic consequences of organizational trust. Trust is indispensable in human exchange activities, the development and progress of enterprises and the society, and the trust between employees and the organization can create a good corporate culture and atmosphere, and improve the operating efficiency of SOEs; the higher the level of trust at regional level, the lower the degree of information asymmetry between the acquirer (SOE) and the target company (private enterprise) and the lower the transaction costs of the M&As, all of which will have a significant impact on the M&A performance of SOEs. Based on this, the influence paths of trust mechanism on the M&A of SOEs are explored to provide theoretical support for the deepening of mixed-ownership reforms in our country and the improvement of the level of trust within enterprises and different regions.

3.9 Innovation Theory Innovation is the process of changing, updating or creating a new product to obtain higher economic or social benefits. In essence, innovation is the process of materializing innovative thinking and transforming ideals into reality. Schumpeter first studied innovation theoretically and regarded innovation as an economic factor in 1934.

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3.9.1 Schumpeter’s Innovation Theory Schumpeter (1934) regarded innovation as the creation of a new production function by economic entities, and emphasized the key role of production technology and method revolution in economic and social life. He believed that innovation arises from the process of production and operation, that is to say, innovation denotes changes that occur within the enterprise during the production and business operation rather than been imposed from the outside. Schumpeter’s innovation theory is comprised of the following viewpoints: (1) (2)

(3)

(4)

(5)

Innovation can be abrupt and discontinued and it is necessary to study economic development and innovation from a “dynamic” perspective. Innovation also means destruction. In a competitive socio-economic environment, the “new combinations” brought in by innovation also means the destruction of the original production technology or organization. With the expansion of economic scale, innovation is more manifested as self-renewal within the enterprise. Innovation must create values for economic entities. Generally speaking, innovation follows the invention which is the discovery or creation of a new method or tool, and applies the new method or tool discovered or created. The most intuitive manifestation of the application of new methods or tools is the ability to create value for economic entities. Innovation is the essential requirement of economic development. There is a fundamental difference between economic growth and economic development. Innovation can help to achieve cyclical development of the social economy, while economic growth is only possible with factors such as capital or population. Entrepreneurs are the main force of innovation and play an important part in innovation activities. Entrepreneurs are executors of the “new combination” in the course of enterprise innovation. Their core responsibilities, which are an important factor that distinguishes real entrepreneurs from other activists, do not include enterprise operation and management.

3.9.2 Technical Innovation Theory and Institutional Innovation Theory With the continuous deepening and specialization of innovation theory, scholars have gradually built-up innovation theory systems such as technical innovation and institutional innovation based on Schumpeter’s innovation theory. The first is a theoretical system of technical innovation targeted at technical changes and promotion. In 1960, Rostow first came up with the famous “take-off” theory, which held that “technical innovation” would play a decisive position in the innovation of economic

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entities. Enos (1962) believed that technical innovation resulted from the integration of various economic entities such as capital input and plan formulation. Based on the analysis of the production function of neoclassical economics, Solow (1956) believed that the growth of national economy was closely related to the growth rate of capital and technical innovation, and proposed the “two-step” theory of technical innovation. The second is the theoretical system of institutional innovation focuses on institutional innovation and change. Institutional innovation sets to realize stable and sustainable social development and reform by designing a brand-new system. Different from Technical Innovation Theory, the focus of institutional innovation is to achieve reformation of political institutions. Deng Xiaoping considered reform as fundamental changes of the country’s original institutions and regulations, and institutional innovation should be taken as the highest form of reform realization.

3.9.3 Innovation Diffusion Theory With the widespread application and recognition of innovation theory, some scholars have conducted researches on the diffusion of innovation. Rogers (1962) was convinced that the diffusion of innovation was subject to factors such as the inherent attributes of innovation, time elapse and communication channels, and deeply explored the factors forming diffusion networks. Among studies that regard communication as the medium of innovation diffusion, Innovation Diffusion Theory holds that communication is mainly carried out in interpersonal communication and mass communication. Interpersonal communication is bidirectional with feedback, which can exert significant impacts on people’s compulsory views; while mass communication is the quickest and most effective way to make a minority view known and accepted by the majority. In addition, the effect and adoption rate of diffusion of is also affected by the time sequence. The most reasonable sequence of communication is to make the innovative ideas understood by most people through mass communication first, and then gradually shift from the means of masses communication to interpersonal communication. Rogers (1962) insisted that innovation initiates both positive and negative effects and the effects of innovation should be considered in a specific cultural background and social system.

3.9.4 Summary Schumpeter’s innovation theory believes that innovation is the establishment of a brand-new production function by economic entities, which is endogenous and abrupt, and can create new values for economic entities. With the continuous deepening and specialization of innovation theory research, scholars have proposed Technical Innovation Theory and Institutional Innovation Theory based on the differences in the objects of innovation, and made in-depth exploration of the dominant factors in

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innovation. Scholars including Rogers put forward Innovation Diffusion Theory in consideration of the communication effects of innovation, and studied the communication channels, communication effects, and adoption rate of innovation. Innovation is very important for enterprises and can even become the core competitiveness of enterprises. Enterprises can increase their values through the new products and technologies generated by technical or institutional innovation. The report of the 19th National Congress of the Communist Party of China urged SOEs to play a positive rule in technical innovation to enhance their creativity and independent innovation capabilities. Based on this, this article will explore the impact and specific influencing paths of innovation mechanism on M&A of SOEs, and devote attention to the role of SOE managers in innovation.

3.10 Brief Summary of Theoretical Foundations State-owned Sector and Mixed Economy Theory, new Institutional Economics Theory, Strategic M&A Theory, Contract Economics Theory, Information Economics Theory, Informal Institutional Theory, Enterprise Capability Theory, Trust Theory and Innovation Theory together constitute the theoretical foundations of this article. And the framework of the theoretical foundation chapter is indicated in Fig. 3.2. Public sector is the dominant force driving China’s economic development. And by extending to the mixed economy, state-owned sector endows new connotations to the theory of state-owned sector and mixed economy, which has become the guiding philosophy of SOEs reform in our country, and provided clear guidance on the methods and paths of SOEs reform. Relevant researches on mixed ownership have affirmed the important role of mixed ownership in both market economy and enterprise. The market price mechanism and government policy regulation work

Fig. 3.2 Research framework of theoretical basis

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together to maintain stable economic development and solve unemployment problems in social development; the reform of enterprises will boost full integration of advantages of the state-owned and private sector to increase core competitiveness. Therefore, the research on effects of SOEs M&As is inseparable from the guidance of mixed economy theory and related researches on mixed ownership. In essence, the M&A of SOEs belong strategic M&A, which are M&A taken by enterprises to achieve specific development strategies and increase corporate values, and are different from wealth transfer M&A in terms of motivation. The main motivation of strategic M&A is to increase corporate values by expanding the scale of the enterprise, achieving synergy, improving the management skills and competitive advantage of the enterprise. In the three stages of strategic M&A, enterprises are faced with various risks and should pay constant attention to changes in the external environment and the culture of the target company. Acquiring core competitiveness is a main motivation of SOEs’ M&A, and innovation are part of the core capabilities of enterprises. Therefore, this article is inseparable from enterprise capabilities theory. SOEs can obtain the scarce resources and capabilities, management and technical expertise and innovation capabilities of the target party after M&A, however, they also need the “dynamic power” to integrate and reallocate resources to truly realize value creation. New institutional economics is an economics study that focuses on the study of transaction costs and the institutional structure and arrangement. According to Property Rights Theory, enterprises can be divided into SOEs and private enterprises, and private enterprises are more profit-seeking in nature. This article will focus on the study of M&A of SOEs. There are many stakeholders in the M&A process (such as the parties to the M&As, suppliers, and employees). The M&A transactions between enterprises will inevitably involve transaction costs, and will be affected by the cultural and other informal institutions within both parties. M&A have changed the scale and boundaries of SOEs, but also incur conflicts between both parties in terms of corporate culture and core concepts; and SOEs will choose appropriate organizational form according to the cost after the merger and acquisition. Therefore, whether from the integration of corporate culture or the choice of organizational form, or the creation of corporate values, the strategic M&A of SOEs cannot do without the guidance of new institutional economics. Stakeholders will encounter information asymmetry in the three phases of strategic M&A of SOEs, and will make decisions with bounded rationality based on changes in the external environment, therefore their decisions may not necessarily achieve Pareto Optimality concerning the economic consequences. However, through information disclosure, reputation mechanisms, and corporate value sharing mechanisms, information asymmetry in M&A can be moderated to strengthen the trust relationship between SOEs and the target company and facilitate the smooth conclusion of M&A with appropriate considerations. The design and research of trust and innovation mechanism for strategic M&A of SOEs cannot do without the guidance of information economics. The M&A transaction is an act of the enterprise, and requires a series of contracts to be signed between enterprises to clarify the rights and obligations and achieve the

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purpose of the transaction. From the formation of M&A motivations to the completion of M&A transactions, various contracts will be signed by enterprises. In addition to the rights stipulated in incomplete contracts, stakeholders will also look to the power (such as factors affecting the returns of investors) in the execution of the contracts, and obtain more benefits using such power in the game. Designing trust and innovation mechanism under Incomplete Contract Theory can explore the ways and paths of interaction between trust mechanism and innovation capabilities, as well as the economic consequences, and deepen the understanding of motivations and effects of M&A. The research scope of informal institutional theory is very extensive and involves many schools of thought such as classical economics and institutional economics. Since the operation and management of enterprises is carried out in a specific institutional environment, the institutional environment will have an important impact on the operation and management of the enterprises. Organizational Capital based on Corporate Culture can promote the free flow of man-related production factors, help organizations to create a good environment, and improve the efficiency of the organization, thus playing an important part in every facet of enterprise production and management. M&A help enterprises to grow rapidly through extended development, however, the synergy benefits of M&A cannot be achieved overnight since it must be connected with post merger integration. All of these, as intermediate links connecting corporate organizational capital and the new organizational environment, determine whether the merger and acquisition can create values for the enterprise. The informal institutional environment of the acquirer and integrity in corporate values and behavioral patterns of the organization with organization capital based on corporate culture will mitigate information asymmetry caused by trust problems between the acquirer and the target company, and promote the integration of enterprise resources to create value for M&A enterprises. Therefore, in the analysis of strategic M&A of SOEs based on organizational capital theory, the important role of the institutional environment and corporate culture cannot be ignored. Human exchange activities, the development and progress of enterprises and the society are inseparable from trust. The increase of trust between employees and business organizations helps to create a good corporate culture and atmosphere and improve the operational efficiency of SOEs; the degree of trust at regional level helps to reduce information asymmetry between the acquirer (SOE) and the target company (private enterprise), and reduce the transaction costs of M&A. As a result, Trust Theory is required in the analysis of the impacts and the specific influencing paths of trust mechanism on strategic M&A of SOEs. Innovation is the process of changing, renewing or creating a new product to obtain higher economic or social benefits. In essence, innovation is the process of materializing innovative thinking. Innovation is of key importance to enterprises, and can even become the core competitiveness of enterprises. Enterprises can introduce new products and technologies through technical or institutional innovation, and improve the operational efficiency and corporate values. Therefore, the guiding role of innovation theory cannot be overlooked in the exploration of the integration effects and specific influencing paths of innovation mechanism on strategic M&A of SOEs.

Chapter 4

The Theoretical Framework of Trust and Innovation Mechanism in M&A of China’ SOEs

The Communiqué adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China in November 2013 clearly pointed out the necessity to “vigorously develop a mixed economy”. In September 2015, the “Opinions of the State Council on Developing the Mixed Ownership Economy in SOEs” emphasized “the deepening of mixed-ownership reform of SOEs”, In November 2017, the 19th National Congress of the Communist Party of China required “further reform of SOEs and development of mixed-ownership economic entities”. In October 2019, the Fourth Plenary Session of the 19th Communist Party of China Central Committee once again highlighted the requirement of “developing a mixed economy and making it stronger and better”. And during the Third Session of the 13th National People’s Congress of the People’s Republic of China in May 2020, it is emphasized in the government work report again about “accelerating the development of a mixed economy”. Undoubtedly, in the new era, especially under the impact of the coronavirus epidemic, the state-owned sector and the private sector must integrate and develop together. In other words, the mixed-ownership reform of SOEs can mitigate the inherent shortcomings in the development of state-owned or private enterprises, and strengthen the vitality of enterprises and the competitiveness of state-owed sector through institutional reforms. M&A and reorganizations are important means to enhance the vitality of SOEs, and the positive role of M&A must be put into full play in the reform of SOEs to adapt to the new situation. This Chapter first reviewed the history of mixed-ownership reform of SOEs; then summarized the problems in M&A of SOEs, and finally analyzed the macro institution of M&A of SOEs, the meso mechanism of industry development and the micro mechanism of enterprise development from the perspective of “innovation-mixed ownership M&A-trust”.

© Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_4

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4.1 Review of Mixed-Ownership Reform of China’s SOE 4.1.1 Review of the Development of China’s State-Owned Sector From the founding of the People’s Republic of China in 1949–2018, per-capita national income has increased from CNY66.1 to CNY64520, and GDP rose from one-twentieth of the world’s total to one-sixth of the world’s total, which remarks an earth-shaking change. Over the past 70 years, the state-owned sector, the “pillar” of China’s socialist economy, has undergone a series of reforms. Looking back the past and summarizing the previous experiences are meant to build a more prospective future, therefore a summary is made in this research to understand the development stage and history of the state-owned sector, identify the critical points of reform of the state-owned sector, and plan for the future of the state-owned sector. The most important and fundamental aspect of economic system reform is to clarify the ownership of the means of production, only in this way can the vitality of production factors under various property rights be stimulated and the productivity of all factors be improved (Ge and Yin 2019). The entire economic system has gone through tremendous changes along with the ownership structure reform in the history of China’s state-owned sector. Taking the reform and opening up as the baseline, China’s state-owned sector has generally experienced a period of planned economy with only public ownership and market economy with the coexistence of different economic sectors (Liu 2019). And the state-owned sector has gradually elevate from the “top pillar” to the “backbone” of China’s economic development after going through the economic recovery in the early days of the founding of People’s Republic of China, the transformation of private enterprises and the establishment of planned economy, the Great Leap Forward, the “Cultural Revolution”, the market economy based on central planning, the socialist market economy system, and the improvement of state-owned asset supervision system and the arduous exploration of new economic system (Li and Sun 2019). In first three decades of the reform and opening up, the public sector has played a positive role in the rapid recovery of China’s economy. State-owned capital is the most important internal capital driving the country’s industrial development as well as the most important guarantee for people’s livelihood and social stability. But at that time, the public sector was mistaken as planned economy, which restrained SOEs, the micro-cosmic body of the state-owned sector, in moving further towards the essence of “enterprise”. For example, SOEs weakened the production efficiency and economic performance evaluation, and over-emphasized the fairness of distribution, which resulted in unreasonable and uneconomic allocation of factors, weakened the vitality of economic development and jeopardized the superiority of socialism (Ge and Yin 2019). The private sector has grown rapidly after the reform and opening up. Meanwhile, the state-owned sector has been divided into public service, first-class commerce and second-class commerce in nature, and the co-development of the state-owned sector and the private sector has been promoted through state policies.

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Different economic sectors are planned and continuously adjusted to improve the national economy while maintaining the dominant role of public ownership. Worldrenowned achievements have been made in the socialist market economy system (Li and Sun 2019). Over the last seventy years, the state-owned sector has achieved remarkable results in many aspects. However, we must clearly realize that the problems hindering the integration of stated-owned sector, the representation of public ownership, with the market economic system remain unsettled, which is fundamental to the reform of the state-owned sector after the reform targets of socialist market economy system is defined. Enterprises are the micro-scopic bodies of economic development, therefore, we need to start with the reform of SOEs to facilitate the integration of the state-owned sector with the market economy system. Seen from the development process of the state-owned sector around the world, the state-owned sector does exist in each country although the ownership foundation, economic structure and economic development mode of each country are different, so do the national culture, people’s ideology and customs. Of course, the stateowned sector varies greatly in terms of size, mechanism and development strategy. The state-owned sector in developed countries is represented by the United States and the United Kingdom with “private” sector as the mainstream. The United States pursues a market economy with “big market and small government” and keeps the scale of the state-owned sector as small as possible. The key to the success of stateowned sector reform in Britain is the creation of a competition mechanism for the survival of the fittest and the crack-down on the monopoly of state-owned sector. The state-owned sector in the United States and the United Kingdom are obviously characterized by categorized management. India and Argentina are taken as examples to illustrate the development of state-owned sector in developing countries. India has carried out nationalization reform mainly through market-oriented reform of SOEs, which allows private shares into SOEs, expands the autonomy in business operation, and associate’s business performance with employees’ interests. Argentina, like the United States, maintains the smallest size of state-owned sector, with the state controlling only a few companies vital to the national economy and people’s livelihood and the private sector holding most public facilities and enterprises. Generally speaking, whether for a developed or a developing country, the stateowned sector is an economic form that combines government-owned assets and shares in the form of enterprises that represent the interests of the people, and the privatization in state-owned sector reform is related to the establishment of a sound market economy system. Seen from the level of economic development, there are certain differences in the proportion of state-owned sector (Liao and Zhao 2014), but it is undeniable that the implementation of mixed-ownership in the market economy system is an important measure taken by all countries in their state-owned sector reform. As a result, the state retains only a few enterprises for public services and privatizes a large number of state-owned commercial enterprises. Whether it is the ownership structure reform or the economic system transformation of China’s state-owned sector, or the privatization reform of SOEs in various

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countries in the world, it has revealed a core message that the reform of the stateowned sector is to achieve economic benefits through improved resource allocation efficiency, especially in commercial SOEs. The state controls only a few enterprises that are concern with national security and social stability, which are the public service enterprises referred to in this study, and allows and vigorously encourages private capital to enter commercial SOEs. Zhang and Yu (2019) expounded on the development direction of SOEs from the perspective of resource allocation, since enterprises under the resource allocation concept is consistent with those under the Western economic growth theory regardless of the nature of property rights of the enterprises. SOEs should promote the economic growth by increasing the productivity of all factors and optimizing the allocation of factors and resources. Undoubtedly, the integration of SOEs and private enterprises has broken the glass doors and spring doors in corporate competition and stimulated potential economic growth through the market-oriented allocation of factors to finally achieve better Pareto efficiency (Pei and Xu 2019). The Third Session of the 13th National People’s Congress of the People’s Republic of China held on May 22, 2020 proposed that state capital and SOEs reform contains the implementation of the three-year action plan for SOE reform, the improvement of the performance of state capital and SOE reform and the elevation of core competitiveness, and sets to improve the system of state capital regulation, intensify mixed ownership reform, relieve SOEs of the obligations to operate social programs, get SOEs to focus on their main responsibilities and businesses, and establish sound market-oriented operating mechanisms. Of course, the core objective is to energize the market entities. The reform of state-owned assets and SOEs went from “promote” in the government work report in 2018 to the “accelerate” in the government work report in 2019, and then to “improve the performance” in the government work report in 2020, indicating that the reform of state-owned assets and SOEs is result-oriented. With the launch of the “Three-year Action Plan for SOE Reform”, the reform actions of state-owned assets and SOEs will be clearer.

4.1.2 Review of the Development of China’s Mixed Economy The mixed economy emerges along with the development of the state-owned sector, and the process can be summarized in five stages. The first stage (1949–1978) is the incubation stage of mixed economy. The socialist construction in this period emphasized the development of public ownership and planned economy. The confiscated bureaucratic capital was merged into the public sector as state capital to develop a mixed economy. However, the state capitalist economy no longer existed with the completion of Three Great Remould. The second stage (1978–1992) is the budding stage of mixed economy. At this stage, the macroeconomic policy no longer emphasized overall planned economy, and developed a commodity economy under the framework of planned economy. As a whole, the coexistence of different ownership was formed, and the development of non-public sector gradually got on track.

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The third stage (1993–2002) is the exploration stage of mixed economy. With the deepening of reform and the clarification of market-oriented development goals, the state-owned sector and non-public sector such as the private sector had shown a continuous trend of integration, and shareholding system reforms began to be implemented in SOEs, which increased the vitality of SOEs and the state-owned sector since private capital were brought. The fourth stage (2003–2013) is the development stage of mixed economy. The private sector was developing rapidly and the mixed ownership reform was no longer limited to simple capital mixture, but also the integration of business management and production factors. However, the willingness of the non-public sector to integrate into the public sector was generally not strong, and the room for mixed ownership reform was huge. The fifth stage (2013 til present) has witnessed the rise of mixed economy. The Third Plenary Session of the 18th Central Committee of the Communist Party of China defined the boundaries of mixed-ownership, pointed out directions for various enterprises and relieved the constraints of inertial thinking by including more state-owned and other forms of ownership in the reform framework. On December 7, 2019, China State-owned Sector Research Center officially released Report on the Development of China’s State-owned Sector (2019). The report, which commences from the 18th National Congress of the Communist Party of China and ends in 2019, indicates that the proportion of mixed ownership reform of key SOEs has reached 70%, representing a 20% increase compared with that before the 18th National Congress of the Communist Party of China in 2012. And 70% of the enterprises in mixed-ownership reform have seen quick profits growth. The mixed economy is characterized by an increase in the mixture of the state-owned and private-owned sector, and a strong demand for mixed ownership reform in the fields with fierce competition, and rapid growth in profits of enterprises with mixed-ownership (Fig. 4.1). Great strides have been made in mixed economy in various aspects after seventy years of development (Wu 2017), while there are still many problems both internally and externally in the development of mixed economy. Internally, there are many hidden obstacles for private enterprises to truly participate in mixed-ownership reform. Although mixed economy has been implemented for many years, the proportion of enterprises that have truly achieved mechanism integration is still very small since the connotation and function of mixed-ownership reform are not well understood. On the whole, the current reform mainly solves the contradiction in the system and mechanism, instead of issues such independent innovation including technical innovation and international market development through mixed ownership reform, let alone the promotion of China’s economy to the high-value link in the global industrial chain. Enterprises that have completed mixed-ownership reform quickly encounter “policy changes”, that is, private capital is faced with the serious problem of insufficient property rights protection and relatively less policy support, making it difficult to achieve in-depth integration of state-owned capital and private capital. Externally, Western countries do not recognize SOEs that have implemented shareholding reforms as market players. The mixed ownership reform is driven by capital, but is not limited to the mixture of capital. The simple mixture of capital cannot enforce the reforms of shareholders’

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Fig. 4.1 The evolution of mixed economy

meeting, board of directors and managers which involve new incentive and constraint mechanisms since those are systematic programs that require constant revision and improvement (Zhao 2015). Mixed ownership reform encounters many obstacles, on the one hand, the loss of state-owned assets and the withdrawal of private entrepreneurs incur the resistance of both the state-owned and private enterprises; on the other hand, the unsustainable policy caused by the unclear positioning of reform also hinders both state-owned and private enterprises in carrying out reform (Wang 2019). Seen from the internal environment of the development of mixed ownership, the difficulties are mainly manifested in the following four aspects: 1.

2.

There are many hidden obstacles for private enterprises to truly participate in mixed ownership reform. Although mixed ownership reform has been implemented for many years, the proportion of enterprises that truly implement mixedownership at the shareholders’ meeting, board of directors and management level is not high. Compared with private enterprises, managers of SOEs are more likely to identify with other SOEs, and resist the participation of private enterprises in their operation and management. The threshold for mix ownership reform seems low and is actually high for private enterprises. And some local governments dare not take the risks of mix ownership reform because they are afraid of being held accountable. The connotation and role of mixed ownership reform are not well understood. First of all, the reform is a systematic project that requires the establishment of institutional mechanisms and long-term implementation rather than simple capital mixture. Constant revision and exploration are required to solve the technical problems of the reform and elevate the value creation standing of China’s

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4.

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economy in the global industrial chain. It is obviously wrong to think that enterprises can break through all the bottlenecks and achieve economic benefits through the reform. Second, the focus of the reform, which should “reform” rather than “mixture”, has not been clearly outlined. Capital mixture and change of monopoly are only the basis of mixed ownership reform, whereas the realization of marketized enterprises operation through the improved decision-making mechanisms based on the goals of modern enterprise system, optimized corporate governance quality under the background of the modernized state governance and enhanced resource allocation efficiency built upon innovation is the goal. Quick “policy change” after the reform. The entry of private capital into SOEs not only mixes tangible capital, but also enables the sharing of knowledge, innovation and intellectual capital. However, implicit capital such as intellectual property rights is not well protected, and the support from the industry and financial institutions are insufficient. It is difficult to achieve deep integration of state-owned capital and private capital following the reform. Private enterprises are not entitled the right to speak in the board of directors and after the reform, as well as the power in the board directors and decision-making process. The regulatory model of enterprises after the reform is not adjusted according to the changes in the shares of market entities, making it impossible to achieve “equal shares, equal rights” an fair distribution between private capital and state-owned capital. At the same time, there is no sound incentive mechanism in the enterprise to truly activate the enthusiasm and creativity of employees. In addition, the cultural differences and inconsistent goals between private capital and state-owned capital also prevent the two from quick integration.

The biggest challenge of mixed ownership comes from the unrecognition of external economic entities. China joined the WTO in 2001 and formally announced in 2011 that all its WTO commitments have been fulfilled. However, Western countries led by the United States always have a deep-rooted prejudice against China’s state-owned sector. Those countries severely criticize that China grants large-amount and wide-range subsidies to export enterprises, and claim that China has violated the principles of transparency and fair competition in its WTO commitments. Although China has achieved good results in the pursuit of market-oriented reforms and mechanisms, the market-oriented economy in this study has not been recognized by other countries and SOEs in this study has been viewed with “colored glasses”. On March 9, 2018, the signing of the Tariff Agreement officially started the Sino-US trade war. Later on December 13, 2019, China and the United States announced that a consensus on the first phase of the economic and trade agreement had been reached, which temporarily eased the Sino-US trade friction. The Sino-US trade war is a longterm and serious issue, and the fundamental way out lies in reform. As far as the reform of the state-owned sector is concerned, it is necessary to vigorously promote the development of mixed economy, be open to both internal and external parties, establish a fair and transparent market environment, implement competition neutral

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mechanisms and eliminate ownership discrimination. And M&A are undoubtedly important approaches to mixed ownership reform of SOEs.

4.1.3 A Review of the Mixed Ownership Reform of China’s SOEs The state-owned sector is the lifeblood and leading player of China’s national economy, and has made significant contributions to our social stability and economic construction since the reform and opening up. However, SOEs also have many shortcomings in years of development, which is why the reform of SOEs has been ongoing. The rapid development of SOEs has brought about continuous growth of the national economy for a long period of time after the reform and opening up, which is related to a series of reform measures adopted by SOEs to improve the efficiency of internal incentives in the 1980s, such as the secondary distribution of profits to employees, the performance-based remuneration and bonus system, and employees’ rights of enterprise management, so that all members from executives to ordinary workers can enjoy the benefits of reform. The incentive effects of reform are quite obvious. After entering the twenty-first century, China has experienced a new norm with slackened economic growth, and SOEs have faced practical problems such as overcapacity, inefficient resource allocation and insufficient competitiveness caused by over-diversified development goals, which has drawn high attention of the party and the State leaders who has emphasized repeatedly on the development of “mixed economy” by stating that mixed ownership reform is the marketization of factors rather than a simple mixture of capital, and the release of the power of mixed ownership system in stock economy and incremental economy. However, it has been elaborated during the Fourth Plenary Session of the 19th Central Committee of the Communist Party of China that the progress of in-depth mixed ownership reform is still slow. The author believes that enterprises reorganization through merger and acquisition, a system that integrates capital, factors management and culture, should be taken as a key measure to avoid simple capital mixture. With the expansion of enterprise boundaries, the fundamental issue of joint development of both state-owned and private enterprises within the group must be resolved, including better allocation of existing resources, better flow of factors within the enterprise, the interconnection between internal and external factors through market mechanisms, and the maximization of the returns on capital through intensified production and operation. And this process is not only the optimization of production, but also an embodiment of continuous adjustment, upgrading and optimization of corporate governance and decision-making mechanisms. The Third Plenary Session of the 18th Central Committee of the Communist Party of China held in 2013 made it clear that enterprises with mixed ownership must be vigorously advocated in micro-scopic practice, but the pilot reform was actually

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launched in October 2016. Up to now, of the pilot reform of four batches of companies have been launched, and certain results have been achieved with full coverage of reforms in seven key areas.1 However, the depth and breadth of the reform are not desirable as the objectives and orientations of market-oriented operation are not clear enough. The objectives of reform are to improve the vitality and competitiveness of SOE, but only simple capital mixture has been achieved in some SOEs any consideration of the underlying mechanisms. Clear objectives of reform of should be set to make the plan more scientific, and achieve more effective results based on the mixture of capital. The enterprise may not be suitable for reform if it only uses equity financing to reduce the debt ratio. For example, the industry of the company is not suitable for reform or the business scope and economic resources are overly dependent on major shareholders, etc., then good results would be difficult to achieve in the reform. SOEs have focused on areas related to national security and the lifeline of the national economy and are under soft capital constraints. Unlike private enterprises, SOEs assume more social functions in addition to economic benefits creation, therefore the interests of shareholders may not be effectively protected. SOEs should focus more on their main business, and reduce the proportion of policy tasks, or dismantle the policy tasks and operate towards the market-oriented business objectives, and attach great importance to capital efficiency and investment effects under hard capital constraints to effectively protect the interests of shareholders through the reform. Due to the impact of COVID-19 epidemic and the global economic downturn, the economy situation is not optimistic, therefore two most important economic components of our country must develop together and move forward together. Under such circumstances, the mixed ownership reform cannot be delayed. M&A are effective ways for the reform of SOEs. SOEs often carry out mergers and acquisition to obtain special assets, especially intangible assets of private enterprises, gain competitive advantages, conduct capital management, realize corporate value addition, fulfil the evaluation of state-owned assets management departments and seek synergy, etc. The ultimate goal of reform is to achieve development, while capital mixture and reform measure are only the form and the means. In the reform of SOEs through M&A, state-owned capital and private capital should be aggregated to realize the rational flow and redistribution of various elements, and achieve the benefits of market-oriented elements. SOEs should be allowed to withdraw from competitive fields in an orderly manner and participate in basic industries and key areas, so that private enterprises can enter competitive areas with high industry barriers. Enterprises after the reform will not only give full rein to both the advantages of SOEs and private enterprises, but also form new advantages by combining the advantages of both so that the state-owned and private capital will development steadier with better quality under the impact of global economic downturn. In spite of the significance of M&A, it is undeniable that there are so many problems in the current M&A practice in our country. In the following sections, the problems in the M&A of SOEs will be analyzed in details. 1

Seven important fields include electric power, oil, natural gas, railway, civil aviation, telecommunication and military industry.

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4.2 Research on Problems in the M&A of China’s SOEs M&A are designed for the reform of SOEs and the energization of SOEs’ vitality. SOEs not only enhance their own competitive strength, but also adapt to marketoriented competition and gain greater vitality through the M&A with private enterprises. Certain achievements have been made in supporting the reform of SOEs through M&A, whereas, the reform is still in the exploratory period with immature and imperfect mechanisms. And there are still many problems in the actual process of M&A in spite of the advantages, which incurs great risks and challenges for SOEs in the M&A process and seriously hinders the development of SOEs and the effectiveness of the reform. This article analyzes the existing problems in M&A of SOEs in the pre-merger, interim and post-merger stage, and proposes a three-dimensional mechanism of “innovation-mixed ownership merger-trust” to resolve these problems.

4.2.1 Analysis of Pre-merger Problems of China’s SOEs 4.2.1.1

Blind Decision-Making Resulted from Agency

Principal-agent problem is very common in SOEs due to our special property rights system. The investor is the state government, and the managers are directly appointed by the government or hired from the market, therefore the interests of shareholders and managers are inconsistent. Some SOE managers seek for M&A out of their own interests or the quick completion the requirements of state policies, which are not completely voluntary behaviors under market mechanism. Whether the target enterprises can meet the requirements of the strategic development of SOEs are not fully considered when selecting the target enterprises for M&A. M&A activities are carried out in a hurry without a comprehensive and detailed investigation of the target enterprises’ operation and financial status. The M&A parties lack communication and are not fully aware of the potential risks of the M&A. M&A transactions under such circumstances are usually blind and risky. In addition, some SOE managers are likely to seek M&A purely to fulfill the assessment of the superior departments or cover up the problems in their management when encountering difficulties in business operations. They hope that the SOEs can achieve value appreciation through M&A to complete the assessment objectives and get the rewards. As a result, most M&A SOE end in failure despite the obvious effects in a short-term because the impacts of M&A are not thoroughly considered.

4.2.1.2

The Loss of State-Owned Assets Due to M&A Valuation

Transaction pricing is one of the core issues of corporate M&A. Reasonable M&A pricing stems from comprehensive investigations and objective evaluations based on

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asset appraisal reports and financial audit reports which are important evidences for the determination of M&A value. SOEs are likely to lose the state-owned assets in case of overpriced M&A transaction if they fail to make a reasonable estimation and evaluation of the value of the target company before the M&A. And the fairness of M&A transactions is worth considering due to the information asymmetry between the M&A parties, and the less developed property rights transaction market in our country. At present, there is a lack of standards for the asset appraisal industry in relevant laws and regulations. SOEs may suffer deviations in the appraisal results and fall into financial risks after M&A events if the private enterprises with poor operating conditions are not evaluated by professional institutions due to insufficient criteria for asset evaluation in current laws and regulations. To make the situation worse, some SOEs managers may collude with the target companies to raise the transaction price of the M&A to get the price difference and encroach state-owned assets by exploiting legal and policy loopholes for their own benefits; while, some private enterprises may take measures such as friction of assets to increase their value out of the profit-seeking nature, which leads to inaccurate and high valuations of those private enterprises, and results in the loss of state-owned assets in the M&A of SOEs.

4.2.1.3

Weak Willingness to Implement Reforms in Key Areas

Under our special economic system, SOEs are generally considered as enterprises that boast inherent advantages in property rights and resources. SOEs often occupy absolute market share in certain key industries or fields, while private enterprises are latecomers which are naturally profit-seeking with little advantages in property rights and resources. In fact, it is extremely difficult for private enterprises to enter key industries or fields dominated by SOEs. Since the substantial lunch of pilot reform by the central government in October 2016, four batches of pilot enterprises have been included in the list of mixed ownership reform up till now, and certain results have been achieved in seventh important areas. However, the overall progress is relatively slow and only a small number of SOEs have successfully completed the reform through M&A. The reform through M&A means that monopoly areas with high industry barriers shall be open to private enterprises and the benefits will be shared with private enterprises. Actually some government authorities are unwilling to let private enterprises share monopoly rents for free, and only open low-profit areas with low industry barriers to private enterprises to be in line with the requirements of state policies. Under such circumstances, M&A are not efficient and are difficult to achieve the expected results.

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4.2.2 Analysis of Problems in M&A of China’s SOEs 4.2.2.1

Analysis of Information Asymmetry Caused by the Concealing of Private Enterprises in M&A

Information asymmetry between the acquirer and the target company is one of the major obstacles that hinder the value creation of M&A for the enterprise, especially when the target company tries to conceal the true information, which is likely to cause failure of the M&A. And the risks of information asymmetry mainly include on-balance sheet risks and off-balance sheet risks. On the one hand, SOE fails to conduct in-depth investigation of the various situations of the private enterprise which is likely to whitewash the financial statements to protect its own interests prior to the M&As. In fact, the distorted financial data of the target company cannot truly and fairly reflect its operation and financial situation, and intensifies the risk of M&A. On the other hand, SOE may suffer many adverse effects and risks such as increased debt burden, disputes over obligations and loss of business opportunities after the M&As because private enterprises usually conceal its contingent debts, implicit guarantees and joint litigation, and other important information, as well as some undisclosed potential debts which are difficult to investigate and verify, including external guarantees intentionally concealed by the company and liabilities of default already occurred.

4.2.2.2

Over-Financing Caused by the Lack of Effective Financing Methods and Channels

The different M&A methods selected by the acquirer (SOEs) will lead to differences in the payment methods and the amount of M&A consideration, which in turn results in payment and financing risks for SOEs in the M&A process, for example, in cash payment M&A, the acquirer needs to raise a large amount of funds in the short term, and may face a shortage of funds and a high tax burden in the later stage of post merger integration and subsequent operations; in debt-borne M&A, the acquirer does not need to pay a large amount of cash directly, but have to repay more debts in the later stage of post merger integration and subsequent operations which results in greater capital pressure; while in share-based M&A, the introduction of strategic investors can generate tax incentives which are conducive to the future development of the enterprise, and retained cash for subsequent M&A to reduce the financial pressure of the enterprises. Unfortunately, there are strict restrictions on share-based M&A imposed by the Securities Law. SOEs can easily obtain loan support from banks due to their background, and they have certain advantages in raising funds for M&A, which makes SOEs rely too much on cash payment M&A and ignore other payment methods, and results in high leverage and high debt and great pressure in cash for the subsequent operation. In addition, our capital market and financial intermediaries

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start relatively late and are unable to fully meet the financing demands of SOEs in M&A, making it difficult to improve the performance after M&A.

4.2.2.3

Legal Application Issues Caused by Incomplete Laws and Regulations on M&A Reorganization

As formal institutions, laws and regulations will inevitably have a positive impact on the M&A of SOEs. However, there is little legislation designed for M&A in our current legal system. Although a number of rules and regulations on M&A2 have been promulgated, the regulations on M&A between economic components of different ownership are still insufficient. In addition, the government pays more attention to the interests of SOEs and ignores the interests of private enterprises in the state-owned assets and SOEs reform, which also dispels the enthusiasm of private enterprises in participating in the mixed ownership reform through M&A. At present, the incomplete legal system for reorganization through M&A makes it difficult to meet the needs of SOEs, results in considerable risks in applications of law in applications and approval and transaction pricing, and increases the costs of statedowned enterprise in the M&A. In addition, the incomplete laws and regulations also brought many other risks prior to the M&A, such as risks of tax violation and bona fide performance. As far as the risk of tax violations is concerned, private enterprises may have tax evasion in their extensive growth out of profit-seeking nature due to the week awareness of compliance, and honest operation and tax payment in accordance with the law. SOEs will easily fall into the risk of tax violations after the M&As if they fail to conduct a detailed investigation of the true situation of the target company (private enterprise). As far as the risk of bona fide performance is concerned, private enterprises with small scale and limited performance capability may breach the contract due to the week awareness of compliance and integrity under the incomplete credit system at this stage. SOEs shall avoid the risks after M&A through detailed investigations of the true situation of the target company.

4.2.3 Analysis of Post-merger Problems of China’s SOEs The problems after the M&A of SOEs are mainly reflected in the risks of post merger integration. The operation and management of SOEs are based on government instructions, and the M&A of SOE are also carried out under government guidance although the institutional reform that separates the corporate ownership and management power has been implemented. Passive M&A are not rare in SOE M&A. The government may intervene in the M&A of SOEs out of risk appetite or support 2

For instance, the Company Law, Securities Law, Interim Measures for the Administration of the Transfer of State-owned Property Rights in Enterprises and Interim Measures on Acts of Enterprise Mergers amended in the recent years.

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for enterprises. The passive M&A have brought about many adverse effects such as increased economic losses and difficulties in mergers and acquisition, resulting in low degree of integration and failure of M&A synergy. The low degree of integration after M&A is caused by neglect of resource integration of both parties after the M&A since more attention has been paid to the pre-merger negotiations and specific transaction. Waste of resources or unreasonable resource allocation arise from the process of post merger integration since both parties fail to adapt to and integrate in the management and operation according to the detailed work plans formulated for the post-merger enterprises. On the other hand, the returns on assets are influenced due to improper allocation of assets and increased financial leverage coefficient which are not resolved through complete internal asset management plans by the post-merger enterprises with larger asset-liability ratio. In addition, some SOEs pay more attention to the integration of stock assets after the M&A, and ignore the flow of internal capital and the integration of personnel which can easily lead to operational risks. Specifically, problems that easily occur in the post-merger stage often includes risks in management integration, operation adjustment and cultural conflict.

4.2.3.1

Risks in Management Integration

The management integration of after the M&A mainly involve management model, organizational structures and personnel, etc., which are the sources of risks in management integration. Due to the long-term differences in business philosophy and corporate development goals between state-owned and private enterprises, the operation and management and management concepts also differ. If the differences are not effectively resolved after the M&A, SOEs may fall into management integration risks due to imperfect management mechanisms and unsuitable management systems. Therefore, SOEs should fully integrate the excellent management systems of both parties, and effectively integrate management models, organizational structures and personnel. For example, due to business adjustments and other factors after the M&A, SOEs may face the problem of executives adjustment and talents retention, and should take effective measures to resolve such key problems.

4.2.3.2

Risks in Business Adjustment

Operational risks after the M&A include internal operational risks, external market risks and policy adjustment risks. On the one hand, the scale and scope of main business of SOEs will expand accordingly after the M&A. However, SOEs should focus on the main business and adjust the business strategies and industrial structure to grab more market shares based on the actual development of the companies and changes in the external market environment and avoid operational and market risks after the M&As due to the different business strategies of the previous companies. On the other hand, the government policy support for enterprises is in constant adjustment, which determines that the SOEs must pay close attention to the policy adjustments

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in the post-merger operation and follow the direction of state policy to convert the policy dividends into economic benefits. It is crucial that SOEs achieve synergies in business operations after the M&A and fully utilize the superior resources of both parties to acquire strategic development opportunities, stimulate the vitality of the enterprises, and improve the efficiency of business operations for the subsequent development, otherwise the enterprises may fall into operation difficulties after the M&A.

4.2.3.3

Risks in Cultural Conflicts

SOEs and private enterprises are developed under completely different background and management philosophies due to China’s special economy system, which are mainly reflected in the following four aspects. Firstly, in terms of business philosophy, SOEs have certain administrative characteristics and assume social responsibility and other functions. SOE emphasizes legal compliance and honest operation, while private enterprises are naturally profit-seeking and put more emphasis on efficiency. Secondly, in terms of operation and management, SOEs pay more attention to the long-term sustainable development of enterprises, while private enterprises are more concerned with economic benefits in the short term due to their profitseeking nature. Thirdly, SOEs must comprehensively consider the opinions of executives and multiple stakeholders such as the government in decision-making and take collective responsibility and decentralized authority, while most private enterprises make decisions by the managers alone; fourth, in terms of employee selection and management, SOEs have implemented a market-based selection system and mainly promote the employees according to the status and interpersonal relationships, while private enterprises take more consideration of employees’ contributions and innovation capabilities. Due to the long-term cultural differences, cultural conflicts between SOEs and private enterprises are inevitable in the subsequent post merger integration and operations, and inappropriate settlement of cultural conflicts will bring adverse effects and even lead to failure of M&A. The daily operation mechanism of the post-merger enterprises awaits discussion in a comprehensive way to maintain the mobility, flexibility, efficiency and creativity of indigenous private enterprises under the premise of legal compliance (Fig. 4.2).

4.2.4 Resolve Problems in China’s SOE Reform Through the “Innovation-Mergers and Acqusitions- Trust” Mechanism M&A are important ways of existing resources relocation. Enterprise M&A (M&As) usually aim at the improvement of resource allocation efficiency and then the increase of enterprise values. It is not hard to conclude from the aforementioned analysis that

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Fig. 4.2 Problems in M&A of SOEs

the lack of trust and innovation mechanisms constitutes a major source of problems in the M&A of SOEs. Therefore, this article needs to take innovation as the driving force, M&A as the focus, and trust mechanism as the guarantee and design a “innovation-M&A-trust” mechanism to build stronger and bigger enterprises through M&A with the goal of improved capital allocation efficiency. Effectively and rationally flow of traditional elements, knowledge and human capital in commercial SOEs can effectively increase the rate of capital return, enhance the vitality of SOEs and improve the core competitiveness of the state-owned sector. The Fourth Plenary Session of the 19th Central Committee of the Communist Party of China will expand the basic socialist economy system from a single system to a three-dimensional basic economic system, which has provided an institutional foundation for the M&A of SOEs, and also ushered in a new era of M&A of SOEs. The three-dimensional basic economic system sends a signal that the allocation system and market mechanism must be taken into account while using mixed economy as the basic form to solve outstanding problems in the development of the stateowned sector. Through the mixed economy, resource elements are used in an equal manner in accordance with the law by various economic entities and resources are allocated in a rational and effective way, the base of initial distribution is expanded, benefits are distributed by virtue of the ownership of production factors, and the initial distribution of national income is made according to the market mechanism. In this way, the state-owned sector’s advantages of “concentrating power on great work” can be fully exploited to realize the redistribution of state-owned income to public goods, health and education and innovation under the principle of fairness and efficiency. Finally, the third distribution of national income is completed following the principle of voluntariness. And this entire income distribution process is completed in the principle of optimal resource allocation efficiency and establishment of a flexible

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and efficient market mechanism, thus giving full play to the decisive role of market in resources allocation and giving better play to the role of the government. Mixed economy is developed to improve the efficiency of resource allocation in the entire economic system. The implementation of a high-quality income distribution system is built upon the reasonable allocation of resources. Therefore, the huge advantages of the market economy system must be put into fully play to let the market decisively resources allocation, and give better play to the role of the government whether in the ownership system or distribution system. The reform of SOE, that is, the ultimate task of SOE M&A, sets to promote the formation of a flexible and efficient market mechanism and promote the efficiency of resource allocation in market economy, so that SOEs can be self-disciplined economic entities that are independent in management, responsible for their profits and losses, accumulation and development, thus forming a fully open market-oriented economic system to meet the demands of a rational economic person, enhance the vitality of SOEs and promote the high-quality development of the state-owned sector. In the following sections, the author will discuss the macro system, meso industrial development mechanism and micro enterprise development mechanism of the M&A of SOEs from the perspective of “innovation-mixed ownership M&As-trust”.

4.3 Research on the Three-Dimensional Macro-Mechanism of “Innovation-M&A-Trust” In order to better allocate resources in the economy, countries with a large amount of SOEs must develop the market forces, establish a competition mechanism, and divide rationally the state-owned and private sectors so that each department can make due contributions to the nation’s development. Countries begin to carry out state-owned sector reforms one after another after realizing this fact, and it has been proved that an effective competitive environment cannot be created without reasonable macroeconomic policies and a sound legal framework, especially in developing countries (Mary and John 1995). The principles of efficiency and competition is the basic guarantee for the survival and development of enterprises and the prosperity of the country’s economy. Before the reform of the state-owned sector, SOEs were often tied to non-commercial goals without a competition mechanism for the survival of the fittest. However, the vitality and operational efficiency of an enterprise can only be stimulated in a competitive market under the support of the macroscopic mechanism. Therefore, the author will explain the impact of innovation and trust on mixed ownership M&A from the macro level in the following sections.

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4.3.1 Macro-Innovation Mechanism and M&A from China’s Perspective According to the “Global Innovation Index 2019”, China ranks 14th in the world in global innovation index, surpassing the United Kingdom and all developing countries.3 In 2018, China’s total R&D expenditure reached CNY1965.7 billion, accounting for 21.68% of the world’s total and ranking second in the world. The total R&D expenditure accounted for 2.18% of total GDP, exceeding the EU average (2.03%) and reaching the level of a moderately developed country,4 with over four million5 R&D personnel in various fields and a 58.5% contribution rate of science and technology. It has been indicated by all the data that China has been close or equivalent to those innovative countries in main indicators of technical innovation, however, we must be sober about the gaps in our comprehensive innovation capabilities when compared with those of developed countries. We must improve our innovation capabilities and solve prominent problems such as unbalanced and inadequate development of innovation (Zhang et al. 2019). This article divides innovation into innovation input, innovation implementation and innovation output, and analyzes at different levels what mechanism can continuously stimulate the vitality of mixed ownership M&A and release the dividends of the mixed-ownership system. Innovation is the driving forces of economic development, and continuous capital input is the premises for improved technical innovation capabilities. It is held by the new economic growth theory that technological progress, manpower and materials are the driving forces of economic growth. Innovation requires not only the investment of huge quantity of traditional elements, knowledge and manpower in the early stage, but also continuous capital support during the innovation. And obviously innovation is difficult to sustain without capital support in the entire process, and the innovation capital in the traditional factors must be identified firstly. The past few decades have witnessed rapid economic growth which mainly relies on the input of large amounts of traditional factor. However, the economic growth has obviously changed from traditional factor-driven to innovation-driven in the new era, and the traditional factors are equally important for innovation. In the transition and transformation from the stage of extensive factor investment to the stage of innovation-driven development, innovation capital must be picked out from the traditional factors and fully exploited in the process of innovation with improved resource allocation efficiency. Secondly, traditional factors, knowledge and manpower should be relocated rationally to form comprehensive innovation capital which can improve the efficiency of innovation and generate better innovation results based on the identification of 3

See World Intellectual Property Organization: Global Innovation Index Report 2019 (July 24, 2019), https://www.wipo.int/global_innovation_index/en/2019/. 4 Data comes from 2019 China Statistics Abstract, Beijing: The Chinese Press, 2019. 5 The data comes from Li Zhao: “Cultivating and Growing the New Dynamics through Innovation”, compiled by the State Council Research Office: “The Second Plenary Session of the Thirteenth National People’s Congress (Work Report) Tutorial Book”, Beijing: People’s Publishing House, 2019, Page 229.

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innovation capital in traditional factors. Finally, the distribution of innovation input shall be fully mobilized to ease the imbalance in innovation input structure. In 2017, the input in basic research, applied research, and experimental research account for 5.5%, 10.5% and 84%6 respectively, which is extremely unbalanced since basic research has become the biggest short slab of innovation. As far as the innovation process is concerned, continuous technical innovation, business model innovation, and data-enabled innovation in the era of big data must be made on the basis of innovation capital input. Technological innovation is the first layer of innovation which improves the initial and secondary innovation capabilities to solve key problems in the development of mixed economy, gather and integrate global resources for technological innovation, enhance the supply of high-end technologies, and crack down the path dependence of mixed economy on foreign technologies. Business model innovation is the second layer of innovation that increase of the size of the entire “value cake” to capture values for the company and maximize the value of innovation results compared with ethnological innovation which directly produces new products and wealth (Sun et al. 2015). Luo et al. (2005) believed that market economy is an uncertain economy in a state of “creative destruction”, and enterprises can only survive through continuous reconstruction or creative destruction of business models. And data-enabled innovation is the third layer of innovation. Data empowerment in the era of big data is influencing innovation in various ways and paths. Moreover, data empowerment has formed three-dimensional driving forces of innovation, namely the instrumental use of big data and technologies, and the creation of “big data” innovation chain driven by the commercialization of big data resources and technologies, and the cross-industry and integrated innovation centered on “big data”. On the basis of traditional technical and business model innovation in the past, data empowerment enables resource integration and dual innovation through the Internet and efficiently promotes the rational allocation of resources. Apart from the improvement of technological innovation, business model innovation and data-enabled innovation capabilities, trust issues should also be emphasized in the innovation process. Coase (1937) believed that trust is an important guarantee for the occurrence and smooth progress of economic activities, and can reduce the inherent needs of both parties in obtaining information or carrying out supervision of each other to reduce transaction costs. The key element of innovation lies in trust, and the key to smooth innovation is to make capitalists trust innovation and invest capital boldly in innovation. As a long-term process which is invisible and intangible, innovation can hardly create benefits for capitalists in the short term and will inevitably make capitalists have doubts and reservations about it. Although innovation is unpredictable, the important driving force of innovation—capital—is controllable, and the emergence of blockchain technology featured by decentralization has created a kind of trust mechanism for all capitalists in the mixed economy. From the perspective of a rational economic person, the high investment in the early stage of innovation, 6

The data comes from the National Bureau of Statistics of China: “Statistical Bulletin of National Science and Technology Expenditures (2017)” (October and 9, 2018), http://www.stats.gov.cn/tjsj/ zxfb/201810/t20181009_1626716.html.

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uncertainties in the process of innovation, and the lagged output and information asymmetry will reduce capitalists’ expectations on innovation. They are unwilling or worried about large capital investment in innovation, which makes it difficult for innovation to actually run. Through blockchain technology, different transaction information in economic activities is recorded in the form of blocks, and the “ins and outs” of capital in the entire innovation process are clear at a glance. The “block + chain” data structure enables capitalists to understand the dynamic flow of capital in the innovation process in a timely manner, reduces the time chain and cost chain of innovation and frictions in element input, promotes the orderly flow of capital across industries and regions, and optimizes the efficiency of capital allocation and protection of innovation input, thus resolving the “worries” of capitalists. In terms of innovation output, innovation solves not only the efficiency issues, but more importantly, the application and diffusion of technological achievements in production and business operations (Hong 2013). Therefore, it is necessary to maximize the value of innovation output, commercialize the innovation results, recycle and protect the intellectual property rights. First of all, we must maximize the value of innovation outputs, increase the conversion rate of innovation results, ensure the reasonable transformation of innovation capital input into innovation outputs, and reduce the loss of capital value; second, it is necessary to commercialize the innovation results. Innovation outputs must be secured since the ultimate goal of innovation is to bring benefits to capitalists. Innovation can only stimulate more and become stronger when it actually creates economic benefits for capitalists; and the innovation outputs shall be properly recycled and reused to form a virtuous circle of the entire innovation process and constantly stimulates the vitality of innovation; finally, the intellectual property rights of innovation results must be protected through accelerated reform of the intellectual property rights protection system, and the intellectual property protection laws and regulations must be unified to avoid the decentralization of the property rights protection system, promote the establishment of intellectual property transaction markets, and create a technology transfer network connecting domestic and foreign technologies, capital, talents and innovation resources.

4.3.2 Macro Trust Mechanism and M&A from China’s Perspective The competitiveness of a country is ultimately the competitiveness of the institutions. The institutions include not only formal institutions but also informal institutions, both of which are inseparable parts of the institution. The former provides conditions for the stability and improvement of the latter, and the latter prompts the emergence of the former. The Fourth Plenary Session of the 19th Central Committee of the Central Committee of the Communist Party of China has vested new connotations to the Basic Socialist Economy System with Chinese Characteristics. However, formal institutions are not enough for the development of mixed economy, and corresponding

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informal institutions and supporting mechanisms are required to exploit the significant institutional advantages, improve the capacity of the institutions and achieve the tremendous superiority and strong vitality of the institutions. It is unwise to break away from the informal institutions and only consider the formal institutions in the M&A or vice versa. As the basic informal institution of the economy and society, trust mechanism plays an important part in the implementation of M&A. The new connotations given by the Fourth Plenary Session of the 19th Central Committee of the Communist Party of China has laid a formal institutional foundation for this article. However, it is obviously not enough to rely on formal institutions alone to promote the M&A. This article embeds resource allocation theory and contingency theory into a three-dimensional basic economic system, and constructs a new theoretical system of M&A in the top-level design through the trust mechanism to manifest the advantages of our basic economic system by means of theoretical innovation. The Fourth Plenary Session of the 19th Central Committee of the Party was held to thoroughly implement the strategic goal of “promoting the modernization of the national governance system and governance capabilities”. And the three-dimensional basic economic system proposed by the Fourth Plenary Session further clarified and sublimated our basic economic system, which serves as the formal institutional basis of this article. Taking the three-dimensional basic economic system as the foundation of the formal institution, one of the key research topics of this article is the integration of trust mechanism, the basic informal institution, into the formal institutions. To be specific, this article embeds the theoretical basis of capital allocation theory and contingency theory on the basis of three-dimensional basic economic system, and integrates the trust mechanism to achieve theoretical innovation by building an institutional system for the three-dimensional basic economic system. Resource allocation is an eternal topic in economics due to the limited resources and unlimited demands in the social reproduction. Resources are always scarce compared with the demands, which make resource allocation indispensable in order to obtain the optimal economic benefits with the least resource consumption. The social resources are allocated through dynamic mechanism, information and decision-making mechanism. Firstly, the goal of resource allocation is to maximize the economic benefits. Under the assumption of a rational economic person, capitalists will take various measures to improve the efficiency of resource allocation to maximize their own interests. Secondly, the maximization of resource allocation efficiency is based on reasonable resource allocation plans, which requires the grasp of as much information related to the transactions as possible through a mechanism that enable the collection, treatment, transmission and processing of information. Thirdly, corresponding decisions on resource allocation shall be made on the basis of the resource allocation plans formulated. Decision-making power with different restrictive relationships and mechanisms can be centralized or decentralized. Whether resources can be allocated effectively and rationally determines the success or failure of economic development, which is also true for the development of mixed economy, and the reform of SOEs through M&A studied in this article. Capitalists always chase maximum economic benefits with the least resources and the best reasonable resource allocation. However, the resources among enterprises are allocated by the market in accordance with the

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efficiency goal under the market mechanism, therefore, it is particularly important that SOEs utilize domestic and foreign resources, improve the efficiency of resource allocation, and continuously release the advantages and improve the capabilities of the three-dimensional basic economic system through M&A under the guidance of resource allocation theory in the new era of comprehensive reform and opening up. The Contingency Theory built upon a systematic point of views is another important theoretical basis of this article. The core of this theory is to define various variables via the intra and inter relationships between the various subsystems and the external environment. Contingency Theory are complementary with Resource Allocation Theory as the former deal with the internal problems of enterprise development, and the other tackles the extremely uncertain external environment. “Contingency” means expedient responses. The internal elements and external environment faced by the enterprise are quite different, and there is no unified principle and method in the actual operation and management of the enterprise since different plans must be adopted according to the actual situation. In general, Contingency Theory emphasizes that companies must adapt to changes in the development process, and adjust their management strategies in real time according to the changes in the external environment. The key to achieving good results in corporate management lies in the full understanding of internal and external conditions and effective contingency strategies. The growth of a country’s wealth is not only a function of capital, natural resources, labor and other materials input, but also a function of technical progress embodied in the production process and environmental factors upon which the economy depends (Hong 2018). Applying the Contingency Theory with the three-dimensional Basic Economic System to the reform of SOEs through M&A is to enable SOEs to adapt to changes in the global economic environment with extreme uncertainties through M&A by executing the three-dimensional Basic Economic System and improving internal resource allocation efficiency. As an open system, mixed economy should be managed in an “organized” manner with constant adjustment and adaptation to changes in the outside world to meet and balance the internal demands and survive the uncertain and turbulent environmental conditions, achieve full marketization, and get the recognition of Western countries to promote the “bring in” and “going out” of the mixed economy, so that SOEs that have undergone mixed-ownership M&A can truly become market economy entities.

4.4 Research on the Three-Dimensional Meso-Level Industrial Development Mechanism of “Innovation-M&A-Trust” from China’s Perspective Industry is the supporting force of the sustained development of national economy and the cornerstone of social harmony and stability, and it is closely related to the efficiency and quality of national economic development. SOEs are the backbone

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of our national economy, therefore it is self-evident that the promotion of mixed economy at the industrial level under the supply-side structural reform plays an important role in the layout optimization and structural adjustment of industries. In addition to the increase in economic aggregate, the economic development process of a country and region is more reflected in the optimization of economic structure (Hong 2018). China’s economy has gradually entered a new normal characterized by changed economic growth rates, optimized industrial structure and transformed development momentum in the new era. And transformation and upgrading of the industry has become the inherent requirements and inevitable choices in order to adapt to the new era (Liu and Cai 2018). Xi Jinping, General Secretary of the CPC Central Committee, once pointed out that “the optimization and upgrading of industrial structure is the key to improve the comprehensive competitiveness of China’s economy”. The 19th National Congress of the Communist Party of China proposed to deepen supply-side structural reforms, built China into an innovative country and promote the industrial upgrading by centering on quality and benefits and improving the production efficiency. The Fourth Plenary Session of the 19th Central Committee of the CPC further emphasized the principle of “take supply-side structural reform as the main task and develop a modernized economy”. This article will explain the impact of innovation and trust mechanisms on mixed-ownership M&A from the perspective of meso-level industry development in the following sections.

4.4.1 The Collaborative Innovation Mechanism and Mixed Ownership Mergers from China’s Perspective 4.4.1.1

Promote the Integration of Real Economy with Virtual Economy Through Collaborative Innovation

Innovation is the driving force of economic development, and the construction of a modern industrial system can be realized through the collaborative innovation of the industry, government, universities and research institutions. China has been a big country in the real economy but nevertheless a strong country in the real economy for a long time due to insufficient innovation and slow industrial transformation and upgrading. The Central Government has always emphasized that technical innovation is the foundation of the development of real economy, and that innovation must be promoted in order to revitalize the real economy and enhance the internal impetus of the real economy through the deep integration of the real and virtual economy. Government takes the lead in the collaborative innovation system to integrate the innovation capital of the industry, university and research institution in an orderly manner, organize scientific researchers from all sides to jointly tackle key research projects and core technologies. We must create a new “Internet” model to serve for the real economy by relying on the high capital mobility of the virtual economy, allowing more resources to flow into the real economy, promoting the traditional

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real economy to deeply participate in value creation, value transmission and value realization, and rectifying the structure of industrial development. We must pay attention to basic and applied research and technology transformation, and accelerate the adjustment and upgrading of industrial structure. At the same time, we shall emphasize the transformation of innovation achievements and protect and share the benefits of innovation achievements under the guidance of the government. Finally, we must establish a market-oriented, technical innovation system with enterprises as the main body and in-depth integration of production, education and research to facilitate the integration of the real economy and the virtual economy, and promote the development of the real economy with advanced industrial clusters to enhance our international competitiveness.

4.4.1.2

Promote the Integration of State-Owned Capital and Private Capital in M&A Through Collaborative Innovation

At the 2017 Asia-Pacific Economic Cooperation (APEC) CEO Summit, General Secretary Xi Jinping emphasized that the new round of technical and industrial revolution will profoundly change the growth momentum, what we should do is to increase input in innovation to nurture new growth areas. Implementing the industriallevel M&A driven by collaborative innovation is to fully absorb high-quality stateowned and private-owned capital, increase investment in innovation, and rely on the integration of state-owned capital and private capital to transform and extend to high value-added industries by reducing the proportion of low-value-added industries, and finally form a development pattern in which the industry is moving towards mid-to-high end. The culture of innovation must be fostered in the process of collaborative innovation which integrates the state-owned and private capital. Preferential policies are introduced constantly by the government to encourage innovation, cultivate a good entrepreneurial environment, and rejuvenate industrial adjustment and upgrading. In general, the government will take the lead in the collaborative innovation system of M&A to allocate innovative resources of the industry, university and research institutes to basic and key research projects, promote the deep integration of state-owned capital and private capital, and accelerate the turnover rate and circulation process of capital and the adjustment and upgrading of industrial structure. Those measures can strengthen and optimize state-owned capital, preserve and add value to state-owned capital, allow more state-owned capital and private capital to concentrate on key industries, key areas and advantageous enterprises, and promote SOEs to be better, stronger and larger through M&A.

4.4.1.3

Promote the Development of Mixed Industrial Clusters in the Regional Economy Through Collaborative Innovation

Coordinated economic development of various regions is the goal pursued by all countries and regions in the world, as well as an important strategic goal of our

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country. China has placed coordinated regional development has been placed as an important national economic development policy ever since the “Ninth FiveYear Plan”, and has implemented a series of strategies to promote regional development. However, many problems have emerged from the rapid development of China’s regional economy, such as “problem regions” (such as backward regions, swelled regions and depressed areas, etc.), disparity in development between different regions, deterioration of ecological environment, and fragmented regional policy that need to be addressed on priority. Therefore, the low economic benefits and waste of resources resulted from traditional development concept featured by industrial structure convergence, repeated construction and other vicious competitions in various regions must be avoided. And innovate must be promoted to realize the coordinated development of various regions by allowing each region to give full play to their comparative advantages, realize complementary of advantages, and produce more economic synergies. The spillover effect and agglomeration effect of the collaborative innovation will allow the main bodies of innovation to gather to a public sphere, and improve the value creation capability and innovation efficiency of the region. Through the government-led collaborative innovation, subjects with major technical innovation breakthrough capabilities are gathered in a certain region to improve the innovation efficiency through the two-way spillover effect of innovation, enhance the value creation capacity of innovative subjects, and continuously improve the overall innovation efficiency of the region. All in all, the clear division of labor and complementary knowledge of each subject in the collaborative innovation must be employed to enable the circulation and allocation of various innovative elements in the industrial cluster to form an ecosystem of innovation elements, and efficiently transform capital elements in the region into new products, new processes and new services to generate economic benefits, push forward the adjustment and upgrading of industrial structures, and enable the SOEs to achieve better and stronger growth through M&A.

4.4.1.4

Facilitate Rational Allocation of Production Factors in the Supply-Side Structural Reform Through Collaborative Innovation

The collaborative innovation constitutes an important driving force for the development of industrial productivity and a key focus of the supply-side structural reform. According to the endogenous growth theory, the coordination mechanism of various production factors rather than the advantages of a certain production factor alone should be pursued in the modern economic growth. The advantages of low-cost labor have contributed to China’s rapid economic growth in the past. Now, innovation rises to be the most important and sustainable approach to the development of productivity due to the loss of demographic dividend, sharp rise in the costs of various factors, and unsustainable increase of supply-side factors input. Innovation allows industrial development to rely more on productivity improvement and rational allocation of production factors such as technology, knowledge, and human resources

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in the collaborative innovation system to transform the sweat economy into smart economy driven by innovation. On the one hand, the rational allocation system of production factors formed by collaborative innovation promotes the informatization and intelligent transformation of traditional industries, adjusts the traditional industrial structure and establishes a modern industrial system. On the other hand, the rational allocation system of production factors formed by collaborative innovation enhances the deep integration of emerging technologies and industries, and accelerates the cultivation of emerging industries. In general, to promote the rational allocation of production factors in the supply-side structural reform through collaborative innovation is to intensify technical knowledge, replace inferior production factors with superior production factors, and realize the rational allocation of factors in the market mechanism. In the process of collaborative innovation, various elements can be combined more conveniently, effectively and healthily to improve the efficiency of innovation output and constantly adjust the industrial structure to make SOEs better, stronger and larger through M&A.

4.4.1.5

Optimize the Industrial Structure in the Global Value Chain Through Collaborative Innovation

The profound adjustment of current global economic structure and extremely fierce industry competition are prominently manifested as the competition in global value chain. In the global value chain iteration, the “re-industrialization strategy” of developed countries and the “low-end product diversion” strategy of developing countries have intensified competition in manufacturing industry. The goal of collaborative innovation is to promote the industry to the medium or high- end link of the global value chain and deploy a global innovation chain in the global industrial chain through effective linkage between knowledge and technical innovation, and innovation of international frontier technologies in the corresponding industrial chain. We must abandon the previous collaborative innovation system led by the government that relies solely on the learning, imitation and introduction of technologies. We need to promote mixed economy toward the medium-to-high end of the global industrial chain via technical innovation, market innovation and institutional innovation. Only in this way, can we drag the industrial development out of the low-end link, occupy the important divisions of labor in the global innovation chain, develop the potential value of global production factors and markets, adjust and upgrade our industrial structure in the iteration of the global value chain, increase industrial added value and economic benefits, and help SOEs to grow better and stronger through M&A.

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4.4.2 “Meso-Level” Trust Mechanism and M&A from China’s Perspective 4.4.2.1

Introduce Trust Mechanisms into Industrial Policies to Promote the Integration of Real Economy and Virtual Economy in M&A

In spite of the difficulties in the real economy such as high operating costs caused by increased raw materials and human resources prices faced by state-owned and private enterprises, as well as the intensified challenge resulted from the “re-industrialization strategy” of developed countries and the “low-end product diversion” of developing countries, SOEs in general take a dominate position in the real economy, and private enterprises constitute the main force of the virtual economy in areas such as online sales and express delivery. Through mixed ownership reform, the real economy and virtual economy are combined in the form of “Internet + Manufacturing”, “leading enterprise + supportive facilities”, “stock + increment” and “intensive + circulation” to carry forward the mixed economy and revitalize the real economy. Generally speaking, SOEs are relatively strong in real economy and weak in virtual economy, while the private enterprises are just the opposite. To promote the complementary development of both state-owned and private enterprises through M&A not just concerns the development of mixed economy, but also propels the new national economic development strategy. The mixed ownership systems and special fiscal and taxation policies are required and new financing channels need to be cultivated to achieve innovation-driven development, for example, open new direct financing channels for technology-driven small and medium-sized enterprises with mixed ownership by refining the rules of Sci-Tech Innovation Board (STAR Market), and resolve the capital demands of the real economy and the virtual economy in integrated development through industrial financing funds and industrial investment funds. And differentiated interest rate should be tilted towards the integration of these enterprises and industries in terms of traditional loans.

4.4.2.2

Introduce Trust Mechanisms into Industrial Policies to Promote the Integration of Stated-Owned and Private Capital in M&A

The primary motivation of mixed ownership reform is to improve the efficiency of resource allocation. An ideal market economic system shall conform to the profitseeking nature of capital, and promote the free flow of capital to high-profit industries through the market mechanism to achieve optimal resource allocation efficiency. The “current status” of state-owned capital makes it associated with low operating efficiency of SOEs (Liu 2000; Wu 2012), huge efficiency losses (Liu and Shi 2010), and insufficient innovation efficiency and motivation (Dong et al. 2014; Wei et al. 2017), while the flow of capital from the state-owned sector to the non-state-owned sector can improve the efficiency of capital allocation and utilization as well as enterprise operation. Private capital can not only increase its market competitiveness and grab

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the market shares, but also utilize the advantages of technology, reputation (credit) and political connections of SOEs by entering the monopoly industry of SOEs or the competitive part of the monopoly industry through mixed ownership reform. And state-owned capital can improve the operating efficiency of state-owned capital and achieve mutual benefit by drawing on the resource advantages of private capital in terms of unique technology, business model or operating mechanism. However, the diversification of ownership structure is not the only variable that determines the effectiveness of mixed ownership reform since the success of reform requires systematic institutional innovation and governance. And mixed ownership reform is not only a mixture of capital, but an integration of management, intelligence and advantageous resources and culture. The development of a mixed-ownership economy requires the governance mechanism of Trust as a guarantee. And the integration of state-owned capital and private capital after the reform shall be achieved through the “government-industry association-market” governance approach under the trust mechanism.

4.4.2.3

Introduce Trust Mechanisms into the Implementation of Industrial Policies to Promote the Development of Mixed Industrial Clusters in Regional Economy

Coordinated regional development is one of the acting points to solve the contradiction between the people’s ever-growing demands for a better life in the new era and the unbalanced and insufficient development. In the early days of reform and opening up, a strategy that gives priority to the development of eastern coastal areas was adopted. Then the “Development of the West Regions” and the “Rise of Central China” were implemented to narrow the gap between the West and the East, however, no significant results have been achieved. Mixed economy must be vigorously developed by bring together the strengthens of both state-owned and private sector to narrow the gap between the East and the West and make possible the “Rise of Central China”. Although, the Matthew Effect in the development of state-owned and private sector between the East and the West is not entirely caused by government policies, for example, the development of state-owned and private economies in various regions are affected by deep-rooted factors including advantages in location and innovation capabilities, the government should explore the paths of industrial development in the process of developing regional economy. Industrial clusters are effective ways to promote the coordinated development of regional economies. The “Thirteenth Five-Year Plan” formulated in 2016 has clearly defined the national strategy of developing characteristic industrial clusters to drive regional economic transformation. Therefore, the government must formulate scientific and reasonable policies for regional industrial clusters, integrate trust mechanisms and improve regional industrial production efficiency according to the actual situation to expand and strengthen the mixed economy development capacity of the clusters. And the government must form mixed industrial clusters with capital as the link, market as

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the orientation and backbone enterprise as the leader, as well as specialized division of labor and coordinated cooperation, so as to accelerate the pace of regional economic development, form a successful path for characteristic industries, and solve unbalanced regional economic development through market mechanisms.

4.4.2.4

Introduce Trust Mechanisms into the Implementation of Industrial Policies to Promote Rational Allocation of Production Factors in Supply-Side Structural Reforms

Seen from the supply side, economic development is mainly driven by production factors such as land, labor, capital, technology and management. And long term and stable economic development can be sustained by full and reasonable configuration of those production factors. Therefore, the efficiency of the system, land, capital, labor, technology and management must be improved to facilitate long-term prosperity and development of the state-owned sector, while a reasonable system is the basis of improvement in the efficiency of other factors. Overcapacity exists in both traditional and emerging industries in the state-owned sector, while effective supply for heterogeneous demands is not enough. Therefore, the government should promulgate industrial policies in the form of list-style authority files and indirect taxation and financing commands to stimulate the transformation and upgrading of SOEs in the supply-side structural reform. The government should guide SOEs in exploiting tax reduction policies such as “replace business tax with value-added tax” in mixed-ownership M&A to reduce the tax burdens through indirect policies, sort out the regulations on the Sci-Tech Innovation Board (STAR Market) and trial the registration-based IPO system to provide direct financing channels for the small and micro businesses. Various economic components of mixed ownership should be enabled to enjoy the institutional dividends in the supply-side structural reform. And state-owned and private enterprises shall have the courage to reform and adjust the industrial structure and product structure decisively to reduce costs and expenditures, and explore the potentials and increase the efficiency to resolve overcapacity issues. At the same time, they must reorganize the production factors, aims at the integration of real and virtual economy in M&A, and transforms to high-value products in the high-end industrial chain.

4.4.2.5

Introduce Trust Mechanisms into the Implementation of Industrial Policies to Optimize the Mixed Industrial Structure in Global Value Chain

The global value chain is born as the international division of labor gradually evolves from inter-industry division and intra-industry division to intra-product division and each link of production is distributed in various countries or regions around the world based on comparative advantages. The global value chain is the global vertical structure of product production. On the one hand, the industrial development presents

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a state of discrete distribution on a global scale and agglomeration in local areas; on the other hand, multinational enterprises in the industry have become the leaders and governors of the global value chain. In the current global value chain iteration, China’s industrial development is threatened by intensified competition brought about by the “re-industrialization strategy” of developed countries and the “low-end product diversion” of developing countries. And becoming the governor of the global industrial chain has become the ultimate goal of China in its industrial transformation and upgrading. Therefore, the “Belt and Road” Initiative, Guangdong-Hong KongMacao Greater Bay Area and the Yangtze River Economic Belt strategies must be closely followed to promote the transformation and upgrading of mixed economy, carry forward the tradition of export-oriented economy, improve the quality and efficiency of supply and go international. And mixed economy must participate in global resource integration and cross-border M&A to accelerate the all-round transfer of superior production capacity, resolve excess capacity in international capacity cooperation, and enable equal profits with equal amount of capital and achieve benign resource allocation under the competition mechanism, that is to transfer resources from low-efficiency enterprises to high-efficiency enterprise for full exploitation of resources and the maximum potential of meeting global demands.

4.5 Research on the Three-Dimensional Micro Enterprise Development Mechanism of “Innovation- M&A-Trust” from China’ Perspective Great strides have been obtained in the reform of SOE after seventy years of development since the founding of the People’s Republic of China, but there are still many problems. In general, the dominant position of SOEs has not been truly established in the market, with much skepticism from Western countries in the opening up. The private sector has made significant progress and fruitful results through continuous exploration after seventy years of development since the founding of the People’s Republic of China. However, the quality of development of private enterprises since the reform and opening up is not high due to the combined effects of various subjective and objective factors. And the development of private enterprises is subject to more administrative and policy constraints compared with SOEs. The state-owned sector and the private sector have their own advantages and disadvantages under China’s special economic system, while they both have difficulties in achieving high-quality development alone. Through M&A, the two economic components can be complementary to each other and achieve common development. Reform of SOEs through M&A is the best approach to break the existing constraints and the bottlenecks for development, and move towards high-quality development. This article will analyze the effects of innovation and trust mechanism on the reform of SOEs through M&A.

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4.5.1 Micro Enterprise Innovation Mechanism and M&A of China’s SOE The key to achieving innovation breakthroughs in a competitive environment lies in the improvement of independent innovation capabilities (Jiang 2012). The cultivation of independent innovation capabilities is a practical issue for SOEs to stimulate enterprise vitality and core competitiveness through M&A. In terms of the sequence of development, SOEs are generally considered as incumbents and private enterprises late-comers, and both have unique advantages and disadvantages in innovation. The advantages of SOEs mainly rest on the resources endowment and superior policy supports, while the disadvantages the relatively weak innovation vitality and low innovation resource allocation efficiency. On the contrary, the advantages of private enterprises mainly consist of long-term technical capability and experience, while the disadvantage the weak resource endowment and policies support. The reform of SOEs through M&A can allow complementary advantages of state-owned and private enterprises in innovation, form a joint force for innovation and fully mobilize the enthusiasm of SOEs.

4.5.1.1

SOEs Promote Property Rights Protection and Free Flow of Market Factors in M&A Through Independent Innovation

Both state-owned and private enterprises are involved in M&A, and both state-owned and private enterprises invest their premium capital into enterprise innovations to realize the complementary of capital, and optimize the allocation of innovation input. SOEs have a solid foundation for technical innovation in the real economy, while private enterprises have great advantages in the model, experience and spirit of innovation in the process of long-term technical catch-up, therefore, the advantages of state-owned and private enterprises can be deeply integrated through the blockchain trust mechanism to enhance the efficiency of innovation resources allocation since the SOEs provide a good foundation for innovation for private enterprises and the private enterprises bring driving forces for innovation to SOEs. Moreover, through the joint innovation of state-owned and private enterprises, the profit-seeking demands of rational economic man can be satisfied and the win–win situation for the state-owned and private economy can be achieved by continuous improvement in product quality, satisfaction of consumer demands and high-quality product output and continuous growth in sales and economic benefits. Innovation is the endogenous engine of the mixed ownership system and the most fundamental driving force that enables SOEs to benefit from the mixed ownership system through M&A. Innovation has no physical features and faces great uncertainties, insufficient production factors supplies and high risks of failure in the initial stage. And innovation again suffers inadequate intellectual property rights protection

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after the innovation results come into form. In this sense, we must pay special attention to the free flow of market factors and the intellectual property protection of innovation outputs, and improve the sense of gain and security of private entrepreneurs by securing sufficient innovation elements and comprehensive capital for enterprises in M&A. The state clearly guides property rights entities to improve the technical innovation platform and service system, encourages state-owned and private enterprises to strengthen the protection of property rights in the input, implementation and output stage of innovation, especially intellectual property rights, through independent innovation after M&A to further advance the growth and development of SOEs and form advantageous groups in the industry. State-owned and private enterprises must have equal standing in the acquisition and use of capital, currency, technology, land, resources, environment, labor force, talent and other market factors to eliminate the obstacles to capital flow, improve the efficiency of capital market allocation, and increase the innovation outputs and strengthen the fair distribution and property rights attribution of innovation outputs according to capital contribution to propel the protection of property rights and the free flow of market factors.

4.5.1.2

SOEs Establish New Impetus for Product Supply in M&A by Improving Production Efficiency and Quality Through Independent Innovation

General Secretary Xi Jinping has always attached great importance to technical innovation, and he once pointed out that “innovation is the primary driving force behind the development and the strategic support for the construction of modern economic system”, “core technologies cannot be bought”, and “we must push enterprises to become the main body of technical innovation decision-making, R&D investment, scientific research organization and innovation achievements transformation”. The keynote statement of Xi Jinping has pointed out the way forward and the fundamental guidelines for SOEs in accelerating the pace of independent innovation in M&A. SOEs must improve the quality of products, correct the distortions in factor allocation, and expand effective supplies to better satisfy the people’s demands for a better life in the process of independent innovation. Firstly, the production efficiency must be improved, and secondly, the quality of product supply must be elevated. The improvement of production efficiency is not only a response to the improved resource allocation efficiency in the economic system with mixed ownership, but also the basic condition for enterprises with mixed ownership to become stronger, better and bigger, as well as the basic requirements of a rational economic man in seeking profits. The “zombie companies” must be handled to improve the quality of product supply and eliminate invalid supply, reduce the supply of low-end products, guide the reflux of Chinese consumers from international market and promote the resolution of excess capacity. Only by improving production efficiency and product high-quality and forming new dynamics for supply, can we truly improve the quality and efficiency of the enterprises under the guidance of new consumption concepts. And only by innovation and production revolving around the changing trends in consumer market

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can we stimulation the vitality of enterprises, improve the effectiveness of independent innovation and enhance the competitiveness and value addition of enterprises to the maximum.

4.5.1.3

SOEs Improve the Talents Incentive Mechanism and Cultivate Entrepreneurship in M&A Through Independent Innovation

The system of professional managers is adopted by SOEs in M&A, so do the marketbased talent selection and employment mechanism which require the establishment of a market-based compensation system and an effective incentive and constraint mechanism. In enterprises with mixed ownership, the incentives of entrepreneurs, who are at the center of the enterprise and determine the strategic directions of the enterprises and assume risks in business operation, will affect the long-term development of the enterprises. Enterprises under the system of mixed economy need to have innovative spirit and market vitality, and entrepreneurs’ incentives play a positive role in this process since the incentive effects determine the long-term development of the enterprises. Incentives from entrepreneurs mainly include professional manager system, differentiated remuneration system, strict performance appraisal system, core employee shareholding system and labor contract management system. The talent incentive mechanism mainly involves the mechanism of talent employment. However, it cannot be completely solved by the system since it is particularly correlated to the incentives and entrepreneurship of entrepreneurs with rich connotations. SOEs can stimulate the entrepreneurship of innovation, perseverance and responsibility through independent innovation in M&A. And such Entrepreneurship can act on talent incentive mechanism to mobilize the employees’ enthusiasm for creation and increase the vitality and competitiveness of the enterprises, which fundamentally enhances the competitiveness of enterprises, cultivates a number of first-class enterprises and realizes the development of state-owned capital.

4.5.1.4

SOEs Build a Fair and Orderly Competition Mechanism Based on Consumer Demands in M&A Through Independent Innovation

Consumption is the foundation that promotes economic development. And it is necessary to upgrade the consumption structure via optimized quality standards, give full play to the role of market mechanism and the corpus function of enterprises, and increase the standard conversions of innovative results such as new technologies and products to better meet the people’s ever-growing demands for a better life. In such situation, SOEs should strengthen their independent innovation capabilities through M&A, and promote technical innovation, product innovation and model innovation based on market demands to reinforce the standard transformation of innovative results such as new technologies and products, effectively satisfy the basic consumption through the market mechanism and the dominant role of enterprises and the

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supply of high-quality products and services, and continue to transform traditional consumption and vigorously cultivate emerging consumption to stimulate potential consumption. In this way, a fair and orderly competition situation and a common consumption co-governance mechanism for all parties in the society can be forged when SOEs improve their product quality through independent innovation in M&A and meet the consumer demands through market mechanisms.

4.5.2 Micro Trust Mechanism and M&A of China’s SOEs Mixed ownership reform is a crucial driving force that enhances the vitality of SOEs. And the mixed ownership reform of SOE through M&A can exert important theoretical and practical significance for the establishment of a modern economic system and the high-quality economic development. Institutions include both the formal institutions and informal institutions, which are two inseparable parts of the institutions. And the institution can only maintain its stability when the objectives of formal and informal institutions are consistent (Cui and Zhou 2006). Both the formal and informal institutions have positive impacts on the development of enterprise, and the economic benefits that can be achieved through M&A of SOEs may disappear if one institution is emphasized while the other is ignored, especially under the relatively weak formal institutional arrangements in law and finance. The informal institutions can make up for the shortcomings of formal institutions in certain sense, and trust mechanism as the basic informal institution in our economy and society is crucial for M&A of SOEs, since it affects not only the social stability and economic development but also the enterprise efficiency and market competitiveness. The biggest impact of trust mechanism on an enterprise is that it significantly enhances the innovation capabilities of the enterprise and offsets the lack of incentives for innovation in formal institutions. Therefore, this study combines the trust mechanism, an important informal system, with the general formal institutions to explore its important role in the M&A of SOEs.

4.5.2.1

SOEs Promote the Integration of Formal Corporate Governance Mechanism with New Institutional Culture of Integrity and Innovation in M&A Through Modern Enterprise Systems

Systems are the sources enterprise vitality, and good enterprise development is only possible with good systems. The separation of ownership and management rights can better stimulate the development of SOEs and promote the smooth implementation of M&A. The Fourth Plenary Session of the 19th Central Committee emphasized that deepening the reform of SOEs and improving the modern enterprise system with Chinese characteristics is to deepen the reform under the premise of separation of ownership from management rights. The key to establishing a modern enterprise

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system in SOEs is to build a reasonable corporate organizational structure and a standardized corporate governance structure, and handle properly the organizational relationship between the parent company and the subsidiaries within the group company after M&A. In particular, the value creation capability of SOEs after M&A not only lies in tangible capital such as technology and human resources, but also in organizational capital such as corporate culture. And the effect of corporate culture governance in the corporate governance may affect the reform significantly. The effect of M&A of SOEs is related to the effect of state-owned capital and private capital integration, mainly the integration of integrity and innovative culture. The mixed ownership reform is the reform of stock economy, and innovation is the fundamental driving force for the improvement of t existing resource allocation efficiency, while the course of innovative culture establishment is actually a process of corporate vitality activation since the institution serves as the source of corporate vitality. Therefore, it is necessary to highlight the corporate culture which “advocates innovation, tolerates failure, supports risk and encourages breakthroughs” in the corporate system to encourages innovate of employees in daily work and management and form a new innovation governance mechanism that activates every element of the company to advance the reform. “Mixture instead of integration” is a common problem faced by state-owned and private enterprises in the process of reform, and the lack of trust is the major obstacle that hinders the value creation of M&As through improvement of innovation capabilities. Integrity is the cornerstone of the development market economy and maintains the basic values and social life of the entire society, and the concept of “economic person with integrity” in the modern enterprise system has provided necessary institutional guarantees for the honest governance of enterprises with mixed ownership.

4.5.2.2

SOEs Realizes the Integration of Formal Governance Mechanism with New institutional culture of Integrity and Innovation in M&A Through Modern Corporate Governance

The mixed ownership is about the reform of existing resources, and mixed ownership M&A can realize the advantage complementation of state-owned and private enterprises, but may result in disharmony and inconsistency between the new mechanisms introduced in by SOEs and the original system. Substantial breakthrough in mixed ownership reform can only be made through the integration of formal institutions of corporate governance with the integrity and innovation mechanism. Social trust, as an important social capital, actively promotes the development of economy. The biggest impact of trust mechanism on an enterprise is that it can significantly enhance the innovation capabilities of the enterprise, and the blockchain technology is imported in the implementation of innovation to create a trust mechanism for capitalists and attract capitalists to be confident and bold to invest in innovation, which can offset the lack of innovation incentives in formal institutional. In the modern corporate governance mechanism characterized by clear property rights, well-defined power and

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responsibilities, separated government functions from enterprise management and scientific management, the government, party organizations and enterprises should have a sense of crisis and urgency in building a culture of integrity and innovation while carrying out corporate governance through formal institutions. The innovation results of enterprises can be effectively protected through the formal institutions thanks to the integration of formal institutions with informal institution such as integrity and innovation in the corporate governance, and the enterprises can enjoy the excess returns generated by innovation and be more willing to innovate. They will foster the corporate culture in the strategic competition under the market mechanism through M&A. Cultivate and resolve the conflicts between the new and old mechanisms through integrity and innovation capabilities to eventually enhance the comprehensive competitiveness of the enterprises and build a virtuous circle of innovation for the enterprises.

4.5.2.3

SOEs Integration the Formal Corporate Governance Mechanism with Integrity and Innovation Mechanism in M&A Through Independent Innovation

The governance institutions have generally been established and perfected, and the corporate governance structure has been formed in the reform of SOEs. However, there are still flaws in the construction of a rule abiding culture, and the idea of direct and sole management control still lingers. Some modern governance rules and concepts such as checks and balances and oversight over the execution of power have not been substantively established, therefore, SOEs must strengthen the construction of governance culture and form a good governance culture of integrity and innovation in M&A. The difficulty in building cultural institution of integrity and innovation in SOE is that M&A is not only a simple combination of state-owned capital and private capital, but also the deep integration of the two mechanisms under different cultural backgrounds. Innovation should serve as the endogenous engine that drives the formation of a culture of integrity and innovation and the integration of such culture with the formal institutions in SOEs. They need the endogenous engine of independent innovation. The innovation culture and atmosphere of the enterprises will be energized when comprehensive capital such as production factors, knowledge and human resources are invested into innovation initiatives, and trust mechanism built upon blockchain technology will also stimulate integrity to be the most important culture of the enterprise. The good performance produced by innovation and the property rights distribution mechanism for innovation outputs will strengthen the culture of innovation and integrity and urge the integration of formal institutions of corporate governance with the cultural institution of integrity and innovation.

Chapter 5

Research on the Evaluation Index System of Trust and Innovation Studies Based on Mixed Ownership Reforms of SOEs

Based on the research of the mixed ownership M&A of SOEs from the perspective of the strategic mergers and acquisitions (hereafter referred to as the M&A), the motivations of the M&A can be divided into internal driving motivations based on the realization of the enterprise’s strategic objectives and market profit incentive motivations oriented to obtain market abnormal returns. The trust mechanism of enterprise M&A activities can be divided into the internal one and the external one. The external trust mechanism constructed on the basis of the realization of the interests of stakeholders can affect the M&A value creation of SOEs in the M&A and resource integration of SOEs. The internal trust mechanism built on the basis of the sincerity of both parties in M&A, can have an impact on the M&A value creation of SOEs by influencing the innovation capability of the enterprises. Innovation capability is a vital part of enterprise capability, which can promote enterprise economic growth and enhance the competitiveness of competitive enterprises. Based on this, this part will respectively establish comprehensive evaluation systems and evaluation models of trust mechanisms, innovation mechanisms, and the value creation of mixed ownership M&A of SOEs from the two aspects of the evaluation index system and the evaluation model, and explore the impact of trust or innovation on the value creation of mixed ownership M&A of SOEs. Due to the particularity of ownership, the motivations for SOEs to participate in the mixed ownership M&A include not only the realization of enterprise capital appreciation and value creation, but also some strategic factors at the national level, such as concentrating state-owned economic powers to promote the development of the industry, and maintaining social stability and development. This subject research focuses on the motivation of realizing capital appreciation and value creation in micro-enterprises, exploring the economic consequences of SOEs’ participation in the mixed ownership M&A, and constructing specific influence paths for trust mechanisms and innovation mechanisms. Therefore, based on the characteristics of the self-development and the maximization of interests of SOEs, this subject research

© Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_5

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constructs the evaluation system of trust mechanisms from five dimensions of shareholders, creditors, suppliers, buyers and enterprises’ sincerity; it constructs the evaluation system of innovation mechanisms from three dimensions of technological innovation capability, market competitiveness and sustainable development ability; and the evaluation system of the mixed ownership M&A value of SOEs from four dimensions of Tobin’s Q, the operating cash flow, return on total assets and enterprise governance.

5.1 On the Construction of the Evaluation System of Mixed Ownership M&A Value of SOEs from the Perspective of China The mixed ownership reform was put forward in the 1990s to attract private capital and promote the development of productivity. Since the 1990s, China has allowed domestic private capital and foreign capital to participate in the restructuring and reforms of SOEs. The practice of economic reforms has proven that the mixed ownership can effectively promote the development of productivity. In 1992, private capital was officially introduced into China after the reform and opening up. At present, the idea of integrating mixed ownership into the reforms of SOEs is actually a redefinition of the shareholding structure of our country, and a new understanding of the roles and status of private ownership and private economy in China’s national economic structure. Before the reform, China implemented the policy of eliminating “private ownership”; after the reform and opening up, a small number of individual and private economies were allowed to exist, and private ownership began to appear in China. The 18th National Congress of the Communist Party of China first adopted the term of “encouragement” for the development of non-public ownership. The Third Plenary Session of the 18th Central Committee of the Communist Party of China specified the equal status of the public ownership and the non-public ownership, and specifically proposed to “actively develop the mixed ownership economy”. It was believed that “the mixed ownership economy with cross shareholding and integration of state-owned capital, collective capital and non-public capital is an important realization form of the basic economic system” and “more state-owned economies and other ownership economies are allowed to be developed into mixed ownership economy”. On the one hand, SOEs can obtain strategic opportunities by merging and acquiring private enterprises. Private enterprises, with their unique forms of ownership, have certain advantages in their operating areas in terms of technology and market resources. The reason why most of the domestic private enterprises have failed in the end is that capital, scale and other factors have become the bottlenecks of their development. Most of the SOEs have relatively abundant strength. After merger or reorganization with private enterprises, they can effectively combine their relatively abundant economic strength with various resources of private enterprises, so as to quickly enter a relatively unfamiliar industry in a short period of time, make

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them bigger and stronger, achieve the goal of obtaining greater strategic opportunities, and boost the economic growth of enterprises. On the other hand, the M&A can enhance the economic strength of SOEs. After the SOEs complete the merger and reorganization of private enterprises, with the help of private enterprises as the “springboard”, they can achieve the goals of opening up the market, improving the technical level, inputting funds and completing their own operation and management. Most importantly, it can help the enterprises realize the value preservation and increase of state-owned assets, so as to fundamentally enhance the economic strength of enterprises. Therefore, it is very important to construct the index evaluation system to evaluate the effect of the mixed ownership M&A of SOEs in China. Focusing on the two core research contents of this subject research, namely the trust mechanism and innovation capability, this chapter will construct the evaluation system of the mixed ownership M&A of SOEs in China.

5.2 Evaluation System of Trust Mechanism The development of the enterprise M&A for nearly a century has always been a process in which the M&A theory promotes the M&A practice, and the M&A practice in turn promotes the deepening of M&A theoretical research. This subject research takes the strategic mixed ownership M&A motivation of SOEs as the starting point of the research, the trust and innovation in the strategic M&A as the main research path, and the value created by the enterprise M&A as the end of the research. In the research of trust mechanisms, trust can be divided into two dimensions: outer layer and inner layer. The outer trust mechanism is built on the basis of the realization of the interests of stakeholders, while the inner trust mechanism is embedded in the longterm enterprise culture of the companies involved in the M&A. Specifically, the outer trust mechanism is embodied in the form of the cooperation of stakeholders, which will have an impact on the value of the enterprise; while the inner trust mechanism is embodied in the sincerity of the M&A enterprise, and affects the value generated from the enterprise M&A through its effect on the enterprise innovation capability, thus forming a comprehensive evaluation system of the influence of trust mechanisms on the value of the M&A enterprise. A complete and comprehensive evaluation standard system covers six aspects of the evaluation subject, object, target, index, standard and method. The evaluation object is the person who evaluates the object (Hu 2008). In terms of the enterprise M&A activities, both parties, the shareholders, suppliers, and government regulatory authorities of the M&A enterprise are all the potential evaluation objects who will evaluate the economic consequences of the enterprise M&A. The evaluation object is the objective object to be evaluated, and is decided upon the evaluation targets and needs of the evaluation subject. It can be the M&A enterprise, functional departments, or specific groups of people within the enterprise (such as grassroots employees, management and R&D personnel). The evaluation target is determined and established according to the requirements of the evaluation subject. This target

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is drawn up and announced in advance, but the evaluation target may be adjusted due to changes in the objective environment and other factors. The evaluation index is specifically set by the evaluation subject according to the evaluation object and target, and will evaluate the specific aspects of the evaluation object. The evaluation method takes the evaluation target as the ultimate orientation, and the fundamental goal is to obtain the final results by evaluating the evaluation index. This subject research adopts two evaluation systems to evaluate trust. The first is the trust evaluation system based on stakeholders. Before the M&A, stakeholders in the M&A activities will anticipate the returns that the M&A activities will generate for themselves and build trust in the M&A enterprise; after the M&A, stakeholders will compare the difference between expected returns and actual returns, and the degree of realization of expected returns will affect the degree of trust and cooperation between stakeholders and the M&A enterprise. Therefore, the stakeholder trust evaluation system is a system that fully integrates the expected evaluation of interests and the results of interests (Li and Wang 2016; Li et al. 2016). In this subject research of trust mechanisms based on stakeholders, the stakeholders of the mixed ownership M&A activities of SOEs are the evaluation subjects, the enterprises formed by the M&A are the evaluation objects, and the evaluation target is to maximize the stakeholder returns. The evaluation indexes include four types of indexes, namely shareholders’ M&A income index, the creditor’s M&A income index, the supplier’s M&A income index and the buyer’s M&A income index. The evaluation method is to measure the realization degree of the expected returns generated by the stakeholders in the M&A by combining various statistical methods according to the evaluation targets. The second is the trust evaluation system based on the acquirer management. In the research of trust mechanisms based on the acquirer management, the evaluation subject of the M&A is the decision maker of the M&A activities (i.e. the acquirer management), the evaluation object is the trust mechanism of the M&A enterprise, that is, the outer trust mechanism related to stakeholders and the inner trust mechanism of both parties in the M&A, the evaluation target is whether the trust mechanism can increase the enterprise value created by the enterprise M&A, the evaluation index is an evaluation index designed for the trust of stakeholders and both parties in the M&A, and the evaluation method takes the evaluation target as the ultimate guide and aims to obtain the final evaluation results through the combination of various statistical methods and the assessment of evaluation indexes.

5.2.1 Evaluation Index of Shareholder Trust The trust of shareholders of the M&A enterprises in the enterprise M&A activities stems from their desire to improve market and financial performances after the M&A and to maximize their own interests. Generally speaking, the M&A market performance can be divided into two categories, the short-term one and the long-term one; the M&A financial performance primarily belongs to the long-term category and is closely related to shareholders’ equity.

5.2 Evaluation System of Trust Mechanism

5.2.1.1

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The Market Performance of the Mixed Ownership M&A

This subject research will adopt event study methods to measure the M&A market performance. The event study method is an approach to measure the impact of the M&A on shareholders by calculating the changes in abnormal returns for the company’s stock after the announcement of the M&A. Ball and Brown (1968) and Fama (1969) first applied event study methods to the research of accounting and financial reporting and the effectiveness of the capital market. Soon afterwards, event study methods were gradually adopted by scholars and widely used in the research of the stock market performance. 1.

The short-term market performance of the mixed ownership M&A

Treat the mixed ownership M&A of SOEs as a single transaction event and determine the event window. Then calculate the gap between the actual rate of return on the company’s stocks during the event window and the expected normal rate of return, so as to determine the impact of this mixed ownership M&A activity on the benefits of business owners. There are usually two indexes for measuring short-term shareholder returns: the abnormal return (AR) and the cumulative abnormal return (CAR). The specific calculation steps are as follows: The first step is to determine the event window for the research. To measure the impact of a certain M&A transaction on enterprise stock market returns, it is necessary to determine the event window for the research first. Abnormal fluctuations in enterprise stocks during the specific window of time are the market performance of the M&A event. The selection of the event window usually takes the M&A announcement date as the origin, and reflects the cumulative economy ic consequences of M&A activities for business owners by measuring the fluctuation degree of the enterprise’s stock prices in a certain period of time before and after the M&A announcement. For the length of the event window, scholars have not yet concluded an accurate empirical value, but generally speaking, the longer the event window, the more likely the research is to be interfered by other irrelevant factors, and the worse the effect of the research. Therefore, the shorter the event window, the higher the reliability of the research results (Seiler 2004). There is no uniform standard for the choice of window of time in the research on the short-term market performance of the M&A at home and abroad. Most scholars use [−1, + 1], [−2, + 2], [−5, + 5], [−15, + 10] etc. as the event window. The second step is to calculate the expected return E(R) of the company’s stocks. The formula for calculating the abnormal return AR is AR = R-E(R), where R is the actual return on the stocks of the sample company, and E(R) is the expected normal return of stocks on the assumption that the sample company has not been involved in M&A transactions. It can be seen from the calculation formula of AR that the calculation of the expected normal return rate E(R) of enterprise stocks will greatly affect the accuracy of the calculation of enterprise abnormal returns. In the current research on the stock market performance, there are mainly three ways to calculate E(R):

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Mean Adjusted Returns. This method assumes that the expected return before the stock M&A is a constant, and different companies have different constants of expected returns. This method pays more attention to the historical information of specific stocks, and can be applied to situations where stock changes are not strongly correlated with changes in the overall stock index of the market. The specific model design is as follows: A Rit = Rit − R i

➁

Among them, ARit and Rit are respectively the abnormal and actual returns of the stock i on day t; R i is a constant, which is the expected return of the enterprise before participating in the M&A activities. Market Adjusted Returns. This method assumes that the expected return on stocks of all enterprises in advance is the same, and uses market indexes to calculate market portfolio returns. Since the market investment portfolio of venture capital is a linear compound of all stocks, the Market Adjusted Returns has distinct time-series characteristics and can be applied to situations where the changes in enterprise stocks are highly correlated with changes in the overall stock index in the market. The specific model design is as follows: A R = Rit − Rmi

➂

Among them, ARit and Rit are respectively the abnormal and actual returns of the stock i on day t; Rmi is the market portfolio return. Market and Risk Adjusted Returns. This method is based on the capital asset pricing model (CAMP) to calculate E(R). The Market and Risk Adjusted Returns comprehensively considers the advantages and disadvantages of Mean Adjusted Returns and Market Adjusted Returns. It is a compromise method and is widely used by scholars in the research of the market performance (Xin 2003). The specific model design is as follows: A Rit = Rit − αˆ i − βˆi Rmi

Among them, ARit is the abnormal return of the stock i on day t; Rmi is the return of the stock i on day t; αˆ and βˆi are the regression coefficients of ordinary least squares during the estimation period. The third step is to add up the abnormal return of daily stocks during the event window, and calculate the cumulative T2 abnormal return of enterprise stock i during A Rit . the event window by C A Rit = t=T l The fourth step is to calculate the average abnormal return AARpi and the average cumulative abnormal return CARpt of all sample companies during the event window. The reason why the average abnormal return and the cumulative return of the sample companies are calculated is that the company’s stock returns will be affected by many factors (such as), and the averaging method can better eliminate the interference of irrelevant factors.

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The average daily abnormal return of the equally weighted stock portfolio P on day t: 1 AARpi = ARit N i=1 N

The average cumulative abnormal return of the equally weighted stock portfolio P in: CARpt =

T2 

AARpt

t=T1

From the research literature, most empirical research results show that the M&A event can bring short-term abnormal returns to shareholders. Jensen and Ruback (1983) found that during the M&A event period, shareholders received abnormal returns, among which shareholders of the target company made more profits, while the acquirer shareholders’ benefits had no significant difference. Andrade et al. (2001) looked at the situation of the entire industry and found that the target company received 16% of significant abnormal returns during the event period, and the acquirer shareholders’ returns were negative but not significant. The target company’s shareholders were the main beneficiaries of the M&A event. Faccio and Masulis (2005) found that when the acquired company was unlisted, the acquirer shareholders could obtain positive cumulative abnormal returns. In China, Li et al. (2002) explored the M&A events of listed companies by listed companies in Shanghai and Shenzhen stock markets in 1999 and 2000 respectively, and found that the market performance of the acquirer shareholders was significant, but the shareholders’ return of the target company had no significant difference. Zhu (2006) conducted the research on M&A events from 1998 to 2002 and found that the acquirer shareholders could obtain accumulated abnormal returns during the event period. He locked the event period at 1 day, 10 days and 20 days before and after the M&A, and still concluded that the average and median of CAR were significantly greater than 0, firms obtained abnormal returns. For the strategic M&A of SOEs referred to in this subject research, from the perspective of value creation for SOEs by the mixed ownership M&A, the short-term abnormal return created by the strategic mixed ownership M&A for SOEs is not the internal driving motivation, but the incentive motivation for the mixed ownership M&A of SOEs. However, due to the long-time span of the strategic M&A, whether from the perspective of internal driving motivations or incentive motivations, the mixed ownership M&A of SOEs creates abnormal returns for enterprises and helps shareholders of SOEs gain profits, which will thus increase the trust of shareholders of SOEs in the enterprise M&A. 2.

The long-term market performance of the mixed ownership M&A

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The long-term market performance of the mixed ownership M&A refers to the change of stock prices brought about by the enterprise’s participation in the mixed ownership M&A event over a long period of time. Different from the calculation of the short-term market performance of the M&A, to calculate the long-term market performance of the M&A, it is usually not necessary to estimate the normal return of the acquirer stocks, but to select the enterprises matching with the sample enterprises after the M&A event and compare the market performance between enterprises involved in the M&A and not involved in the M&A, so as to measure the market performance of the M&A enterprises during the specific event window. In the research on the long-term market performance of the M&A enterprises, most researchers choose the enterprise scale and the ratio of the book value to the market value as the conditions for matching the sample enterprise and the control group enterprise, and compare the stock returns of the sample enterprise and the control group enterprise. Their differences in stock returns are used as a measure of the longterm market returns of the acquirer shareholders. The specific calculation model is as follows: BHARiT =

T 

(1 + Rit ) −

t=0

T 

(1 + Rbenchmark,t )

t=0

1 ARjt N j=1 N

Rbenchmark,t =

Among them, BHARiT is the long-term abnormal return rate of the i-th acquirer enterprise’s stock; Rit is the normal return rate of the i-th stock in the t-th month; Rbenchmark is the average return rate of the control group enterprise’s stock; ARjt is the actual return rate of the j-th control group enterprise’s stock in the t-th month; N is the number of the control group enterprises. In the research of the long-term market performance of the M&A, scholars generally divide the control group enterprises into five groups based on the enterprise scale and the book-to-market ratio, and pair them with sample companies to form 25 investment portfolios. Generally speaking, the book value adopts the value of the enterprise at the beginning of the year, and the market value is taken from the circulation market value disclosed in the enterprise’s annual report for that year. Gregory (1993) used 452 M&A events in the UK from 1984 to 1992 as the research samples. Examining the long-term market performance, he found that the long-term market performance of the acquirer’s M&A had declined. After dividing the samples of the M&A into two types of industry-related one and non-related one, he found that the M&A in non-related industries could not help enterprises obtain cumulative abnormal returns. The domestic scholar Zhu (2006) explored the long-term market performance of 1,672 M&A events in China and found that the BHAR of enterprises after the M&A was significantly negative. In the long run, it was difficult for the M&A to help shareholders increase the market performance. Many scholars at home and abroad have discovered the short-term phenomenon of

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market performance improvement after the M&A. This also provides the evidence to a certain extent that the M&A cannot generate gains for the acquirer shareholders in the long-term. As the long-term market performance of the M&A decreases, it is difficult to win the long-term trust of shareholders. In the M&A practice, after the M&A of the target company, the acquirer’s own shareholding structure has continued to change and even the controlling shareholders have changed in many cases, which also shows that it is difficult for the M&A enterprise to obtain shareholders’ trust with good long-term performance of the M&A.

5.2.1.2

The Financial Performance of the Mixed Ownership M&A

In the M&A research, the financial performance of the M&A generally refers to the medium and long-term book performance of the enterprise, and it is closely related to the shareholders’ equity of the M&A enterprise. From the perspective of the balance sheet, enterprise assets are mainly inputting from shareholders and creditors, and enterprises continue to use assets to generate profits in the daily production and operation process, thereby increasing enterprise shareholders’ equity. Generally speaking, the measurement indexes of the financial performance of the enterprise M&A include rate of return on common stockholders’ equity (ROE) calculated based on the book value of the enterprise’s assets, earning per share (EPS) calculated based on the enterprise’s stock price, etc. The first is ROE, which is calculated based on the enterprise’s book value. ROE is an important index commonly used to measure the financial situation of an enterprise, and there are many ways to calculate ROE. If ROE is measured by the ratio of the current net profit realized by the enterprise to the business owner’s equity at the beginning of the period, it indicates the value generated by the capital invested by the business owner at the beginning of the period; if ROE is measured by the ratio of the current net profit to the enterprise interactive equity at the end of the period, it indicates the proportion of the value created by the enterprise using shareholders’ input in the total input of shareholders in the current period. In addition, according to the DuPont analysis, ROE = ROA (Return on Assets) × EM (Equity Multipier). Furthermore, the formula can be further split into ROA = Net Profit Margin on Sales × Asset Turnover. In the analysis of enterprise financial indexes, the net profit margin can reflect the profitability of the enterprise, that is, whether the enterprise is trusted and recognized by customers; the asset turnover which can reflect the liquidity of the enterprise is an index that suppliers and enterprise creditors pay close attention to. The higher the asset turnover, the higher the utilization rate of enterprise assets; and the equity multiplier can reflect the multiple of shareholders’ equity. In the M&A of SOEs, the trust of shareholders in the enterprise is the foundation of the trust of other stakeholders of the enterprise, and the demands of shareholders also represent the demands of other stakeholders to a certain extent. When SOEs participate in the mixed ownership M&A, the enterprise’s ROE has been significantly improved, representing that the M&A activities have generated profits for shareholders of the

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state-owned enterprise and shareholders will increase their trust in the operating activities of SOEs. The second is EPS calculated based on the enterprise’s stock price. In the enterprise M&A activities, shareholders not only pay attention to the creation of the enterprise’s book value, but also focus on the enterprise’s market performance (such as the stock performance). Therefore, EPS growth is also an important factor for the accumulation of shareholder trust. EPS is generally used to evaluate the profitability and development ability of an enterprise and the investment risk of the owner, and to reflect whether the market is optimistic about the enterprise. When SOEs participate in the mixed ownership M&A, the enterprise’s EPS has increased significantly, indicating that the enterprise’s profitability has become stronger, the value of stocks held by shareholders in the market continues to increase, and the shareholder trust of SOEs will increase. After the M&A of SOEs under cross-ownership, if both parties in the M&A can achieve synergy, the input–output function of the production factors of M&A enterprises will change, and the financial performance of the enterprises will improve, thus increasing the long-term trust of the acquirer shareholders in SOEs. Most researches suggest that SOEs’ participation in the mixed ownership M&A will improve their financial performance. Megginson (1994) believed that SOEs had the problem of low operational efficiency, and privatization could improve the efficiency of business operations and have an impact on the business performance (Dsouza et al. 2005). Wang (2016) explored the M&A activities of the local state-owned enterprise Grandblue Environment under cross-ownership and found that the M&A enhanced the innovation capability of Grandblue Environment, thereby promoting the market performance and financial performance of the enterprise. However, some scholars have found that the profits generated by the M&A activities can only be reflected in the improvement of the financial performance of the M&A enterprises after offsetting the M&A premium paid by the acquirer. Therefore, it is difficult for the M&A activities to generate synergies for the enterprise. The “synergy trap” may lead to overconfidence of the enterprise’s managers and excessive payment of consideration for the M&A, which may result in a dilemma for the M&A enterprises (Sirower 1997). Brunner (2002) sorted out 15 papers on the M&A financial performance from 1977 to 2001, and took EBIT, ROA and ROE as the evaluation indexes to measure the financial performance of M&A enterprises. He found that only a few papers showed that M&A can promote the financial performance of enterprises.

5.2.2 Evaluation Index of Creditors’ Trust The trust of creditors of the M&A enterprises in M&A activities comes from their demand for sufficient profits and cash flow, as well as timely repayment of interest and principal. Generally speaking, creditors will judge the debt situation and repayment ability of enterprises through four aspects: capital structure, bond period structure, short-term debt-paying ability and long-term debt-paying ability.

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5.2.2.1

151

Capital structure

Jensen and Meckling (1976) from the perspective of enterprise financing, pointed out that modern debt financing method may cause conflicts of interest between creditors and enterprise shareholders. Among the stakeholders of M&A activities of SOEs, shareholders are the holders of the enterprise ownership, while creditors are economically dependent stakeholders. In the environment of information asymmetry, when there is a conflict of interest between shareholders and creditors, since shareholders are the owners of the enterprise and have absolute information advantages, they are “agents” with opportunistic behaviors. As a result, under investment may occur (Myers and Majluf 1984). There are great differences in the benefit creation function of shareholders and creditors in SOEs. Shareholders’ interest demands in mixed ownership M&A are to obtain higher returns with as little risk as possible, avoid paying too much M&A premium, realize the rapid growth of the M&A enterprise value and the owner’s equity, while creditors expect enterprises after the M&A to have more sufficient profits and cash flow and be able to repay the money on time. Therefore, in the investment activities of enterprises, shareholders tend to invest in high-risk and high-yield projects. If such a project investment succeeds, the creditors can only enjoy fixed income (i.e., interest income on the debt), while the shareholders can enjoy all the remaining income. If such a project investment fails, creditors and shareholders must share the economic losses caused by the investment failure. When the asset-liability ratio of an enterprise is high, the enterprise may face the dilemma of being unable to repay the debt, and the shareholders may refuse projects whose net present value of cash flow is greater than 0 but can not create more net profits for the enterprise considering their own income, which damages the interests of creditors. Therefore, the capital structure of enterprises becomes the most important index for creditors to measure their own interests. In China, scholars generally use assetliability ratio as a measure of the capital structure of listed companies. In the financial analysis, this is also called “equity ratio”. After SOEs participate in the mixed ownership M&A, the equity ratio of M&A enterprises will increase, and creditors will reduce their trust in SOEs and take a series of measures, such as supervision and governance of SOEs according to the terms of the debt contract, pressure on enterprises to regularly repay principal and interest, etc., to restrain the egoistic behavior of over investment or under investment by shareholders of SOEs, so as to safeguard their own interests.

5.2.2.2

Debt Maturity Structure

According to the information of debt maturity structure possessed by SOEs, creditors can better evaluate the degree to which their own interests are protected. According to debt maturity, debt can be divided into short-term debt and long-term debt. Myers and Majluf (1984) found that the short-term debt owned by the enterprise can transmit the relevant information of the growth of the enterprise. If the future investment opportunities of the enterprise are regarded as growth options, the higher the growth

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of the enterprise, the more serious the under investment of shareholders in the course of operation. And the higher the short-term debt that the enterprise has to repay before the option expires, the more efficiently it can alleviate the under investment of shareholders. The long-term debt can put loan enterprises under the supervision of creditors, and can effectively restrain over investment of the management. (Capriow et al. 1997). Zhang (2008) studied the interest protection and realization mechanism of creditors from the perspective of debt maturity structure. The study showed that there was a U-shaped relationship between the management over investment and the debt maturity structure of the enterprise, and both long-term and short-term debts owned by enterprises could protect the interests of creditors. At present, there are two common methods to evaluate the debt maturity structure of the enterprise. The first one is the balance sheet method, whose formula is Debt maturity structure = Long-term debt/Total debt (Barchlay et al.,1995); the second one is the incremental method, that is, the actual issuance period of various debt instruments is used as a measure of the debt maturity structure (Mitchell,1993). At present, Chinese scholars mainly use balance sheet method to calculate debt maturity structure. When creditors are dissatisfied with the M&A of SOEs under mixed-ownership and their trust in SOEs is reduced, they may shorten the debt maturities provided to SOEs to protect their own interests.

5.2.2.3

Short-term Debt-paying Ability of Enterprises

The role of capital structure is mainly used to measure the long-term debt-paying ability of enterprises, and the debt maturity mainly lies in alleviating the conflict between shareholders and creditors and evaluating the long-term debt-paying ability of enterprises. According to the debt maturity, liabilities are divided into the longterm liability and the short-term liability, but over time, the long-term liability held by enterprises will eventually be converted into the short-term liability. Therefore, the short-term debt-paying ability of enterprises will have an important impact on the risk of creditors. There are many ways to measure the short-term debt-paying ability of the enterprise. First, the sustainability of the short-term debt-paying ability. Financial activities of sustainable development refer to the reasonable financial forecasting and evaluation of the sustainable development of enterprises by optimizing the financial activities of enterprises under the constraints of existing resources, thus helping achieve sustained and long-term growth of enterprise value. It can be seen that the sustainability of the short-term debt-paying ability of enterprises will have an important impact on the financial activities of sustainable development of enterprises. Second, the current ratio. It is calculated by Current ratio = Current assets/Current liabilities. The liquidity of assets and liabilities held by the enterprise directly determines its short-term debt-paying ability. Current assets are the assets that an enterprise has the ability to use, sell or liquidate within one year, and the current liabilities are the debts that must be repaid within one year. It is worth noting that the current liabilities owned

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by an enterprise also include the long-term liabilities that need to be paid off within one year. Third, the cash to current liabilities ratio. Although the liquidity reflects the relationship between the current assets and current liabilities held by an enterprise, it still has some limitations, such as not reflecting the reserves drawn by the enterprise, recognizing the income in advance, and not directly reflecting the contingent liabilities held by the enterprise and other relevant information. The cash to current liabilities ratio can make up for part of the deficiencies of the current ratio. Its formula is Cash to current liabilities ratio = Cash flows from operating activities/Current liabilities. Since there is a certain difference between the profit calculation and the value of the actual cash flow, the enterprise may create enough profits in the current period but lack sufficient cash flows to repay the debt. Therefore, through the analysis of net cash inflows of the enterprise, we can explore the possibility for the enterprise to repay the current debt on time or more directly reflect the actual capability of the enterprise to meet its current liabilities. Fourth, off-balance-sheet factors. In addition to the on-balance-sheet factors of the financial statements, creditors will also pay attention to the off-balance-sheet factors. For example, the bank credit spendable can improve the off-balance-sheet factors of the short-term debt-paying ability of enterprises; the enterprise guarantee is not conducive to the off-balance-sheet factors of the short-term debt repayment of the enterprise. Once the enterprise has fulfilled its current obligations due to off-balance-sheet factors, it will increase the burden of repayment. Many scholars have studied the short-term debt-paying ability of enterprises. Based on the research method of the financial ratio, Altman (1968) established a Z-score model to warn the financial risks of enterprises. Through the analysis of the enterprise’s debt-paying ability, the model has unique advantages in forecasting financial distress and preventing bankruptcy. Altman et al. (1977) established a ZETA model, which takes the current ratio as an index to evaluate the short-term debtpaying ability of enterprises. For the analysis of the same enterprise sample, the ability of the ZETA model to forecast financial risks are more accurate. Based on the economic phenomenon of the enterprise bankruptcy, Wu Shinong and Huang Shizhong (1987) constructed the bankruptcy index system from four dimensions, including asset liquidity, and used the current ratio and currency ratio as the indexes to evaluate the short-term debt-paying ability and asset liquidity of enterprises.

5.2.2.4

Interest Rate on Debts

The capital structure, debt maturity structure and short-term debt-paying ability mentioned above all focus on the risk of creditors. In addition to the risks faced by creditors, the interests of creditors are also closely related to returns. In the related research of M&A activities, foreign scholars generally use event study methods to analyze the volatility of bond prices of listed companies, so as to calculate the abnormal returns of creditors in the event window, but no unified conclusion has been reached. Eger (1983) and Walker (1994) studied some American companies and found that M&A activities had helped creditors of the acquirer to achieve abnormal

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returns. Billett et al. (2004) studied 831 M&A events from 1979 to 1997, taking [-30, 0] as the event window. They found that the M&A made the cumulative abnormal returns of the acquirer’s creditors negative. They also classified the sample companies according to the bond rating, M&A payment methods, etc. and found that there was no significant difference between the sample groups. In China, most listed companies take bank loans as the main financing channel and measure the returns of creditors by financial indexes. Most scholars use the interest payment ratio of listed companies as an index to evaluate the returns of creditors, because the costs paid by the debtor are the returns of creditors.

5.2.3 Evaluation Index of Suppliers’ Trust After SOEs participate in the mixed ownership M&A, they have expanded the scale of production and operation, generated the synergy effect, and enhanced the bargaining power of suppliers. However, if there is no mutual trust between the M&A enterprise and the supplier, and there is a problem of information asymmetry between the two parties, the supplier may delay the delivery or even do not provide raw materials to the enterprise, which will increase the transaction cost and directly affect the production activities of the enterprise, thus affecting its sales performance and damaging its brand and reputation, resulting in the loss of its interests. Therefore, the degree of the supplier’s trust has an important impact on the production and operation activities of M&A enterprises. The trust of M&A suppliers in M&A activities of SOEs mainly comes from their demand that M&A companies have sufficient cash flow to repay loans on time and establish long-term cooperative relations. Generally speaking, the supplier will judge the operation of the enterprise through the accounts receivable turnover and the inventory turnover.

5.2.3.1

Turnover of Accounts Receivable

For enterprises, accounts receivable is an important current asset and an important step to realize cash flow recovery. However, with the development of the commercial credit and the expansion of the enterprise scale, the problem of accounts receivable caused by credit sales of products in upstream and downstream enterprises in the supply chain is becoming more and more serious. Meng (2006) found that the direct and indirect economic losses of Chinese enterprises due to the lack of the commercial credit are nearly 600 billion yuan per year. Therefore, accounts receivable will have an important impact on the trust of upstream and downstream enterprises in the supply chain. Theoretically speaking, the accounts receivable turnover is the ratio of credit sales and average accounts receivable balance, but because it is difficult for external stakeholders to obtain credit sales, it is generally replaced by the main business income. The accounts receivable turnover can well reflect the turnover speed of

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accounts receivable and the effectiveness of accounts receivable management. The higher the index value, the stronger the enterprise’s management ability of accounts receivable, the faster the speed of cash recovery, and the stronger the short-term debtpaying ability of the enterprise. After participating in mixed ownership M&A, SOEs can generate the synergy effect and the scale effect, learn from the management advantages of private enterprises, and have a bigger say in their relationship with customers. The accounts receivable turnover will increase. This indicates that the enterprise is more likely to pay on time and has a strong debt-paying ability, which will enhance the degree of trust of suppliers in the enterprise. However, if the effect of the M&A is not ideal, and even the SOEs have lost their original advantages, it will lead to the continuous decline of the accounts receivable turnover of the acquirers, which will reduce the trust of suppliers in the enterprises.

5.2.3.2

Inventory Turnover

Most of the SOEs involved in the M&A are in the manufacturing industry, with a wide variety of inventories, such as raw materials, goods in process, finished products, and materials processed on commission. According to statistics, the proportion of inventory owned by the manufacturing industry in current assets is generally 60%, which reflects the importance of inventory management in the production and operation of enterprises. Factors influencing inventory risks mainly include internal and external factors. The internal influencing factors mainly include the instability of reorder time, the finiteness of the forecast level of market demands, the uncertainty of the forecasting period and methods, etc. In recent years, with the progress of science and technology and the increase of the fierce market competition, the update speed of products is increasing. In addition, due to the development of economy and other factors, the customers’ demand for products is becoming more and more difficult to forecast, and the requirement for heterogeneity is becoming higher and higher, which further raises the uncertainty of the customer demand and increases the difficulty of the enterprise’s inventory management. Because of the limitation of the management, many enterprises will make the forecast of the customer demand for a long time in advance to arrange production and make the decision of inventory purchases, which may lead to a large mismatch between the plan and the actual demand of the enterprise, increasing the difficulty and risks of the inventory management. The external factors that affect the inventory mainly include the fluctuation of the external economic environment (for example, the inflation), the renewal of production technology, the change of policies, the disruption to supply chains and so on. The renewal of production technology will have a great impact on the product sales of enterprises, and the obsolete products of enterprises will pile up in warehouses, increasing the risks of inventory depreciation and management. The disruption to supply chains will directly affect the purchase of raw materials, thus affecting the normal production activities of enterprises, and enterprises may not be able to produce enough products to meet the needs of customers, which will result in economic losses. From

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the analysis of the current situation, the main problem of manufacturing enterprises is that there is too much inventory backlog, which will have a great impact on the inventory management ability and profitability of enterprises, and will also affect the sustainable development of enterprises. The inventory turnover can be used to reflect turnover of the inventory and the sales capacity. The specific calculation method is Inventory turnover = Main business cost/Average inventory balance. The inventory turnover is a key index to measure the production and operation, inventory management and sales level of enterprises. Specifically, the higher the inventory turnover, the less the cost of the inventory occupation, the higher the liquidity of the inventory and efficiency of the capital use, and the stronger the cash recovery capacity. The slower the inventory turnover of the enterprise is, the worse the asset liquidity will be. And the asset management ability and management efficiency will be low, which will have a direct impact on the profitability and operation ability of the enterprise, and limit the sustainable development of the enterprise. The supplier’s trust in enterprises is based on the timely recovery of funds and the the stability of the contract signing. If after the mixed ownership M&A, the state-owned enterprise expands the enterprise scale, generates the synergy effect, can fully combine the advantages of the acquired enterprise (the private enterprise), optimize the capital structure of the state-owned enterprise, improve the management ability of the inventory, and increase the inventory turnover, and the supplier’s interest demand is guaranteed stably, the supplier will increase its degree of trust in the M&A enterprise, and form the strategic alliance based on the trust with the enterprise, so as to realize the win–win situation between the supplier and the M&A enterprise. However, after the strategic M&A under cross-ownership, if the resources integration effect of state-owned and private enterprises is not ideal, the M&A enterprises lack suitable managers, and the culture and management habits of M&A enterprises can not be well integrated, it may not be conducive to the improvement of the inventory turnover of M&A enterprises, and the risk that suppliers can not recover funds is further increased, which will reduce the trust of suppliers.

5.2.4 Evaluation Index of Buyers’ Trust After the mixed ownership M&A of SOEs, the scale of production and operation of enterprises is expanded, the synergy effect is generated, the bargaining power of customers is enhanced, and more specialized and high-quality products and services can be supplied to customers. However, if the M&A enterprise and the customer do not trust each other, the customer may not choose to buy the products of the M&A enterprise. This will directly affect the sales profit and reputation of the enterprise, and will not be conducive to the long-term development of the enterprise. Therefore, the degree of suppliers’ trust has an important impact on the M&A value creation of the enterprise. The trust of the M&A enterprise customers in SOEs mainly comes from their demand for M&A enterprises to supply more high-quality products and

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services and personalized products in line with their needs. Generally speaking, the buyer’s customers will judge the business situation of the enterprise through the growth rate of the business income and the market share, and establish trust in the M&A enterprise.

5.2.4.1

Growth Rate of Business Income

Penrose (1959) believed that the fundamental driving force of the enterprise growth lied in the capability to use its own resources to provide services or products, and it was very important for enterprises to have the capability to create internal knowledge. Marris (1960) put forward that the finiteness of internal resources is one of the main factors limiting the growth of enterprises, and the optimal growth speed of an enterprise is the speed that makes the enterprise most efficient. In the research of micro-enterprises, scholars generally use the development trend of the business income to measure the growth of enterprises for three main reasons. First, the business income is the most important source of funds for the daily operation of enterprises. In the course of the daily operation, enterprises need to pay by cash to buy plants and raw materials, pay wages to employees, etc. Only when raw materials are manufactured into finished products and successfully sold to achieve the business income, can enterprises truly realize the return of cash and a complete cycle of production and sales. Second, the business income can reflect the operating results of enterprises. The business income is the value created by the enterprise through the normal operation activities on the basis of the capital invested by the owner and the creditors, and it is also the most important guarantee to realize the profit of the enterprise. Third, the business income can partly reflect the level of production management of enterprises. The fact that the business income of the enterprise is increasing can partly reflect that the enterprise has a good command of the change of the market and customer demands, has established a good business income management system, and can provide reasonable management decisions. In general, growth rate is the ratio of growth of current business income and business income of the previous period. The growth rate of the business income truly reflects the change of the enterprise income relative to that of the previous year. It is used to judge the growth and profitability of enterprises, to evaluate the production and operation status of enterprises, and to forecast the future income growth trend of enterprises, and it is also an important basis for enterprises to make expansion strategy decisions. The growth rate of the business income is positive, indicating that the current income of the enterprise has increased compared with that of the previous period. The higher the growth rate of the business income, the faster the development of the enterprise, the higher the recognition of the products and services provided in the market, and the better the development prospect of the enterprise. Otherwise, it shows that the income of the enterprise is decreasing, the products or services provided by the enterprise do not meet the needs of the market and customers, there is a situation of products unsalable, and the enterprise needs to deeply investigate

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the market and customer needs and constantly update the production technology to meet the needs of the sustainable development of the enterprise. After the mixed ownership M&A of SOEs, if the SOEs have an open mind for innovations, learn from the management mode and production technology of private enterprises, constantly improve the knowledge creation capability of M&A enterprises and promote the optimization of the production input function of M&A enterprises, the products and services provided by M&A enterprises will be more in line with the needs of the market and customers, and the growth rate of the business income of M&A enterprises will continue to increase, so customers will increase their trust in M&A enterprises. However, if SOEs can not realize the integration of resources well in the process of the M&A, and lose their original competitive advantages, resulting in the decline of the business income, customers will reduce their trust in M&A enterprises.

5.2.4.2

Market Share

Market shares represent the proportion of sales volume or sales revenue of an enterprise to similar products in the market. The sales volume described here can be either the value of products or services provided by the enterprise, or the volume of products or services provided by the enterprise. Market shares can directly reflect the position of products or services by enterprises in the market. The larger the market share, the bigger say of enterprises in the market, and the higher the recognition degree of the market and customers to products or services provided. Therefore, the market share is an important symbol of enterprise right of control and the market position. For the group of consumers, a large part of them have “herd behaviors”, that is, when purchasing products or services, they choose the enterprises with the highest sales volume or the best reputation. The market share of enterprises has a great impact on the value creation of enterprises. Currently, many scholars have studied the relationship between market shares and the enterprise value. Based on 3,000 business units of 450 enterprises, Buzzel and Gale (1987) deeply explored the influence of the market strategy on the enterprise value, and found that market shares would affect business profits. Szymanski et al. (1993) summarized and generalized the papers on the relationship between market shares and the enterprise profitability in American journals of economic management, and found that most researchers believed the size of enterprises’ market shares can promote the enterprise profitability. Based on price and non-price strategies, such as the M&A, brand marketing and products’ official promotions, Liang (2004) studied the market shares and profitability of enterprises, and found that the appropriate choice of various price and non-price strategies will help to improve the market share and profitability of enterprises. Generally speaking, there are two ways to measure market shares: quantity and quota. The market share calculated based on the quantity can reflect the proportion of the sales volume of products or services provided by the enterprise to the total sales volume of similar products or services; the market share calculated based on

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the quota takes into account the price factors of products or services, and can reflect the share of sales revenue of products or services provided by the enterprise in the market. Specifically, the larger the market share, the higher the satisfaction of the market or customers to the products or services provided by the enterprise. The trust from the buyer will promote the growth of the sales revenue of the enterprise, and help the enterprise expand the market share. In an industry, large-scale enterprises usually have stronger economic strength and long-term competitiveness and higher sustainable growth of revenue. Therefore, many industries will be polarized. Largescale enterprises continue to develop into industry giants, while small-scale ones are facing the dilemma of poor management performance and even bankruptcy. In the process of SOEs participating in the mixed ownership M&A, if the enterprise merger can bring scale effects and synergy effects to the enterprise, the market shares of M&A enterprises will grow, which will increase customers’ trust in the enterprise’s products. And the trust of customers will increase their purchasing desires for the products or services of the enterprise, thus helping the M&A enterprise to create more value.

5.2.5 Evaluation Index of Enterprises’ Integrity In the enterprise governance activities, sincerity can reduce the rigid trend in the enterprise M&A. Under the guidance of the enterprise’s sincerity values, the trust culture of both M&A enterprises will resonate in the new organizational environment. The enterprise culture of sincerity will help both M&A enterprises realize resources integration, improve their core competitiveness and innovation capabilities, and have an important impact on their value creation. Generally speaking, the evaluation indexes of sincerity include four types, namely punishment, litigation, information disclosure quality and the number of public denunciations of executives.

5.2.5.1

Punishment

With the rapid development of the capital market, at present, China has formed a diversified and deep-seated capital market structure, such as the main board and small and medium-sized enterprise board. The verification method of IPO has also increased the pilot registration system on the basis of the original approval system, so as to continuously promote the development of China’s capital market and the IPO of high-quality enterprises. In order to promote the development of the capital market and provide a fair and open environment for the listing, financing, capital operation, etc. of enterprises, China has promulgated a series of rules and policies,1 and the internal governance and information disclosure behavior of enterprises 1

In December 1993, the Eighth Standing Committee of the National People’s Congress passed the “Company Law” to regulate the organization and behavior of companies and protect the legitimate

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are increasingly standardized. But at present, due to the imperfect development of China’s capital market, many companies still have irregular behaviors, such as financial information fraud, insider trading, and information disclosure violations, which are supervised and punished by the regulatory authorities. According to the theory of contract economics, once both parties in the M&A sign a contract, the contractual relationship will be established by them. The default behavior of either party will have a great impact on the image of the M&A enterprise. If the acquirer state-owned enterprise doesn’t conduct sufficient due diligence and sincerity degree review on the acquired enterprise (the private enterprise) before the mixed ownership M&A activities, and it still signs a contract with the target enterprise, after the mixed ownership M&A activities, once the target private enterprise has financial fraud, insider trading, etc. due to a lack of sincerity, and is punished by the CSRC or relevant government departments, it will have a great impact on the enterprise’s image after the M&A. Although financial fraud, insider trading and other behaviors belong to the target company’s own behaviors, as it is a holding subsidiary of the state-owned enterprise, investors jointly believe that the whole group has insincerity. For example, investors extend the insincerity of the holding subsidiary to the insincerity of the whole group, just as when someone in a team did something wrong and the regulatory authorities lacked sufficient evidence, they would hold the whole team accountable, which was similar to the “guilt-association system” in ancient China (Zhang 2001).2 The joint effect of insincerity will have a negative impact on the market performance and book performance of mixed ownership M&A of SOEs. Therefore, we expect that in the environment of lack of insincerity in both parties in the M&A, especially the target firm, it will be difficult for the mixed ownership M&A to help the acquirer enterprise achieve strategic M&A objectives and create value for the M&A enterprises.

5.2.5.2

Litigation

Macneil, a famous American contract law researcher, believed that the enterprise is the key to combine and connect a series of contracts (agreements). These contracts cover a wide range and include a variety of types, such as contracts signed between enterprises and employees or managers (i.e., labor contracts), contracts signed between enterprises and suppliers or customers (i.e., as purchase contracts), contracts signed between enterprises and creditors (i.e., loan contracts), and contracts signed by enterprises for capital operation (i.e., M&A contracts). Once these contracts are rights and interests of companies, shareholders and creditors; in July 1999, China promulgated the “Securities Law” to regulate the operation of the securities market; in April 2010, China promulgated the “Enterprise Internal Control Application Guideline” to promote the realization of enterprise development strategies and optimization of governance structures. 2 Originated in the Spring and Autumn Period and the Warring States Period, the “guilt-association system” was used to its fullest potential by the Qin state. The strict “guilt-association system” established in the Shangyang’s Reforms bound peasants to land cultivation, which not only guaranteed the source of tax revenue, but also prevented group riots by young men.

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signed, all parties to them shall fulfill their obligations in strict accordance with the corresponding laws and regulations.3 If the above contracts (agreements) aren’t fully and promptly performed by all parties, it may cause contract disputes or even legal litigation. According to the procedure of law enforcement and judgment, some contract disputes may last for a long time. The parties to the contract need to pay more efforts and transaction costs, and it may even affect the normal operation of enterprises. In recent years, the litigation cases related to accounts receivable and accounts payable in China have accounted for 20% of civil litigation cases. Due to the insincerity and the failure to fulfill the obligations of the contract in time of the parties to the contract, the normal trade and transaction behaviors have been converted into civil litigation cases. The litigation not only causes direct economic losses to the defaulting party, but also produces signaling effects. Investors have a sense of distrust in the involved enterprises, which leads to the decline of the stock price of the defaulting enterprise. From a long-term point of view, the long-playing litigation will consume the contract parties a lot of energy and transaction costs, and affect the normal operation of enterprises. Therefore, we expect that if the SOEs don’t fully investigate the contract performance and the pending litigation of the target firm (the private enterprise) before the mixed ownership M&A, and the target company is sued due to breach of contract after the M&A, it will have a great impact on the sincerity image of the whole group, and also have a direct impact on the value creation of the mixed ownership M&A.

5.2.5.3

Information Disclosure Quality

The efficient market hypothesis4 holds that the stock market is an efficient market when the stock price in the capital stock market fully reflects all the information of the company (Fama 1970). Therefore, in order to promote the development and improvement of the stock market, as the party with absolute information advantages, the company should actively and promptly disclose its information. “Securities Law of the PRC” stipulates that listed companies should promptly and accurately disclose information in accordance with the provisions.5 Under the guidance of relevant laws and regulations, listed companies have gradually formed a complete set of 3

Such as “Law of the PRC on Employment Contracts”, “Economic Contract Law of the PRC”. According to the efficient market hypothesis pointed out by Eugene Fama in 1970, efficient capital markets are divided into weak form efficient markets, semi-strong form efficient markets and strong form efficient markets. In a strong form efficient market, each stock investor obtains complete, timely and accurate information. The buying and selling of stocks is completely affected by the availability of information, the value of the information is completely differentiated by the price, and technical analysis is invalid. 5 Article 193 of the “Securities Law of the PRC” stipulates that if a listed company or other information disclosure obligors fails to disclose information according to regulations or if the disclosed information contains false records, misleading statements or major omissions, it shall be ordered to make rectification and be given a warning by securities regulatory authority. 4

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information disclosure and announcement process from publishing the prospectus at IPO, regularly disclosing quarterly and annual statements after the IPO, to issuing announcements for major transactions of the company. Investors and creditors will make decisions based on the information disclosed by the company. Due to the information asymmetry between listed companies and investors, out of egoism and opportunism, listed companies may take the behavior of adverse selection, that is, selectively disclosing information, partially disclosing information or deliberately falsifying false financial information, which will lead to distortion and falsity of information disclosed by the company, thus making external investors lose confidence in the capital market and sell their stocks successively, resulting in a sharp drop in the stock market. For example, in the economic crisis of the Western capital market from 1929 to 1933, and the financial crises in 1998 and 2008,6 the distorted and false information disclosed by listed companies played a catalytic role. Therefore, in order to maintain the stability of the capital market and promote the development of the capital market, regulators all over the world attach great importance to the information disclosure of listed companies, formulate targeted rules and regulations,7 and take strict measures against false disclosure, financial fraud, etc. Seemingly, the company conceals the true financial situation and selectively discloses the favorable information to the outside world, which can help it obtain certain profits in the short term; however, in the long run, once the investors find that the company has insincere behaviors, such as information concealment and financial fraud, they will lose their trust in the company, which will lead to a substantial drop in the company’s stock. With the development and improvement of the capital market, the information disclosure and supervision system will be increasingly sound. The high-quality information disclosure can help enterprises transmit the signal of good management and standardized operation to the capital market, so as to enhance the company’s reputation and help the company create value; while the low-quality information disclosure will make the company establish an insincerity image, increase the company’s transactions costs (such as holding press conferences) and reduce the company’s performance. Therefore, in the mixed ownership M&A activities of SOEs, the information disclosure quality of the target firm (the private enterprise) will be an important trust measurement index; similarly, the target firm will also investigate the information 6

The stock market crash that first occurred in October 1929 in New York lasted for 4 years, affecting countries such as the United Kingdom, Germany, France, Italy and Spain, and evolving into a great economic crisis of Western capitalism; on July 2, 1997, the Asian financial crisis swept across Thailand; in 1998, some major Asian economic powers experienced economic depression, causing political chaos in certain countries; in 2008, due to the interactive influence of the real estate market and the financial market, systematic risks in the financial system were formed. Lehman Brothers and Merrill Lynch, among the top 4 investment banks in the United States, filed for bankruptcy and was acquired respectively, which then triggered the financial crisis. 7 For example, the United States promulgated the “Securities Act” and the “Securities Exchange Act” in 1933 and 1934, respectively, and China promulgated the “Securities Law of the PRC” in 1997 to regulate the acts of false records and frauds of listed companies.

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disclosure quality of the acquirer (the state-owned enterprise). So, we expect that in the mixed ownership M&A activities of SOEs, if either party participating in the M&A activities causes investors’ attention due to the low-quality information disclosure after the M&A activities, it won’t be conducive to the value creation of M&A enterprises.

5.2.5.4

Public Denunciations of Executives

In the enterprise governance of modern enterprises, shareholders are the owners, while the management manages the daily business affairs of enterprises. Due to the different economic utility functions of executives and shareholders, shareholders expect to obtain higher returns and maximize the company’s wealth and owner’s interests with the smallest possible risk, while the management expects to obtain excessive remuneration or rewards. There is a “principal-agent” problem between them. Owing to the information asymmetry between the shareholders and the management, some enterprise executives may misappropriate the enterprise funds, make false financial information disclosure, provide illegal guarantee, etc. out of egoism and opportunism, which will damage the interests of the enterprise’s shareholders. In order to restrain the self-interest behavior of the management and reduce the “principal-agent problem” between shareholders and the management, companies with good management and standardized operation usually establish a standardized, open and transparent talent selection mechanism through the company’s articles of association and internal code of conduct, and strictly follow the specific process mechanism to select talents. However, it may be difficult for the companies with relatively non-standardized operation to select and cultivate the management with both capability and moral integrity. The management is the name card and soul of an enterprise and the behavior of the management will represent and reflect the behavior of the enterprise. It is difficult to separate the executives from the enterprise. For example, when you talk of Microsoft, you will think of Bill Gates; when you speak of Jack Ma, you will think of Alibaba. When the executives of an enterprise lack sincerity and infringe upon the rights and interests of small and medium shareholders or investors, investors will make a presumption of guilt, and then think that the whole enterprise represented by them is lack of sincerity. Generally speaking, the constraints on the behavior of the enterprise management come from four aspects: regulatory authorities, the external manager market, the internal governance mechanism and the internal reputation mechanism. First, regulatory authorities. When the executives of enterprises disclose financial information falsely, provide guarantees illegally, etc. or damage the interests of investors, the government regulatory authorities will denounce and punish them publicly, so as to arouse the attention of investors and other people in the management. Second, the external manager market. When an enterprise’s executives are publicly denounced by the regulatory authorities and dismissed by the original company due to their illegal operations, their reputation in the external manager market will be reduced, which will have a great impact on their subsequent employment and appointment.

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Third, the internal governance mechanism. Enterprises with good management and standardized operation often set up sound enterprise governance system, internal supervision system and risk control system. Once the enterprise’s management is found to have behaviors that damage the enterprise’s image or reputation, they will be punished and put under supervision. Fourth, the internal reputation mechanism. If the management of an enterprise is publicly denounced by the government regulatory authorities for illegal operations, their reputation inside the enterprise will be greatly reduced. In many enterprises, the appointment and removal of the management adopt the form of assessment. The decline of the management’s reputation in the enterprise will not be conducive to their continued employment in the enterprise, and even less conducive to the evaluation of personal value. Among the four aspects mentioned above, the most severe punishment is the government department’s public denunciation of the enterprise executives who operate against the regulations. It serves as a huge warning to the enterprise’s management and is also the critical path to improve the enterprise governance and internal control. As it is difficult to separate the behavior of enterprise executives and that of the enterprise, once the enterprise executives are publicly denounced or punished, investors will reduce the degree of trust in the enterprise, which will lead to the drop of the stock price and the enterprise’s performance. Therefore, we expect that in the mixed ownership M&A activities of SOEs, if the executives of the target firm (the private enterprise) are publicly denounced by the government regulatory authorities, the society will receive the signal of insincerity of the M&A enterprises in general. In the short term, the market performance of the M&A enterprises will decline. In the long run, the deficiency of the enterprise governance mechanism with the board of directors as the core will lead to exorbitant post merger integration costs and reduce the long-term book value of the M&A enterprises.

5.3 Evaluation System of Innovation Mechanism Innovation is the process of changing, renewing or creating a new product, so as to obtain higher economic or social benefits. In essence, innovation is the process of materializing innovative thinking and transforming ideal into reality. According to Porter et al. (1988), the innovation capability is an important part of the enterprise capability, including technology development capability, resource utilization and allocation capability, etc. Mulgan and Albury (2003) put forward that the innovation of enterprises needed to create value for enterprises, which will eventually be reflected in the improvement of enterprises’ economy, operation efficiency and output quality. According to Hunady and Orviska (2014), the innovation capability is an important factor to promote the enterprise’s economic growth and enhance the competitiveness of competitive enterprises. From the above research, scholars believe that innovation is not only the innovation of technology and production capacity, but also the improvement of core competitiveness and the growth of the sustainable development ability.

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As for the relationship between enterprise innovation capability and enterprise value, Goldfinger (1974) thought that the innovation activities of enterprises created value for the production and operation activities of enterprises. Intangible assets (such as patents and technologies) held by enterprises are an important part of enterprise innovation capability, which can reflect the production technology capability, competitive advantages, the future development potential and the competitiveness in the market of enterprises (Yuan et al. 2012). In 2006, China’s Ministry of Finance issued the “Accounting Standard for Business Enterprises No. 6—Intangible Assets”, which removed goodwill from intangible assets and classified it into an independent asset.8 Unlike intangible assets, goodwill which is unidentifiable can help enterprises realize abnormal returns in the future and it is an intangible resource with special heterogeneity (Du et al. 2011). Therefore, based on intangible assets and goodwill, this subject research will establish the evaluation system of enterprise innovation mechanisms. The specific indexes of the evaluation system of enterprise innovation mechanisms are listed in Table 5.1.

5.3.1 Evaluation of the Technological Innovation Capability and Innovation Mechanism The main influencing factors of enterprises’ technological innovation capability are shown in four aspects, namely the R&D investment level, the proportion of technical intangible assets, the R&D personnel density and the goodwill yield. First, the R&D investment level. R&D activities are the most critical link in the enterprise innovation value chain, and also the fundamental source of innovation. The R&D investment directly reflects the emphasis and support of enterprises for innovation activities. Second, the proportion of technical intangible assets. According to different sources, intangible assets can be divided into self-created and purchased intangible assets. Self-created technical intangible assets can directly reflect the innovation achievements of enterprises, while purchased technical intangible assets can promote the R&D activities of enterprises. The proportion of technological intangible assets will directly reflect the value of core technologies of enterprises. Third, the R&D personnel density. Only by core technologies, enterprises can’t really achieve innovation, which is also supported by cooperation of R&D personnel. Talents occupy a key position in the enterprise innovation activities. They are the main body of the innovation activities, the users of the core technologies and the authors of the innovation achievements. Fourth, the goodwill yield. Goodwill is generated by M&A activities of the enterprise. Before the M&A, due to the problem of asymmetric information and the management’s concern about the sincerity degree of cooperative enterprises,

8

“Accounting Standard for Business Enterprises No. 6 -Intangible Assets” stipulates that intangible assets are identifiable non-monetary assets without physical form owned or controlled by enterprises.

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Table 5.1 The evaluation system of enterprise innovation mechanisms Primary index

Secondary index

Measurement method

Technological innovation capability

R&D investment level

R&D expenditure/ Business income

Proportion of technical intangible assets

Total technical intangible assets/ Total intangible assets

R&D personnel density

Number of R&D technicians/ Total number of staff in an enterprise

Goodwill yield

Business income/total goodwill

Brand advantages

Sales expenses/Business income

Market shares

Enterprise sales revenue/sales revenue of the same industry

Abnormal return rate

Net profit margin of the enterprise—average net profit margin of the industry

Asset growth rate

(Total assets of current period—Total assets of previous period)/ Total assets of previous period

Share of intangible assets

Total intangible assets/total assets

Share of goodwill

Total goodwill/total assets

Staff quality

Number of employees with bachelor’s degree and above/ Number of employees on active duty

Intangible assets per share

Total intangible assets/ Number of outstanding shares of common stock

Goodwill per share

Total goodwill/number of outstanding shares of common stock

Market competitiveness

Sustainable development ability

there is less specialized investment (such as innovative technologies) between enterprises, and more attention is paid to the protection of core capabilities such as the technology. After the enterprise M&A, the degree of information asymmetry between both parties in the M&A gradually decreases, and the acquiree becomes a subsidiary of the acquirer. As the management reduce their worries about the leakage of core technologies, the specialized investment of both parties will increase (Klein et al. 1978), the innovation capability of enterprises will be enhanced constantly, and the value created by goodwill for enterprises will continue to rise. Therefore, the business income based on goodwill can be used as a basis to measure the innovation capability of enterprises.

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5.3.2 Evaluation of Market Competitiveness and Innovation Mechanism The market competitiveness of enterprises mainly depends on three factors, namely brand influence, market shares and super-normal profit margins. First, brand influence. The brand influence of an enterprise plays a decisive role in customer loyalty and enterprise reputation. Generally speaking, the brands favored by customers have strong innovation capability and can provide customers with heterogeneous and high-quality products and services; at the same time, in order to maintain or even improve the brand influence, enterprises will pay more attention to the innovation investment. Considering that the brand value information is difficult to quantify and customers are familiar with brands mainly through advertising, this subject research will take advertising investment as the standard to judge and measure the brand value of enterprises. Second, market shares. The market share of an enterprise is the key index reflecting its competitiveness and business performance. The larger the market share, the stronger the competitive advantages of the enterprise. Third, the super-normal profit obtained by enterprises. The most essential difference between intangible resources and tangible resources is that intangible resources can help enterprises create abnormal returns and market value. Therefore, the super-normal profit margin can represent the utilization efficiency of intangible resources, thus reflecting the innovation capability of enterprises. In addition, the super-normal profit margin of enterprises is available in data.

5.3.3 Evaluation of Sustainable Development Ability and Innovation Mechanism The main influencing factors of the sustainable development ability of enterprises are shown in six aspects, namely growth of assets scale, the proportion of intangible assets that can continuously create profits and value, the proportion of goodwill that can create super-normal profits, the quality of enterprise staff, the status of intangible assets per share, and the status of goodwill per share. First, the scale of enterprise assets. The expansion of assets scale can reflect the growth rate of an enterprise. Although the expansion of enterprise scales doesn’t necessarily represent the high-quality development of the enterprise, the growth of scales is the basis for the sustainable development of the enterprise. Second, the proportion of intangible assets that can continuously create profits and value. Intangible assets are the source of core competitiveness and product heterogeneity of enterprises, which will directly affect their sustainable development ability. Third, the proportion of goodwill that can create super-normal profits. Unlike other resources, goodwill is unidentifiable and can help enterprises obtain abnormal returns through post merger integration, which is helpful to the value creation of enterprises. Fourth, the quality of enterprise staff. Human capital is an important part of the organizational capital of enterprises.

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Staff is also the main body of an enterprise to achieve innovation and value creation. The higher the staff quality, the stronger the innovation capability, resource allocation and integration capability of an enterprise. Educational background is the most direct external performance index of the staff quality. Fifth, the status of intangible assets per share. The intangible assets per share reflect the value of intangible assets owned by the enterprise shareholders on average, which conforms to the measurement standard of listed companies, and reflect the creativity of intangible assets owned by shareholders. Sixth, the status of goodwill per share. Similar to intangible assets per share, goodwill per share can also reflect the creative capability of heterogeneous intangible resources owned by shareholders of outstanding shares.

5.4 Evaluation System of M&A Value In the evaluation system, the value created by SOEs participating in the M&A is the most fundamental and important part of the evaluation system. Only by establishing the evaluation indexes of the enterprise M&A value, can we explore the influence path of trust on the mixed ownership M&A value of SOEs. The selection of M&A evaluation indexes should observe the following principles: (1)

(2)

(3) (4)

(5)

The principle of goal consistency. The mixed ownership M&A of SOEs is the main content of this subject research. The purpose of the strategic mixed ownership M&A of SOEs is to realize the specific strategies of enterprises and generate synergy effects, so as to help enterprises obtain core competitiveness and realize long-term development. Therefore, the selection of evaluation indexes in the M&A value evaluation system should be closely linked with the strategic objectives of mixed ownership M&A of SOEs. The principle of measurability. The selected evaluation indexes should have clear definitions, open measurement standards and feasible operation procedures. The principle of reliability. The error and noise of the index are small, which is consistent with its definition. The principle of dynamic nature. The selection of evaluation indexes should be combined with the strategies of the mixed ownership M&A of SOEs. When the M&A strategies of SOEs change, the evaluation indexes should be adjusted accordingly. The principle of balance. The selection of M&A evaluation indexes should fully and comprehensively consider the economic consequences of the M&A, and integrate different economic consequences, such as overall consideration of the impact of mixed ownership M&A activities on the market performance and financial performance of SOEs and that on cash flows and profits of enterprises.

Based on the above-mentioned five principles, Tobin Q, the operating cash flow and return on total assets are selected as the measurement indexes of the M&A value creation.

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5.4.1 Tobin’s Q Tobin (1969) proposed Tobin’s Q theory, which believed that if the capital held by an enterprise is not depreciated, its investment level will depend on the market value and the replacement cost of the held capital. The specific calculation formula is Q = MV/RC, where MV is the market value, and RC is the replacement cost. Tobin’s Q is a key index to measure whether the asset value is overvalued or undervalued. In the fully circulating capital market, the specific calculation steps of Tobin’s Q are as follows: (1)

The first step is to calculate the return on capital r, and the specific model design is: rk =

(2)

dMV MPK + −δ MV MV

where MPK is the marginal product of capital and δ is the depreciation rate of assets. The second step is to calculate the expected return rate of investors (r k ) under the condition of market equilibrium (Expected return on capital = Expected return rate of investors), and the specific model design is: rk =

E(M P K ) d M V + −δ MV MV

By integrating the above formula, we can get ∞ MV =

[E(M P K (t))]e−(ηk +δ)t dt

0

As the net return rate of asset replacement cost implies the marginal efficiency of capital R, it’s concluded: ∞ RC =

[E(M P K (t))]e−(ηk +δ)t dt

0

In certain cases, MPK is a constant, and RC can be expressed as: RC =

MPK (R + δ)

Therefore, Tobin’s Q can be expressed as a function composed of marginal efficiency of capital and discount rate:

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Q=

R+δ rk + δ

Generally speaking, the Tobin’s Q of an enterprise will change with the stock price. When Q < 1, MV < RC, which means that the market value is less than the replacement cost, and investors will choose to buy a large amount of the company’s stock to achieve the accumulation of funds in the financial market; when Q = 1, it means that the company is in a dynamic equilibrium with no room for arbitrage in the capital market and the physical industry market; when Q > 1, it means there is a risk that the company’s stock price will be overvalued, capital will flow from the financial market to the product market, and the company will also increase investment expenditure. The Q-ratio theory proposed by Tobin (1969) fully considers the market value and book value of the enterprise, and is an important index for evaluating the M&A value in this subject research. However, although China has completed the non-tradable shares reform, it is still difficult to obtain relevant research data of Tobin’s Q defined by Tobin, and there are certain difficulties in obtaining data on the marginal efficiency of capital and the discount rate. In view of this, Chung and Pruitt (1994) proposed an approximate calculation formula, and verified that the accuracy of this formula to calculate Tobin’s Q was nearly 97%. The formula is as follows: Q=

(M V E + P S + D E P T ) TA

Among them, MVE is the market value of circulation, PS is the value of preferred shares, DEBT is the net debt, TA is the book value of total assets. Considering the availability of data, this subject research will adopt the approximate formula of Tobin’s Q as a way to calculate the value created by mixed-ownership M&A of SOEs.

5.4.2 Operating Cash Flow In the research of modern financial theories, most scholars would evaluate the value of an enterprise based on the net present value of the cash inflow generated by the enterprise’s future business activities. The cash flow generated by business activities is an important source of funds for an enterprise. It can be used to purchase plants and raw materials and pay employees’ salaries, which is closely related to the value creation of the enterprise. To achieve the stable and sustainable development, enterprises must have sufficient cash flow to meet their daily needs for business activities and asset expansion. In a fully efficient capital market, the internal and external financing costs of an enterprise are similar and will not cause a significant impact on the enterprise’s valuation. However, in an imperfectly effective capital market, the information held by enterprises and external financiers is not symmetrical. The enterprises hold more

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internal information, while external financiers hold less. In order to reduce the selfinterest and agent behaviors of enterprises, external financiers will demand higher returns on capital. According to the pecking order theory, the internal financing cost of an enterprise is the lowest, so the best financing pecking order is internal financing, bond financing, and equity financing. Therefore, when investing in projects, the management will give priority to internal financing methods, and the operating cash flow is an important source of internal funds (Myers and Majluf 1984). Compared with the external financing, when enterprises use internal resources to invest in projects, they can obtain certain benefits at a lower cost, which can create value for the enterprises whose share price in the capital market will also rise. With the expansion of enterprises and the increase in investment opportunities, the demand for funds is also increasing, and investors will also pay more attention to the assessment of enterprises’ operating cash flow. Therefore, this subject research uses the cash flow of business activities after the M&A as an index to measure the value creation of the mixed ownership M&A of SOEs. If the operating cash flow of SOEs increases after M&A activities, the enterprises will have more funds to invest in high-quality projects, and the mixed-ownership M&A will create value for the enterprises.

5.4.3 Return on Total Assets In the process of achieving the sustainable development, enterprises shall not only consider the realization of enterprise goals and the improvement of their industry status, but also improve their core competitiveness and enhance adaptability to the organizational environment (Lu 2003). In the course of evaluating the sustainable development ability of enterprises, many scholars choose the comprehensive index of return on total assets (ROA) as the standard to measure the sustainable development ability of enterprises, it directly reflects the profitability of all assets of the enterprise, and can fully reflect the resource utilization efficiency and specific input–output situation of the enterprise. The higher the ROA, the higher the efficiency of enterprise asset operations, the more output can be obtained with less input, and the greater the enterprise value. Therefore, this subject research uses ROA as an index to measure the value of the enterprise M&A to determine the impact of the M&A on the enterprise’s value creation and sustainable development capabilities. If the ROA of a state-owned enterprise improves after the M&A activities, it indicates that the efficiency of the enterprise’s asset operation has been improved, more output can be obtained with less input and the mixed-ownership M&A has created value for the enterprise.

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5.4.4 Enterprise Governance Capabilities SOEs’ participation in the mixed-ownership M&A will not only have a huge impact on the value creation of enterprises, but also have a certain impact on the enterprise governance of SOEs. As the state-owned enterprise participate in the mixedownership M&A, it can introduce shareholders of private enterprises to manage the enterprise, improve the failure of internal management and supervision caused by “one-share dominance”, optimize the governance process of the enterprise’s board of directors and board of supervisors, and enhance the enterprise’s governance capabilities (Du et al. 2016). The improvement of enterprise governance capabilities will create value for enterprises. Therefore, this subject research will establish the evaluation indexes of the enterprise governance capabilities of SOEs after the M&A from six dimensions: the shareholding structure, the board of directors, the board of supervisors, risk management and control, information disclosure, and the performance of social responsibilities. The first is the shareholding structure. The nature of enterprise equity and the degree of equity concentration will have a certain impact on the enterprise governance. When the enterprise’s shareholders are all state-owned shareholders, the enterprise may lack motivations for the technological innovation and reform. The joining of non-state-owned shareholders will help SOEs optimize their shareholding structure, promote their innovation and progress, and enhance their operational capabilities; when the enterprise’s shareholding structure is too concentrated, it may lead to a “one-share dominance” situation, which will damage the interests of creditors and small and medium shareholders. However, when the enterprise’s equity is too dispersed, it will go against the enterprise’s rapid decision-making and increase communication costs. The shareholding structure plays a very important role in enterprise governance. The second is the board of directors. There is a “principal-agent” relationship between shareholders and the management. The management may violate the interests of shareholders out of opportunism and egoism. The board of directors is an important way for shareholders to supervise the enterprise. The board of directors can restrict the behavior of senior executives, reduce the “principal-agent” problems in enterprises, safeguard the interests of shareholders, and promote the corporate governance of SOEs. It is an important part of corporate governance. The third is the board of supervisors. Since most of the board members hold the company’s stock, when the company has scandal information, the directors may collude with the company’s senior executives to harm the interests of creditors and small and medium shareholders. Therefore, it’s insufficient to have the board of directors only for the enterprise governance. The board of supervisors shall consist of small and medium shareholders, creditors, and employees of the enterprise. A complete board of supervisors can supervise the behaviors of directors and senior executives, and reduce “principal-agent” problems, thus improving the company’s governance.

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The fourth is risk management and control. It plays an important role in the realization of business objectives and the improvement of business efficiency. A sound risk management and control system can effectively prevent errors, form an effective supervision mechanism for the management and employees, and establish a sound enterprise governance mechanism. The fifth is information disclosure. Generally speaking, companies with good enterprise governance have a complete information disclosure system to accurately and timely disclose financial and other key information to promote investors’ understanding of the company. The sixth is the performance of social responsibilities. Actively performing social responsibilities can help companies establish a good image, improve enterprise reputation and brand awareness. Companies with good enterprise governance will pay more attention to the performance of enterprise social responsibilities, thereby helping them achieve the long-term and sustainable development. Therefore, the performance of social responsibilities is also an important measure index of the enterprise governance. SOEs’ participation in the mixed-ownership M&A can not only help enterprises generate scale effects and synergy effects, but also introduce the competitive advantages of non-state-owned shareholders, which can help SOEs improve their enterprise governance system, thereby helping the M&A enterprises to create value and achieve the long-term and sustainable development. The specific design of the evaluation index of enterprise governance is shown in Table 5.2.

5.5 Empirical Research Model After a comprehensive evaluation system for the trust mechanism, innovation mechanism, and the value creation of SOEs’ mixed-ownership M&A is established, it is necessary to use a series of models to analyze and explore the relationship of trust, innovation, and the value creation of the mixed-ownership M&A. The empirical research models for the relationship of trust, innovation mechanisms and the value creation of SOEs’ mixed ownership M&A designed in this subject research mainly include the OLS multiple regression method, the multivariate discriminant analysis, the Logistic regression model, the Probit regression model, the cluster analysis model, and the structural equation.

5.5.1 OLS Linear Regression Model The Ordinary Least Squares (OLS) linear regression model is an important method to evaluate the performance of the enterprise M&A. The basic principle of regression is to find the best matching function by minimizing the sum of squares of errors. ˆ t, ˆ βx According to this basic principle, the best fit straight line is expressed as yt = α+

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Table 5.2 Evaluation index table of enterprise governance capability Primary index

Secondary index

Measurement method

Shareholding structure

Shareholding ratio of state-owned shareholders

Number of state-owned shares/ Total enterprise shares

Equity concentration

Total shareholding ratio of the top 5 shareholders

Ownership checks and balances

Total shareholding ratio of top 2–5 shareholders/ Shareholding ratio of the largest shareholder

Number of the board of directors

Number of the board of directors in the enterprise

Proportion of independent directors

Number of independent directors/ Total number of the board members

Compensation of the board of directors

Natural logarithm of the total compensation of the top three board members

Number of meetings of the board of directors

Number of meetings of the board of directors held in the current period

Number of the board of supervisors

Number of the board of supervisors in the enterprise

Percentage of external supervisors

Number of external supervisors/ Total number of the board of supervisors

Number of meetings of the board of supervisors

Number of meetings of the board of supervisors held in the current period

Risk management and control

Completeness of internal control

Enterprise Internal Control Index in DIB Database

Information disclosure

Audit opinions

If the audit opinion is a standard unqualified opinion, it is 1, otherwise it is 0

Shareholders Meeting Information

Does the company disclose the details of the shareholders meeting, if the company disclosed the details, it is marked as 1, otherwise it is 0

Board of directors

Board of supervisors

Performance of social responsibilities

Tax situation

Income tax expenses/ Total profit

Donation situation

Donation expenditure/ Business income

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where αˆ and βˆ are the estimated value of α and β, yt is the regression fitted value, μ ˆt is the difference between the fitted value and the actual value, that is, the estimated value of the random error term ut . Minimizing the sum of2 squares of errors is actually to minimize the residual sum of squares (RSS) Tt=1 μ ˆ t , that is, the minimum: RSS =

T T  2   2  ˆ t yt − αˆ − βx yt − yˆ t = t=1

t=1

ˆ t + μˆ t , the dependent variable yt is For the regression equation yt = αˆ + βx decomposed into two parts, which are the fitted value of the model yˆ and the fitted value of the residual term μ ˆ t. Compared with other empirical regression models, the OLS linear regression model is simple and convenient to operate, can reflect the regression fit of the model, and is more practical to solve economic problems; but the disadvantage of this model is that the interpretation of the data will vary from person to person, and the equation is not precise but just a speculation, and will be restricted by the diversity of impact factors and uncertainty. Specifically, in the performance evaluation of the mixed-ownership M&A of SOEs, this subject research will take the performance evaluation indexes of the mixed-ownership M&A as the explained variables, and the evaluation indexes such as innovation and trust as the explanatory variables to explore the impact of trust and innovation mechanisms on the performance of SOEs’ mixed-ownership M&A through the OLS multiple regression model.

5.5.2 Multivariate Discriminant Analysis Model The discriminant analysis method is to screen out the variables that conform to the characteristics of the research objectives from the various variables of the sample enterprises, and then classify and predict the research samples by establishing a discriminant function. Altman (1968) analyzed enterprises’ financial crisis based on the discriminant analysis, and selected five indexes including total assets, sales revenue, operating capital, undistributed profits, and liabilities to calculate the Zscore, and established an enterprise financial crisis probability model. According to the size of the Z-score index, enterprises can be classified into high-risk areas, low-risk areas and gray areas. According to the empirical value, the Z-score model divides companies with a Z index of less than 1.81 into high-risk areas, which means that the companies are on the verge of bankruptcy; companies with a Z index of greater than 2.99 are divided into low-risk areas, which indicates that the business is in good condition with small possibility of bankruptcy; companies with a Z index between 1.81 and 2.99 are classified into gray areas, which indicates that their risk of bankruptcy cannot be determined. Based on the advantages and disadvantages of the

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Z-score model, Altman et al. (1977) improved this model and established the Zeta discriminant analysis model. Compared with other research models, the advantage of the multivariate discriminant analysis model is that it uses a variety of measurement indexes to make clear judgments on the operation status and bankruptcy of the companies; but the disadvantages are that the selection of each index lacks a clear economic basis and different indexes’ weight ratio needs to be adjusted frequently and is not sensitive to market changes. In domestic researches, Z-score and Zeta models have been widely used in researches in related fields such as the enterprise financial risk assessment, credit evaluation, and ST company delisting risk assessment. In the M&A activities of SOEs, the trust level of enterprises is firstly constructed based on the Z-score and Zeta models, and the relationship between enterprise trust and SOEs’ M&A performance is studied; then innovation variables are further added to analyze the changes in the relationship between trust and the M&A performance, which is an extension of studies on the discriminant analysis (Song and Qu 2011; Zhang and Zhu 2012).

5.5.3 Logistic Regression Model Press and Wilson (1978) first proposed the Logistic model. The model uses a series of characteristic variables of the samples to predict the probability of a certain economic consequence of the sample company, and then formulates policies to promote the change of characteristic variables in a positive direction; the model sets the risk warning line of the enterprise, positions the research object via risk identification, saves the cost and time of the company’s production and operation management, improve the efficiency of resource utilization and allocation, and promote the stability and sustainable development of the company. The basic settings of the Logistic model are as follows: P=

1 1 + e−y

Among them, y is the characteristic variable in the evaluation process of the economic consequences of the enterprise, and the calculation formula is y = C0 + n C X i=1 i i ; P is the probability of a certain type of economic consequences, and the value range is between 0 and 1. In practical work, the Logistic model has been widely used in the field of credit risk evaluation of commercial banks. Commercial banks can obtain the relevant credit, finance, default information, etc. of loan applicants, establish the Logistic model based on the obtained information, and predict the default probability of loan applicants (Ohlson 1980; Madalla 1983). In China’s academic research, the Logistic model is also widely used in the research of the bank’s credit risk evaluation (Zeng 2004; Li 2005) and the enterprise’s financial distress (Zhu et al. 2012; Liang 2005).

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Compared with other models, the advantage of the Logistic model is that it is not restricted by the statistical hypothesis. The model doesn’t require the conditions of the variable distribution, nor does it need to assume that the variables are multivariate normal distribution, so it can be widely used. When evaluating the value creation of the mixed ownership M&A of SOEs, we can set the M&A activities of enterprises as dummy variables according to the success or failure of the M&A and integration of SOEs, and explore the influence of innovation or trust mechanisms on the mixed ownership M&A of SOEs through the Logistic model; we can also divide the sample enterprises into two groups according to the innovation or trust evaluation indexes of the SOEs, and compare the difference of the enterprise M&A performance between the control group and the experimental group through the Logistic model, so as to explore the influence of trust or innovation mechanisms on the value creation of SOEs.

5.5.4 Probit Regression Model Bath and Brumbaugh (1989) first proposed the Probit regression model. The Probit model is a generalized linear regression model. Assuming that the enterprise is subject to the normal distribution and its probability of having certain economic consequences is P, the P-quantile of the probability function can be explained by the influencing factors of economic consequences. The Probit model and the Logistic model have very similar ideas for the calculation. They both use the maximum likelihood method for regression, and both models belong to the regression model of discrete variables. However, the two models are not the same in the specific calculation process and assumptions. First, the Probit model and the Logistic model have different calculation assumptions. The Probit model assumes that samples are subject to the normal distribution, but the Logistic model doesn’t make strict requirements on the distribution of enterprise samples. Second, the Probit model and the Logistic model have different methods to solve the parameters. The Probit model mainly uses the calculation principle of the maximum likelihood method, while the Logistic model solves the parameters by the linear regression method. Third, the Probit model and the Logistic model have different ways to calculate the probability of economic consequences. The Probit model uses the integral method to find the solution, while the Logistic model uses the logarithm method to find the solution. In a word, the Probit model and the Logistic model are similar in ideas for calculation, but there are also some differences. Compared with the Probit model, the Logistic model is more widely used. In the research of evaluating the value creation of the mixed ownership M&A of SOEs, if the dependent variable is an ordinal variable (such as scoring the M&A performance of SOEs from 1 to 10 points), the regression can only use the Probit model instead of the Logistic model; if the characteristic value of the variable is not fully revealed, for example, and the R&D expenditure is kept confidential by the enterprise who is not willing to publicly disclose it prematurely, the Probit model

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can be used to calculate the value of estimated variables, which makes the research on the impact of trust or innovation on the value creation of the mixed ownership M&A of SOEs more detailed and in-depth.

5.5.5 Cluster Analysis Model The calculation of the cluster analysis method is mainly divided into three steps. Firstly, the cluster analysis method puts the samples or variables in order according to their similarity, so that samples or variables of the same kind have the strongest similarity; secondly, the center-of-gravity method are used to calculate the initial classification and cluster point of the research sample; thirdly, in the process of variable clustering, specific scale variables are selected as “distance”, and the cluster analysis is carried out by Euclidean, Minkovski and other distance formulas according to the specific situation. The purpose of cluster analysis is to make the similarity of the same group of variables the strongest, so that the heterogeneity of different groups of variables is the strongest. It is mainly used in the case that the evaluation index does not subject to the specific distribution characteristics. The cluster analysis method is widely used in the research of customer credit evaluation and enterprise governance of commercial banks, etc. Lundy (1993) evaluated the credit status of commercial bank loan applicants based on the cluster analysis method. It was believed that the credit degree of different types of customers could be judged by clustering the applicants’ gender, occupation, living environment, etc., which would help banks classify loan applicants with similar backgrounds and adopt appropriate business strategies and loan methods for different groups of people. According to the characteristics of enterprises, Lu and Dang (2014) classified listed companies into technology-intensive, labor-intensive and capital-intensive companies by the cluster analysis method, and explored the impact of the governance of the three types of companies on the technological innovation. Compared with other models, the advantage of the cluster analysis method is that it doesn’t require variables to be subject to a certain distribution, and regression results are intuitive, clear and easy to understand; but the disadvantage is that when the enterprise sample size is large, it is difficult to obtain a clear conclusion or the conclusion is biased with the cluster analysis method. In this subject research, it is believed that we can cluster and group the samples according to the trust and innovation degree of SOEs, so as to explore the influence of trust or innovation degree on the value creation of the mixed ownership M&A of SOEs.

5.5.6 Structural Equation Model The structural equation model is mainly used to verify a certain theory. It will first put forward a theoretical structure of pre-hypothesis, and verify whether the theoretical

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structure of pre-hypothesis is true by collecting and sorting data. The specific idea for calculation is to select some variables that can’t be directly observed but are expected to be explored as latent variables; then, the variables that can be directly observed and measured are selected as the measurement method of latent variables, so as to establish the relationship between direct variables and latent variables, namely the structure. Therefore, to ensure the accuracy and reliability of the research conclusion, it is necessary to select and establish measurement indexes with high reliability. The structural equation model is characterized by: Firstly, Multiple dependent variables can be processed and analyzed simultaneously, which is the most important characteristic of the structural equation model. In the regression analysis of the structural equation model, although the chart of statistical results presents the regression results of multiple dependent variables simultaneously, in the specific regression process, the coefficient of each explained variable will be calculated separately instead of simultaneously. Therefore, in the regression results of the structural equation model, the influence of other explained variables is not considered in the calculation process and coefficient of each explained variable. Secondly, the independent variable and the dependent variable may have measurement errors. Behavior, attitude and other research variables belong to the subjective judgment of human beings, which often have strong subjectivity and judgment errors. Therefore, they can’t be measured by simple indexes. The structural equation model allows certain measurement errors between independent variables and dependent variables, which can increase the accuracy and reliability of the research. If the traditional model is used to explore the coefficients of latent variables, the results may be considerably different from the regression results of the structural equation model due to certain measurement errors. Thirdly, factor structure and relationship can be estimated simultaneously. In order to explore the correlation between latent variables, it’s common to use the factor analysis method to calculate the factor score, and then calculate the correlation coefficient of the factor relationship and latent variables. The factor structure and relationship can be estimated simultaneously. Fourthly, complex measurement models are allowed to be used. In the traditional factor analysis model, one index can only represent one factor, but the structural equation model allows the use of complex and more diverse measurement models. For example, for the same variable, multiple indexes of different dimensions can be used for measurement. Therefore, the structural equation model solves the problem that one index can only represent one factor in the traditional factor analysis, making the research results more reliable and accurate. Fifthly, the overall fitting degree of models can be evaluated. Traditional path analysis methods can only judge the strength of the correlation between variables; however, in the structural equation analysis, in addition to evaluating the strength of the correlation between variables, researchers can also evaluate the overall fitting degree of different models to the same sample data to choose a more accurate regression model. The structural equation model consists of measurement models and structural models.

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(1)

The measurement model is used to explore the relationship between observed variables and latent variables. The specific model is set as follows: x = x ξ + σ y = y η + ε

(2)

Among them, x is the exogenous observed variable matrix; Λx is the load matrix of the exogenous observed variable; ξ is the exogenous latent variable; y is the endogenous observed variable matrix; η is the endogenous latent variable; Λy is the load matrix of the endogenous observed variable; δ and ε are model residuals. The structural model is usually used to analyze the relationship between latent variables. The specific model is set as follows: η = λη + ξ + ζ where, λ is the influence effect coefficient between the endogenous latent variables; is the influence effect coefficient of the exogenous latent variable on the endogenous latent variable; ζ is the residual matrix.

The structural equation model can be applied to the multi-dimensional evaluation and analysis of the enterprise M&A performance (Lin 2011; Zhao and Zhang 2013). For the enterprise M&A performance, the measurement index is not unique, And multi-dimensional and multiple types of evaluation indexes can reflect the real changes in business performance before and after the M&A. Therefore, the structural equation model can more accurately reflect the impact of trust or innovation on the mixed ownership M&A performance of SOEs. Specifically, in the evaluation of the mixed ownership M&A performance of SOEs, this subject research will select variables from multiple dimensions as the measurement indexes for the innovation mechanism, the trust mechanism, and the value creation of the mixed-ownership M&A, and analyze and explore the impact of trust and innovation mechanisms on the value creation of mixed-ownership M&A by establishing the structural equation model.

5.6 Case Study Model Based on Balanced Scorecards The balanced scorecard was first proposed by Kaplan and Norton (1992). After years of development and innovation, the balanced scorecard has gradually become a comprehensive system for evaluating enterprise performance and strategic management performance. The balanced scorecard is mainly used in case studies of specific companies. It can effectively overcome the shortcomings of traditional financial evaluation methods that they only evaluate the impact of past events, pay too much attention to the short-term and internal interests of the company, and ignore the benefits

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created by intangible assets for the company. In the case study based on the balanced scorecard, first, the researcher needs to select a company to be studied. In this subject research, the company to be studies is a state-owned enterprise participating in the mixed-ownership M&A; second, the researcher needs to set up corresponding evaluation systems and indexes according to the requirements of the balanced scorecard and the characteristics of specific enterprises; third, the researcher needs to evaluate the company according to the set evaluation system and indexes. This subject research mainly focuses on the value created by the mixed ownership M&A of SOEs through the balanced scorecard system. The design process of the balanced scorecard can be briefly divided into three steps: Firstly, determine the enterprise’s vision and goals. According to the company’s structure and characteristics, the company’s goals are turned into specific goals of each department from the four aspects of finance, customers, the internal process, learning and growth, and four scorecards are established correspondingly. Secondly, establish an appropriate performance evaluation system based on the specific goals of each department set in the first step. The evaluation system needs to comprehensively consider financial and non-financial indexes, internal interest evaluation and external interest evaluation indexes, etc., to ensure that the company’s performance and strategy implementation are evaluated from all aspects. Thirdly, the management and various departments jointly formulate specific scoring rules and methods for the performance evaluation system. Generally speaking, the management will set the target value of performance in advance. When actually implementing the enterprise strategy, it will compare the actual value of the performance with its target value. If a great difference exists between the actual value and the target value, we should consider whether there are problems in the operation and management of each department of the enterprise or the target value is set too high, so as to revise the specific strategy of each department to promote the development of the enterprise. The balanced scorecard involves four dimensions: finance, customers, the internal operation, learning and growth. According to the characteristics of SOEs’ participating in mixed-ownership M&A, this subject research has set up different index evaluation systems from these four dimensions. The summary of the evaluation systems is shown in Table 5.3. The first one is the finance dimension. The financial index can directly reflect whether the implementation and execution of a company’s strategy can create benefits for the company and improve its profitability and asset management level. In view of the specific characteristics of the mixed ownership M&A of SOEs, this subject research selects the return on equity (ROE), equity ratio, state-owned capital appreciation rate, and social contribution value per share as financial evaluation indexes to evaluate the implementation effects of the mixed ownership M&A of SOEs. ➀ ROE, it can directly reflect the utilization efficiency and profitability of shareholders’ capital investment. The higher the ROE, the stronger the profitability of the enterprise and the higher the efficiency of assets allocation and utilization. ➁ Equity ratio,

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Table 5.3 Balanced scorecard evaluation system table Dimension

Evaluation index

Measurement method

Index symbol

Finance dimension

Return on owners’ equity

Net profit at current period/owner’s equity

Positive

Equity ratio

Liabilities/owners’ equity

Positive

State-owned capital appreciation rate

(Owner’s equity at the end Positive of the period-capital reserves increased due to objective factors)/owner’s equity at the beginning of the period *100%

Social contribution value Earnings per share + (total Positive per share taxes + employee expenses + interest expenses + public welfare expenses - social costs)/average number of shares at the beginning and end of the period Customer dimension

Internal operation dimension

Learning and growth dimension

Market shares

Enterprise product sales Positive revenue/ industrial average sales revenue of products of the same kind

Complaint resolution rate

Number of complaints resolved at current period/total number of complaints

Customer retention rate

Number of previous-period Positive transactional customers who still conclude transactions in the current period/Number of previous-period transactional customers*100%

Enterprise innovation capability

R&D investment/number of patents filed

Positive

Product qualification rate

Number of qualified products/total number of products

Positive

Employee turnover rate

Number of separated Negative employees in the current period/average number of employees at the beginning and end of the period

Number of employees’ vocational training

Number of vocational training received by current employees

Positive

Positive

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it can directly reflect the debt-paying ability and the capital structure of the enterprise. The lower this index value, the stronger the enterprise’s ability to repay debts with its own funds and the higher the degree of risk protection for creditors. ➂ The state-owned capital appreciation rate is an important index to measure the effect of SOEs’ mixed ownership reforms. The specific calculation formula is (End of period owners’ equity—capital reserve increased by objective factors)/ Owners’ equity at the beginning) *100%. The state-owned capital appreciation rate can fully reflect the operational efficiency and safety of state-owned capital. If the index value is greater than 100%, it means that state-owned capital has increased in value. The mixed ownership M&A of SOEs can help increase the value of state-owned capital. The larger the index value, the higher the appreciation of state-owned capital. ➃ Compared with private enterprises, SOEs need to bear part of the policy burden, such as maintaining social stability and promoting social and economic growth. Therefore, the purpose of SOEs’ participating in the mixed-ownership M&A is not only to improve the enterprise’s performance, but also to create value for the society and improve the satisfaction of stakeholders. This subject uses the social contribution value per share to evaluate the M&A performance. The formula is Social contribution per share = earnings per share + [(Total taxes + staff expenses + interest expenses + public welfare expenses-social costs)/(the average number of shares at the beginning and the end of the period)] * 100%. The larger the social contribution value per share, the larger the social contribution of SOEs. The second one is the customer dimension. The most fundamental goal of an enterprise is to provide customers with high-quality products and services, so as to create value for itself. This subject research selects market shares, complaint resolution rate and customer retention rate as the customer dimension evaluation indexes for the implementation effect of the mixed ownership M&A of SOEs. ➀ The market share can indirectly reflect the degree of recognition and popularity of the company’s products by customers, and is a part of the company’s competitive advantages. If SOEs’ market shares increase substantially after the mixed-ownership M&A, it indicates that the M&A under cross-ownership has created value for SOEs. ➁ The complaint resolution rate is an important index to reflect whether customers’ demands are met in a timely manner. The specific calculation formula is Number of complaints resolved in the current period/Total number of complaints. The larger the index value, the higher the efficiency of customer complaints resolution. And the customer demands are met timely and effectively. ➂ The customer retention rate can directly reflect the loyalty of customers to the company. A good company can keep its original customers and attract new customers. It is an important factor for an enterprise to maintain or increase its market share. According to the formula, [(The number of previous-period transactional cunstomers who still conclude transactions in the current period)/(The number of previous- period transactional cunstomers)] * 100%. The larger the value, the higher the retention rate of customers, and the higher the loyalty and satisfaction of customers to the company. The third one is the internal operation dimension. According to the requirements for the establishment of the balanced scorecard, the company needs to set the evaluation objectives and indexes of the internal operation dimension on the basis of

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the establishment of the evaluation objectives and indexes of the finance dimension and the customer dimension, which can help the company focus on the control of internal processes related to shareholders and customers. Specifically, the evaluation indexes of the internal operation dimension will involve various aspects such as product reforms and innovation, enterprise’s production and operation, and aftersales services. According to the availability of data and the characteristics of the enterprise, this subject research selects the enterprise innovation capability and product qualification ratio to measure its internal operation. ➀ Innovation capability. The innovation of the internal operation process of an enterprise mainly refers to the willingness of the enterprise to innovate rather than the result of innovation. Therefore, this subject research adopts Enterprise’s innovation and R&D investment/The number of patents filed as a measurement index of the innovation of the internal operation process. ➁ The product qualification rate can reflect the management efficiency of the company’s production and operation activities. The specific calculation formula is Number of qualified products/Total number of products. The larger the index value, the more standardized the company’s internal production management process. Due to the different characteristics of different companies, in the evaluation of the internal operation dimension of the mixed ownership M&A of SOEs, the evaluation indexes of the internal operation dimension can be added according to the specific conditions of the company. For example, petrochemical enterprises can add the indexes such as capacity utilization rate and pollution control rate as evaluation criteria. The fourth one is the learning and growth dimension. The goal of the learning and growth dimension is the internal driving force that pushes forward the previous three goals to achieve outstanding results. In fierce market competition, when the original technology and capabilities can no longer meet the needs of the enterprise development, the enterprise must set the evaluation index of the learning and growth dimension to achieve the long-term sustainable development. This subject research selects the employee turnover rate and the number of employee vocational training as the evaluation indexes of the learning and growth dimension. ➀ Employee turnover rate directly reflects employees’ loyalty to companies and sense of collective belonging. The calculation formula is Number of separated employees in the current period/Average number of employees at the beginning and end of the period. The larger the index value, the higher the employee’s dissatisfaction with the company. And they are less willing to learn and grow to make contributions to the company. ➁ The employee vocational training is an important way to improve the quality and capability of employees. The vocational training can help employees better understand the work of related positions, so as to promote the development of the enterprise. The more employees’ vocational training, the stronger the inherent innovation and growth capability of the enterprise. The case study model based on the balanced scorecard conducts research on the companies’ performance and strategy implementation by selecting specific companies and establishing corresponding evaluation systems and evaluation indexes. The advantage of this model lies in the overcoming of the shortcomings of traditional financial evaluation methods that only evaluate the impact of past events, pay too

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much attention to the short-term and internal interests of the company, and ignore the benefits created by intangible assets for the company. It can evaluate the company’s performance and strategy implementation more comprehensively and clearly. But the disadvantages are that it’s hard to establish and revise evaluation objectives and indexes, and with only one or a few companies selected as research objects it lacks enough representativeness, which may cause the failure of reaching research conclusions. In the performance evaluation of the mixed ownership M&A of SOEs, this subject research will select representative SOEs participating in the mixed ownership M&A as the research cases. Aiming at the vision and goals of the mixed ownership M&A of SOEs, a series of evaluation objectives and indexes are established from four dimensions including finance to explore the mixed ownership M&A performance of SOEs. This subject research will also conduct a specific analysis of companies based on their trust and innovation degrees, and explore the impact of trust and innovation on the mixed ownership M&A performance of SOEs.

5.7 Summary This chapter establishes an evaluation system and related test models for trust, innovation, and value creation of the mixed ownership M&A of SOEs from two dimensions of the index system and models. The research framework of the evaluation index system based on the trust, innovation and value creation of the mixed ownership M&A of SOEs is shown in Fig. 5.1. According to the source of trust, enterprise trust mechanisms can be divided into internal trust mechanisms and external trust mechanisms. The external trust mechanism is constructed on the basis of the realization of the interests of stakeholders, which can affect the M&A value creation of SOEs in its M&A transactions and resource integration. In the external trust mechanism, this subject research measures the trust degree of shareholders in the company by the short-term and long-term market performance and financial performance of the mixed ownership M&A; it measures the trust degree of creditors in the company by the capital structure, the debt maturity structure, short-term debt-paying ability and debt interest rate; it measures the trust degree of suppliers in the company by the accounts receivable turnover and the inventory turnover; it measures the trust degree of the buyers or customers in the company by the growth rate of business income and market shares. The enterprise internal trust mechanism is built on the basis of the sincerity of both parties in the M&A, which can affect the M&A value creation of SOEs by influencing enterprises’ innovation capability. In the internal trust mechanism, this subject research measures the sincerity within the enterprise with punishment, litigations, quality of information disclosure, and public denunciations of senior executives. Innovation is the process of changing, renewing or creating a new product to obtain higher economic or social benefits. It not only includes innovation in technology and production capacity, but also increases the core competitiveness and enhances the

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5 Research on the Evaluation Index System of Trust and Innovation … Trust mechanism evaluation system

Shareh older trust

Credit or trust

Suppli er trust

Buyer trust

Innovation mechanism evaluation system

Corpor ate sinceri ty

Techn ologic al innova tion ability

Market compe titiven ess

M&A value evaluation system

Sustai nabilit y

Tobin' sQ

operati ng cash flow

Return on total assets

Corpor ate govern ance ability

Research model

OLS linear regression model

Multivariate discriminant analysis model

Logistic regression model

Probit regression model

Cluster analysis model

Structural equation model

Case study model based on balanced scorecard

Evaluation of the M&A value creation of state-owned enterprises under mixed ownership

Fig. 5.1 Research framework of the evaluation index system based on the trust, innovation, and value creation of the mixed ownership M&A of SOEs

sustainable development ability of the enterprise. In the evaluation system of innovation mechanisms, this subject research evaluates the enterprise innovation mechanism from the perspective of technological innovation capability, market competitiveness, and the sustainable development ability. Specifically speaking, this subject research measures the technological innovation capability of the M&A enterprise by the R&D investment level, the proportion of technical intangible assets, the density of technical personnel, and the output rate of goodwill; it evaluates the market competitiveness of the M&A enterprise through the brand advantage, market shares and abnormal return rate; it evaluates the sustainable development ability of the enterprise through asset growth rate, share of intangible assets, share of goodwill, staff quality, intangible assets per share, and goodwill per share. In the evaluation system, the value created by SOEs participating in the M&A is the most basic and important part of the evaluation system. Only by establishing the M&A value evaluation index can we explore the specific influence path of trust or innovation mechanisms on the mixed ownership M&A value of SOEs. This subject research designs and establishes an evaluation system for the value creation of the mixed ownership M&A of SOEs from the four dimensions, including Tobin’s Q, the operating cash flow, return on total assets, and enterprise governance capability. In terms of the establishment of research models, according to the type of research, this subject research divides the research models into two types: empirical research

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187

models and case study models. Specifically, this subject research designs and establishes the OLS multivariate linear regression model, the multivariate discriminant analysis model, the Logistic regression model, the Probit regression model, the cluster analysis model, and the structural equation model, etc. to explore impact of trust or innovation mechanisms on value creation of the mixed ownership M&A of SOEs. It designs and establishes a case study model based on the balanced scorecard and a series of evaluation objectives and indexes for the mixed ownership M&A of SOEs, and analyzes the realization of the trust or innovation mechanism in the mixed ownership M&A strategy of SOEs by comparing the difference between the actual value and the target value.

Chapter 6

Game Analysis of China’s Enterprise M&A Pricing Based on Expected Market Excess Reward

This paper examines the incomplete information game between merger and acquisition (M&A) parties, constructing a game model of transaction pricing and expected market excess returns. Based on the perspective of the acquirer, M&A experience data from Chinese A-share listed companies are used to conduct an empirical test of the game model, with findings indicating that transaction pricing is the focus of the M&A game. As far as the acquirer is concerned, transaction pricing is a strategy based on expected excess returns on the stock market. Because of the scarcity of corporate resources, the cost of capital needs to be considered in the transaction pricing strategy. Expected market excess returns are a function of transaction pricing and cost of capital. The empirical research results support the game model constructed in this paper. The higher the M&A premium, the better the short-term market performance of the M&A. This article provides a new theoretical explanation for the question of why M&As can bring a better market response from the perspective of the game. By using a combined research method of game model construction and empirical research, the study has reduced some of the subjectivity regarding model selection and the endogeneity of variable selection. The study thus adds to the literature on the relationship between merger premiums and merger value creation as well as enriching M&A research methods.

6.1 Introduction Corporate mergers and acquisitions (M&As) are an important way of realizing the free transaction of property rights and the free flow of capital. Studies have found that although the market response before and after the M&A event is good, most M&As do not increase the value of the acquirer’s company because of high transaction pricing (Sharma and Ho, 2002; King et al., 2004; Bhaumik and Selarka, 2012). The existing literature focuses on the impact of transaction pricing on the value created © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_6

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by the M&A. Most studies examine the impact of the M&A premium on M&A performance through empirical data (Bris, 2002; Hunter and Jagtiani, 2003), and consider the relationship between transaction pricing and M&A synergies (Gregory, 2005; Brush, 2015). The limitation of such studies is that transaction pricing is formed during the negotiation process between the M&A parties, and M&A transaction negotiation is a form of game behavior. It cannot reveal the formation mechanism of transaction pricing in M&A game by explaining the impact of transaction pricing on M&A value creation from a static perspective through empirical data. In view of this, this article attempts to explain the value creation problem of M&A transactions from the perspective of M&A game by constructing incomplete information game and dynamic game model of both parties in the information asymmetry environment. In the micro-economy, businesses need to sign contracts. A series of contracts signed between the enterprise and the trading partner make it in the contract network. Under a civil law system, according to contract economics, such contracts are complete and have legal force. However, in China, legal contracts must be supplemented with psychological contracts (Jensen and Meckling, 1976; Joseph et al., 2014). Therefore, in an asymmetric information environment, increasing research attention is being paid to information economics. Focusing on the signal transmission function of information, game theory researcher John C. Harsanyi designs incentive and constraint mechanisms to solve the moral hazard of agents after signing contracts, constructs Bayesian Nash equilibrium model, creates “prisoner’s dilemma” situation through optimal contract arrangement, enables agents to tell the truth and restrain agent’s moral hazard after signing the contract (Cramton, 1984). In M&A transactions, negotiation between the parties focuses on transaction pricing. However, in an asymmetric information environment, choices, decisions, and behavioral consequences do not have a one-to-one correspondence. A rational economic person seeks to maximize his or her own utility, but this cannot achieve the Pareto optimality. Optimal and complete rationality turns into bounded rationality, while complete contracts turn into incomplete contracts (Thijssen, 2008). Under information asymmetry, the negotiation process of M&A transaction pricing displays the characteristics of incomplete information games and dynamic games. Thus, both parties continuously adjust their M&A strategies to further their own interests, eventually reaching a dynamic game equilibrium state (Coles and Muthoo, 2003). Existing literature indicates that the M&A pricing game mainly revolves around the expected income targets of stakeholders. Cramton (1984) established a bargaining model, elaborating on the traditional dynamic game model based on incomplete information (Grossman and Perry, 1986), Huang and Lin (2009) viewed the bargaining game process in M&A negotiations as a Markov decision-making process, where the goal of maximizing self-interest is achieved by choosing an optimal strategy. Feri and Gantner (2011) pointed out that when acquirers have external options, they usually choose to sign a bargaining contract instead of directly negotiating the transaction price, and try to find the optimal strategy to maximize total income. Gardener and Moffat (2008) introduced an evolutionary game model to construct an indefinite corporate M&A pricing model with the risk of M&A breakdown. Acquirers can use the negotiation trial method and change their bid to establish the true value of the

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target company to further their self-interest. John et al. (2010) used an evolutionary game model to analyze the optimal strategy for pricing negotiation between two parties under information asymmetry, and obtained the expected return matrix for both parties for cross-border M&As of mineral enterprises. The literature thus reveals that the pricing game for M&A transactions revolves around the expected return target. As far as acquirers are concerned, their expected returns are divided into long-term and short-term returns. These can be quantified as the long-term book performance of the merger or the short-term market performance (Healy et al., 1992). Short-term market performance reflects the market’s expectations of changes in the acquirer’s future book performance due to M&As. Short-term market performance is measured by the cumulative abnormal return (CAR) during the event window (Healy et al., 1992; Ghosh, 2001; Powell and Stark, 2005). The acquirer determines a transaction pricing strategy based on the long-term book performance of the merger and short-term market performance expectations. The short-term market performance can predict long-term book performance, and taking the lead in the announcement window period of M&A events. We argue that the merger and the intersection of the target company’s M&A transaction quotations may reach a game equilibrium state, thereby determining the M&A transaction pricing. Therefore, this article commences by maximizing the expected return of the acquirer, builds a model to capture the relationship between transaction pricing and expected market excess returns through the game of both parties to the merger, and uses the M&A experience data from Chinese A-share listed companies to empirically test the game model to explore the acquisition mechanism for realizing excess market returns. The research results show that transaction pricing is the focus of the M&A game. As far as the acquirer is concerned, transaction pricing is a strategy based on the expected excess return in the stock market. Because of scarce corporate resources, cost of capital needs to be considered in the transaction pricing strategy. The expected market excess return is a combination of transaction pricing and the capital cost function. In the empirical study, the M&A premium is used as the explanatory variable, transaction pricing is the proxy variable, while the cost of capital is used as the control variable. Ordinary least squares (OLS) regression analysis is performed on the M&A premium (explanatory variable) and the short-term market performance following the M&A (dependent variable). A high energy merger premium significantly improves the short-term market performance of M&As. We argue that an important mechanism allowing the M&A premium to have a positive impact on the short-term market performance of M&As is that, among the stakeholders of the M&A, the target company’s shareholders often comprise the biggest beneficiaries. In the long run, it is difficult for acquiring shareholders to benefit from the long-term performance of M&A. Based on the existing literature, the conclusion that the market reflects better before and after M&A events is basically supported (Sharma and Ho, 2002; Eckbo, 2009; Bhaumik and Selarka, 2012), and the short-term market performance has the characteristics of predicting long-term performance and taking the lead in the announcement window period of M&A events (Healy et al., 1992; Bettinazzi and Zollo, 2017). Meanwhile, it is inspired by the synergy benefit model of M&A

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(Bradley et al., 1988; Wang and Xie, 2009; Field and Mkrtchyan, 2017), we argue that, in the M&A game, if the acquirer’s and target company shareholders’ income is combined, the synergistic benefits of the merger can be predicted. This not only promotes the smooth completion of M&A transactions, but also signals that good long-term book performance can be expected based on good short-term market performance. M&A integration efficiency is higher while merger conflicts during integration are reduced. This helps to improve long-term M&A performance and ultimately stimulates M&As to create corporate value. This article therefore posits that the level of M&A premiums is an important factor in explaining the performance of M&As. This study makes three key contributions. Firstly, it examines the relationship between transaction pricing and M&A value creation from a game perspective. The findings reveal that in the M&A game, the acquirer uses the principle of maximizing revenue as the starting point for its pricing strategy. However, because of the complexity of the environment, the uncertainty of long-term income and long-term returns means that the acquirer’s behavior exhibits bounded rationality (Givoly and Hayn, 2000). The paper also suggests that transaction pricing games are carried out based on the expected market excess returns during the window period of M&A events (Yan et al., 2020). These findings provide a new theoretical explanation for the question of why M&As can elicit a better market response from the perspective of game play. Secondly, numerous studies on transaction pricing and M&A value creation point out that higher transaction pricing premiums cannot create value for the acquirer’s shareholders (Hunter and Jagtiani, 2003). Corresponding explanations are given under the synergy hypothesis at the corporate level, the principal–agent hypothesis at the executive level, and the overconfidence hypothesis. However, we position the short-term market performance brought about by the M&A premium and M&A news announcements within the M&A synergy mechanism. Inspired by the construction of synergy benefit model of M&A (Bradley et al., 1988; Wang and Xie, 2009; Field and Mkrtchyan, 2017), our research provides information on why M&A premiums can explain the quality of M&A performance. These findings are theoretically grounded and supported by empirical data, thereby enriching the literature on the relationship between M&A premiums and M&A value creation. Thirdly, the research method used in this paper combines game model construction and empirical research, which helps reduce the subjectivity of model selection and the endogeneity in variable selection. This approach provides a useful contribution to M&A research methods. The remainder of the paper is structured as follows. Section 6.2 describes the institutional background, Sect. 6.3 presents the construction of the M&A game model, Sect. 6.4 contains the empirical research, while Sect. 6.5 concludes the paper.

6.2 Institutional Background

193

6.2 Institutional Background M&A is a form of strategic direction that is taken when the endogenous development and competitiveness of an enterprise cannot be sustained. In China, M&As are often used by enterprises to realize their strategic objectives. Since the non-tradable shares reform begin in 2005 and end in 2006, China’s capital market has matured and the forms of M&A transactions have become increasingly diversified. The marketization process of M&As of A-share listed companies in China has also been accelerated. In April 2008, the China Securities Regulatory Commission (CSRC) issued its Administrative measures for major assets reorganization of listed companies. This prompted the reorganization of listed companies and ushered in a new stage of standardization and development. In October 2014, the CSRC revised the Administrative measures for major assets reorganization of listed companies, and issued the Administrative measures for acquisition of listed companies. This reduced and simplified administrative requirements for M&As, and further prompted listed companies to carry out M&As. In October 2019, the CSRC again revised the Administrative measures for major assets reorganization of listed companies. This change relaxed the recognition criteria and calculation period for restructuring and listing, and allowed high-tech industries and strategic emerging industries to be listed on the Growth Enterprise Market, in line with national strategy. In addition, in 2019, China successfully implemented the Science and Technology Innovation Board (STAR Market) and trialed a new registration system. This laid a policy foundation for the merging and reorganization of Science and Technology Innovation Board companies. The promulgation of these policies promoted the development and the diversification of M&As. In recent years, China’s M&A market has developed rapidly. According to the Zero2IPO Research Center, since 2007, the number of M&A events and the number of M&As in China has maintained consistent growth. In 2017, 2,813 M&As were concluded in China, involving CNY189.92 billion of M&A, with an average value of CNY779 million. With the deregulation of a series of M&A policies, the M&As of Chinese enterprises are expected to maintain an upward trend. In this new economic normal, to achieve high economic growth, many enterprises are likely to pursue an M&A strategy. Based on the perspective of the acquirer, this paper examines the incomplete information game between the two parties of an M&A, and constructs an M&A game model of transaction pricing and expected market excess returns under asymmetric information. This model can be used to guide investors in evaluating the special information of M&A events announced by M&A enterprises and can assist enterprises to conclude rational M&As.

6.3 Construction of M&A Game Model Before an M&A, the target company wholly owns the information involved in the M&A transaction; in contrast, the acquirer has limited information about the target

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company. Therefore, the game between the two parties “in advance” is an incomplete information game. In the M&A, the two parties pass through several stages; namely, the purchaser’s offer—and the target company’s counter-offer -the announcement and equity delivery after the transaction. The purchaser and the target company have different information about the M&A transaction. At this time, the game between the two parties is dynamic. After the M&A, whether market investors support the purchaser’s M&A decision, whether the purchaser’s M&A integration of the target company is completed, and whether the synergy between the parties to the M&A is effective, will be reflected in the short-term market performance and long-term book performance of the merger. This is both a multi-party cooperative game and a non-cooperative game.

6.3.1 Basic Assumption This paper examines M&As from the perspective of the acquirer. The main participants in the merger are the acquirer, the controlling shareholder of the acquirer, the target company, and the controlling shareholder of the target company. Of these, the acquirer and the target company are the direct players in the M&A transaction. This paper constructs a game model based on these participants, and makes the following assumptions: (1) (2)

(3) (4)

(5)

All participants in the M&A game have the rational goal of maximizing revenue as the starting point for decision-making. Contract economics theory and information economics theory form the foundation of the M&A—these two facets of the game model lead the M&A parties to act as direct players in the game. There is no collusion between the parties to the M&A, and the M&A is a zero-sum game. The acquirer and the target company’s controlling shareholder control companys well, but the Type I agency problem is present. The governance and management of both parties to the merger are representatives of their controlling shareholders. The acquirer and the target company fully participate in, and lead, the merger game. The merger is a bona fide merger.

6.3.2 Game Process (1)

The pre-event stage: the game between the two parties

The first step is to judge whether the buyer is “good” or “bad”. At this stage, the acquirer and the target company experience information asymmetry. Each party has its own complete information, but for the counter-party, the information at its disposal

6.3 Construction of M&A Game Model

195

is only superficial. However, in the process of merger review, the target company can distinguish the type of acquirers as either good or bad. The following terminology is used: the acquiring company is represented by T = |g, b|, a good company is represented by g (a good company has better financial indicators and operational development capabilities), and a bad company is represented by b (a bad company not only has poor financial indicators, but also poor management and development capabilities). Suppose the target company knows the probability of the existence of good companies and bad companies based on the situation of the above-mentioned acquirer. We use P(g) and P(b) to represent the probabilities that the acquirer assumes regarding a good company and a bad company, respectively (with P(g) + P(b) = 1). The target company hopes to be acquired by a good company, but to achieve a backdoor listing,1 it may also agree to be acquired by a bad company. The second step is to determine whether the target company is good or bad. In the same way, but in the process of the merger review, the acquirer can evaluate whether a company is good or bad by examining the target company’s financial indicators and business development. Based on the assumption of economic rationality, the acquiring company will only choose to acquire a good company, not the poor enterprise. There is only one type of target company to be merged, good enterprise a. (2)

Interim stage: the game between the two sides.

In the first step, the acquirer proposes to acquire the target company. According to the pre-existing stage and rational judgment, suppose the probability of a “good acquirer” acquiring a good target company is P(a/g), and the probability of a “bad acquirer” acquiring a good target company is P(a/b). In the second step, the acquirer submits a transaction pricing plan to the target company after approval has been granted by shareholders. The acquirer submits the M&A transaction pricing proposal to the shareholders meeting based on the target company’s valuation report issued by the intermediary. The shareholders approve the management’s M&A price proposal after measuring the long-term and short-term benefits of the M&A. In the third step, the target company chooses whether to accept the purchaser’s M&A transaction plan and reaches an M&A agreement. After the target company has identified either a good or bad acquirer, it can measure the probability of its own acquisition by different types of acquirers, thereby calculating its expectations in different situations. Assume that the probability of the target company being acquired by the good acquirer is P(g/a), and the probability of the target company being acquired by the bad acquirer is P(b/a). After comparing the comprehensive 1

The acquirer studied in this article is a listed company. Against the background of the IPO approval system, the listing qualification of a listed company has become a “rare resource”—the so-called “shell.” Because of poor management of some listed companies, they have lost further financing capabilities in the capital market and should be reorganized. Backdoor listing is an important form of asset reorganization. By acquiring the actual control rights of listed companies, non-listed companies inject their own high-quality assets into the listed companies to realize indirect listing of unlisted assets and businesses.

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Fig. 6.1 Takeover game process diagram: Based on the perspective of the acquirer

benefits under different conditions, the target company decides whether to reach an M&A agreement. The action set of the target company is represented by A = {a1 , a2 }, where a1 indicates that it has accepted the acquisition, and a2 indicates that has not accepted the acquisition. (3)

Post-event stage: multi-party game

Assuming that the target company’s enterprise value is V, if it is not acquired, its enterprise value growth rate is ρ, if it is acquired by a good acquirer, its value growth rate is rg, and if it is acquired by a bad acquirer, its value growth rate is rb; then, rb < ρ < rg. In terms of long-term income after the merger, the long-term income of the good acquirer after acquiring the target company is Vg = V* rg, while the long-term income of the bad acquirer after acquiring the target company is Vb = V* rb. In terms of income, the capital market’s response to the M&As of good companies is better and the market exhibits excess returns (CAR > 0). The capital market’s response to the M&As of bad companies may be either better2 or worse (CAR < 0). Therefore, after the merger, as far as the acquirer is concerned, the probability of good long-term income and good short-term income is P (V g /g| CAR > 0), and the probability of bad long-term income but good market income is P (V b /b| CAR < 0). Figure 6.1 shows the game process of mergers and acquisitions.

2

When an ST company announces that it will adopt asset restructuring and when the cap is removed, the market may react better.

6.3 Construction of M&A Game Model

197

6.3.3 Construction of Game Model The objective of the acquirer’s M&A decision is to maximize revenue; that is, to maximize long-term revenue V and short-term revenue CAR. The basic game model is shown in (6.1) while the main variables of the game model are defined in Table 6.1. π = V + C AR

(6.1)

The long-term income V of an M&A is the difference between the book income sale and the cost of the M&A. Drawing on the research of existing literature (Grossman and Perry, 1986; Schijven and Hitt, 2012), the income sale is based on various book incomes generated by M&As. The main costs associated with M&As include transaction pricing B, capital cost WACC, and integration costs ln(A2 × α), the intermediary cost A1 × β. Other relevant variables are defined in Table 6.1. The long-term income model of M&A is shown in (6.2): V = Sale−[B + B × W ACC + A1 × β + ln(A2 × α)]

(6.2)

Drawing on the existing literature (Healy et al., 1992; Bettinazzi and Zollo, 2017), CAR is the function of transaction pricing B, the acquirer’s equity ratio S, and the acquirer-to-target-company size ratio D. The acquirer’s control of the equity ratio, B , S is the ratio of the transaction price B to the target S = MB1 = A1 ×(1−Lev 1 )×r company’s estimated net asset value M 1 , that is, S is a function of B. The ratio A2 , D is the ratio of the size of the acquirer to the target company,D = MA21 = (B/S) of the acquirer’s total book assets A2 to the target company’s estimated net asset value M 1 , that is, D is a function of B. Therefore, CAR is not only a function of the above three transaction characteristic values CAR = f(B,S,D), but also a function of payment of consideration CAR = f(B). By embedding the transaction characteristic comprehensive effect index t into the short-term income model of M&A, the function between CAR and B can be constructed, as shown in (6.3): C A R = f (B) = B × t

(6.3)

Substituting models (6.2) and (6.3) into model (6.1), the profit maximization function (6.4) of the game model is obtained: π = [sale + B × t] − [B + B × W ACC + A1 × β + ln(A2 × α)]

(6.4)

Find the first derivative of B in model (6.4), and get the first derivative model of B (6.5): dπ = t − (1 + W ACC) dB

(6.5)

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Table 6.1 Definition and description of the main variables of the game model Variable

Abbreviation

Definition

M&A total income

π

The sum of long-term income V and short-term income CAR of M&A

Long-term income from M&A

V

The difference between M&A book income Sale and M&A-related costs

M&A short-term income

CAR

The market excess returns brought about by mergers and acquisitions are usually locked within one month before and after the merger announcement

M&A income

Sale

Various types of book income from mergers and acquisitions

Transaction pricing

B

Determined based on a fair third-party assessment of the target company’s net assets and the proportion of shares to be acquired

Capital cost

WACC

The direct cost of transaction pricing, or when the acquirer is faced with multiple investment decision-making options, because one option is selected, the opportunity cost of other options needs to be abandoned

Total assets of the target company

A1

Target company’s book total asset value

Target company debt ratio

Lev1

Target company’s total book liabilities/target company’s total book assets

Acquirer’s total assets

A2

Total book assets of the acquirer

Transaction characteristic composite t effect index

A comprehensive index fitted based on a function of the transaction pricing B, the equity ratio S, and the size ratio D of both parties to the merger and acquisition

Target company net asset valuation premium index

r

Used when calculating the evaluation value of the target company M 1 , M 1 = A1 × (1-Lev1 )

Intermediary expense ratio

β

The fees paid by the acquirer to the securities companies, bank investment institutions and external third-party accountants, appraisers, lawyers and M&A consultants related to the merger shall be accrued according to a certain percentage of the target company’s total assets = A1 × β (continued)

6.3 Construction of M&A Game Model

199

Table 6.1 (continued) Variable

Abbreviation

Definition

Integrated expense ratio

α

In the process of M&A integration, corresponding costs and expenses will be incurred, namely integration expenses. M&A integration is organized and implemented by the acquirer and is related to the total assets of the acquirer. Integration expenses = ln (A2 × α)

When the profit is maximized, this point is the extreme point of model (6.4), and its first derivative is 0, model (6.5) can evolve into t = 1 + WACC, and at the same time, it can be known from model (6.3). So far, the game model is derived (6.6): C A R = B × (1 + W ACC)

(6.6)

Based on the game model (6.6), we put forward our game theory hypothesis: transaction pricing is the focus of the M&A game. Approached from the perspective of the acquirer, transaction pricing is based on its expected market excess returns. Due to the scarcity of enterprise resources, there is capital cost in transaction pricing. Therefore, expected market excess returns are a function of M&A transaction pricing and capital costs.

6.4 Empirical Research 6.4.1 Verifiable Hypothesis Transaction pricing is a key factor affecting the success of corporate M&As. According to the effective market theory, transaction pricing should accurately and fully reflect the market value of the target company’s assets and future earnings. However, empirical data from the past 30 years of M&A practice show that the transaction price paid by the acquirer is often much higher than the target company’s stock market value or fair value, and the M&A premium rate is relatively high. Therefore, in studying the relationship between transaction pricing and M&A performance, some researchers regard the M&A premium as a proxy variable for transaction pricing. The market competition hypothesis, the synergy hypothesis, the principal–agent hypothesis and other research hypotheses have demonstrated the reasons for the existence of a merger premium. Bradley et al. (1988) found that among the stakeholders of an M&A, the shareholders of the target company are often the biggest beneficiaries. In the long run, the shareholders of the acquirer will have lower returns or even losses. Combined and considered, a more comprehensive synergy can be calculated (Rossi and Volpin, 2004; Wang and Xie, 2009). After the 2006 share

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trading reform in China, share-based payments and mixed share and cash payments have become the most common method of payment for transactions consideration.3 After the merger, four-party relationships exist in the group company between the acquirer–target company–acquirer controlling shareholder–target company–original shareholder. The transaction consideration does not form the substantial cash cost of the enterprise immediately, but is transformed into the investment of strategic investors, which continues to stay in the enterprise to support the development of the enterprise. It makes the merger premium and merger performance gradually from the opposite to the integration. Bradley et al. (1988) and Wang and Xie (2009) used M&A premiums and M&A performance to construct a measurement model of M&A synergy. They give weights to the short-term market performance of the target company’s shareholders and the acquirer’s shareholders in the announcement window period of M&A events, and construct a portfolio model to measure the synergy benefits of M&A. We argue that the relationship between the M&A premium and M&A performance is more likely to be an organism rather than an opposite. Based on the conclusion that the existing literature basically supports the conclusion that the market response before and after M&A events is good (Sharma and Ho, 2002; Bhaumik and Selarka, 2012), and the short-term market performance has the characteristics of predicting long-term performance and taking the lead in the announcement window period of M&A events (Healy et al., 1992). At the same time, inspired by the above-mentioned synergy benefit model (Bradley et al., 1988; Wang and Xie, 2009), we expand the research hypothesis of model (6.6). The obtained short-term market performance of M&As is a function of the M&A premium, thereby yielding a verifiable hypothesis: H: After controlling for other factors, the higher the M&A premium rate, the greater the short-term market performance of the M&A.

6.4.2 Sample Selection and Empirical Research Methods 1.

Sample Selection

The initial sample consists of all M&As of China’s A-share listed companies listed on the Shanghai and Shenzhen stock exchanges between 2007 and 2017. Since China completed the share trading reform at the end of 2006, the starting point of the sample is 2007. Related data of listed companies come from the China Stock Market and Accounting Research database. According to research needs and referring to the existing literature (Chen et al., 2019; Fu et al., 2020), the sample was screened as follows: 3 According to the Major Asset Reorganization Rules and Audit Points of Listed Companies by Dr Duan Yalin, Deputy Director of the Corporate Management Department of Shenzhen Stock Exchange, “the report shows that new share-based payment represented by private placement is the most common payment method in major asset reorganizations.”.

6.4 Empirical Research

(1)

(2) (3)

(4)

2.

201

Excluding the acquiring companies classified as financial in accordance with the Guidelines for the Classification of Listed Companies issued by the CSRC to ensure the comparability of financial data. Ensuring the value of the M&A transaction is greater than 1 million yuan. After the M&A transaction, ensure the acquirer receives at least relative control of the target company, excluding samples with less than 30% equity of the acquirer after the acquisition (Balasingham and Barry, 2018). Eliminating missing data samples. At the time of writing this article, 38,520 M&A events were obtained as research samples. Model Setting and Variable Description

To test the research hypothesis, we use the two explanatory variables in model (6.6) -short-term market performance of M&A and transaction pricing. The cost of capital is only used as the control variable. For the explanatory variables, the M&A premium is used as a substitute variable for transaction pricing. Among the control variables, in addition to the use of company capital cost as a substitute variable for transaction pricing capital cost, according to the literature (Malmendier and Tate, 2008; Croci and Petmezas, 2015), we also select the main control variables that affect the short-term market performance of M&A. This paper used the acquisition premium and changes in the short-term market performance of the acquirer to perform the regression of the following equation: C A Ri.t = β0 + β1 Out pricei,t + β2 W ACCi,t + β3 T obin i,t−1 + β4 OC Fi,t−1 + β5 M Bi,t−1 + β6 Gr owth i,t−1 + β7 Si zei,t−1 + β8 Levi,t−1 +  I ndustr ydummy + Y ear dummy + εi,t

(6.7)

The independent variable is the short-term M&A performance of the acquirer, calculated using the cumulative excess return (CAR). The first announcement day of the merger is determined as the day 0, and the market model method is used to calculate the expected return on the acquired company’s stock. This paper selects [−240, −11] as the cleaning period estimated by the market model. The event period window is determined to be 10 days before and after the merger [−10, 10].4 The method of Ittner and Larcker (1998) is used to calculate the excess return on the stocks of sample companies based on the theoretical model of capital asset pricing   10  C A Rit = A Rit αi + βi Rmt , where Rit is the expected return rate of the 





t=−10

sample company if there is no M&A in the same period. According to the capital asset pricing theoretical model, Rmt is the market index return rate, αi and βi the stock return rate and the market index return rate of the sample company during the cleaning period. The regression coefficients are obtained by the ordinary least squares. Since the study samples are drawn from the Shanghai and Shenzhen Stock Exchanges, the 



Servaes (1991) selected − 210 to − 11 days. The selection draws on the literature of Chen et al. (2019) and Fu et al. (2020).

4

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Shanghai Stock Exchange Composite Index and the Shenzhen Component Index, respectively, are used when calculating the corresponding market index return rate. Rit = αi + βi Rmt , ARit is the difference between the actual yield Rit and the expected return of the sample stock Rit for each day of the event period. CARit is the cumulative sum of abnormal returns ARit for each day during the event period, 10  C A Rit = A Rit . 







t=−10

The main explanatory variable is the acquisition premium (outprice) of the acquirer. China’s M&A transactions are based on the target company’s net asset evaluation value and are carried out by means of agreement transfer, following the measurement methods of the M&A premium (outprice) suggested by Calcagno and Falconieri (2014). This article uses the following formula: M&A premium = (transaction pricing/acquisition equity ratio − target company’s book net assets)/target company’s book net assets to calculate the merger premium and take the natural logarithm. Among the control variables, the calculation of the cost of capital (WACC) refers to the weighted average cost of capital method. The cost of debt first removes the operating current liabilities that do not require interest-bearing from the total liabilities to obtain the total interest-bearing liabilities. Interest liabilities are then divided into long-term liabilities and short-term financial liabilities. The cost of the short-term financial liabilities is calculated based on the benchmark one-year loan interest rate announced by the People’s Bank of China in that year, while the cost of long-term liabilities is calculated based on the benchmark interest rate for mediumand long-term loans published by the People’s Bank of China in that year. The cost of equity draws on the measurement method of Francis et al. (2005) and uses the reciprocal estimate of the company’s price-to-earnings ratio (P/E). The calculation formula for the cost of capital is: W ACC = K dl (1−t)

E Bl Bs + L ds (1−t) + Ke Bl + Bs + E Bl + Bs + E Bl + Bs + E

where Bl is long-term liabilities, Bs is short-term financial liabilities, E is owner’s equity, Bdl is the cost of long-term liabilities, Bds is the cost of short-term financial liabilities, K e is the cost of equity, and t is all company tax rates. Other control variables are drawn from the M&A literature. In recent years, the literature has shown that the characteristics of the acquirer, Tobin’s Q, market-to-book ratio, operating cash flow, operating income growth rate, company size, company financial leverage, industry, merger year and other characteristics affect a company’s merger performance (Moeller et al., 2004; Bhaumik and Selarka, 2012). Using the abovementioned literature as a reference, we control for the above-mentioned factors using regression analysis. In the regression, we also control for industry and annual fixed effects, while industry is controlled in accordance with the CSRC’s industry classification standards (14 categories). To eliminate possible endogeneity problems such as reverse causality, in the regression analysis, in addition to the cost of capital (WACC) in model (6.6), other control variables at the level of the acquiring company

6.4 Empirical Research

203

that change over time are taken to lag by one period. The definitions of the main variables involved in the empirical test conducted in this study are listed in Table 6.2. In order to alleviate the possible endogenous problems such as reverse causality, in the regression analysis, in addition to the cost of capital (WACC) of model (6.6), other control variables at the acquirer company level that change over time are taken Table 6.2 Definition and description of main variables Variable

Abbreviation

Definition

Calculation formula and related instructions

Dependent variable

CAR

M&A short-term Market performance

Cumulative abnormal rate of return calculated during the window period [−10, 10] before and after the first announcement of the merger

Independent variable

Outprice

M&A premium

First calculate the M&A premium through the formula: M&A premium = (total transaction price-target company’s book net assets)/target company’s book net assets, and then take the natural logarithm

Control variables

WACC

Capital cost

The weighted average of the company’s debt capital cost and equity capital cost in the year of the merger

TobinQ

Tobin’s Q

The ratio of the total market value of the acquirer to the total assets excluding intangible assets and goodwill, lags by one period

OCF

cash flow

The ratio of the acquirer’s operating cash flow to the total assets, lagging one period

MB

Market to book value ratio

The ratio of the acquirer’s market value to the book shareholders’ equity, lagging one period

Growth

Operating income growth rate

The ratio of the purchaser’s current year’s operating income growth to the previous year’s operating income, lagging one period

Size

Company Size

The natural logarithm of the acquirer’s total assets, lagging one period

Lev

Financial leverage

The ratio of the acquirer’s total liabilities to total assets, lagging one period

Industry

Industry

Industry effect

Year

Year

Year effect

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Table 6.3 Descriptive statistics of main variables Variable

N

SD

Min

CAR[−10,10]

38,520

Mean 0.212

0.280

−0.315

Median 0.187

Max 0.768

Outpricei,t

38,520

5.941

1.081

2.788

5.733

10.123

WACC i,t

38,520

0.028

0.017

0.004

0.026

0.120

OCF i,t−1

38,520

0.042

0.081

−0.240

0.041

0.235

Sizei,t−1

38,520

21.094

0.938

19.661

20.959

25.735

Growthi,t−1

38,520

0.518

1.745

−0.657

0.155

15.440

TobinQi,t−1

38,520

2.326

1.367

0.972

1.858

6.668

MBi,t−1

38,520

0.578

0.228

0.166

0.588

1.077

Levi,t−1

38,520

0.383

0.218

0.042

0.351

0.848

to lag one period. value. We organize the definitions of the main variables involved in the empirical test in this article in Tables 6.2–6.6.

6.4.3 Descriptive Statistics and Correlation Analysis Tables 6.3–6.6 reports the descriptive statistical results of the main variables. We see that, in the sample, M&A events with transfer of control have a positive market response; the average value of CAR[−10, 10] is 0.212, which shows that M&As have better short-term market performance. The mean value of outprice is 5.941; with a minimum of 2.788 and a maximum of 10.123. This is the result of taking the natural logarithm of the M&A premium. The results show that the prices of different M&A events vary substantially. The average value of WACC is 0.028, which is 4.75 percentage points lower than the five-year borrowing rate. To a certain extent, this also shows that M&As have resulted in excessive compensation, market valuations have increased, equity costs have fallen, and weighted capital costs have remained low. To eliminate the influence of outliers on the empirical results, the main continuous variables were winsorized at the 1% and 99% levels in the regression analysis. Tables 6.4 and 6.5 indicate whether there is a multicollinearity problem among the main variables. Table 6.4 shows the correlation test results of the main variables. The upper triangle represents Spearman’s correlation coefficient while the lower triangle represents Pearson’s correlation coefficient. The results show that the correlation coefficients between the main variables are all less than 0.8. Table 6.5 shows the test results of the variance inflation factor (VIF) of the main variables. The results show that the VIF value of the market-to-book ratio MBi,t−1 is the largest, at 5.43, which is far below the critical value of 10. Therefore, we conclude that there is no multicollinearity problem among the main variables.

−0.028***

−0.159***

0.670*** 0.125***

1.000

−0.159***

−0.028***

−0.035***

1.000

0.125***

−0.092***

−0.014***

−0.009*

CAR[−10,10]

Outpricei,t

WACC i,t

OCF i,t−1

Sizei,t−1

0.596*** 0.521***

0.077***

−0.066***

−0.086***

−0.147***

0.088***

0.082***

TobinQi,t−1

MBi,t−1

Levi,t−1

0.093***

0.044***

−0.089***

−0.093***

0.140***

1.000

0.564***

0.620***

−0.470***

0.019***

1.000

0.140***

0.670***

−0.035***

−0.009*

Sizei,t−1

0.093***

0.017***

0.017***

1.000

0.019***

−0.093***

0.125***

−0.049***

0.008

Growthi,t−1

−0.293***

−0.856***

1.000

0.017***

−0.470***

−0.089***

−0.439***

0.077***

−0.147***

TobinQi,t−1

0.372***

1.000

−0.856***

0.017***

0.620***

0.044***

0.596***

−0.066***

0.088***

MBi,t−1

1.000

0.372***

−0.293***

0.093***

0.564***

0.093***

0.521***

−0.086***

0.082***

Levi,t−1

Notes: The upper triangle is Spearman’s correlation coefficient, and the lower triangle is Pearson’s correlation coefficient. ***, **, * indicate significance at the 1%, 5%, and 10% significance levels, respectively

−0.439***

−0.049***

0.008

Growthi,t−1

0.179***

0.179***

−0.014***

−0.092*** 1.000

OCF i,t−1

WACC i,t

0.125***

CAR[−10,10]

Outpricei,t

Variable

Table 6.4 Correlation analysis of main variables

6.4 Empirical Research 205

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Table 6.5 VIF inspection Variable

VIF

SQRT VIF

Tolerance

R-Squared

Outpricei,t

1.04

1.02

0.960

0.040

WACC i,t

2.32

1.52

0.430

0.570

OCF i,t−1

1.08

1.04

0.926

0.074

Sizei,t−1

2.43

1.56

0.412

0.588

Growthi,t−1

1.05

1.02

0.955

0.045

TobinQi,t−1

3.99

2.00

0.251

0.749

MBi,t−1

5.43

2.33

0.184

0.816

Levi,t−1

1.57

1.25

0.638

0.362

Table 6.6 Regression analysis results of M&A premium and M&A short-term market performance Variable

(1)

(2)

(3)

(4)

CAR[−10,10]

CAR[−10,10]

CAR[−10,10]

CAR[−10,10]

0.032*** (24.79)

0.029*** (22.24)

0.031*** (24.32)

0.022*** (17.01)

−1.196*** (−14.43)

−3.831*** (−31.77)

−3.900*** (−32.74)

OCF i,t−1

−0.045*** (−22.35)

−0.025*** (−12.98)

Sizei,t−1

0.030** (2.19)

0.131*** (9.06)

Growthi,t−1

0.025 (1.42)

−0.169*** (−9.58)

TobinQi,t−1

0.005*** (6.57)

0.001 (1.29)

MBi,t−1

−0.019*** (−8.59)

−0.032*** (−13.36)

Levi,t−1

0.226*** (28.77)

0.254*** (31.78)

0.540*** (12.22)

0.872*** (17.93)

Outpricei,t WACC i,t

Intercept

0.019** (2.40)

0.071*** (8.17)

Year

No

No

No

Yes

Industry

No

No

No

Yes

N

38,520

38,520

38,520

38,520

Adjusted R2

0.016

0.021

0.086

0.226

F

614.42***

412.91***

453.05***

416.94***

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses

6.4 Empirical Research

207

6.4.4 OLS Regression Analysis This paper uses model (6.1) to test the relationship between the M&A premium and short-term market performance to verify the proposed game model. Table 6.6 lists the regression analysis results of the M&A premiums and short-term M&A market performance. Column 1 reports the regression results of the M&A premiums and M&A short-term market performance without any control variables. Column 2 reports the regression results of the M&A premium and the short-term market performance of M&A after the cost of capital. Column 3 reports the regression results of the M&A premium and short-term market performance after adding the cost of capital and the acquirer’s company-level control variables. Column 4 reports the regression results of the M&A premium and short-term market performance after adding all control variables and annual and industry dummy variables. The results show that regardless of whether control variables are added, at the 1% significance level, the regression coefficients of M&A premium and M&A short-term market performance are both positive. This finding verifies the research hypothesis that higher M&A premiums will lead to higher M&A short-term market performance. Both the company’s cost of capital and the short-term market performance of M&As are significantly negatively correlated, indicating that investors have become more rational in recent years. On the basis of supporting high M&A premiums, they are more supportive of M&As with lower capital costs. At the same time, this empirical result also verifies the proposed game model. The M&A game revolves around transaction pricing. The market excess returns brought about by an M&A are a function of transaction consideration and capital cost. Moreover, after adding the control variables, the regression results show that the regression coefficient of the acquiring company’s size is significantly negative while the regression coefficient of the operating income growth rate is significantly positive. This indicates that the market favors M&As of smaller and faster-growing companies, and the short-term market performance of M&A is higher. There is a significant negative correlation between cash flow and the short-term market performance of M&As. It may be that, for companies with negative cash flow, investors expect merger integration to be better and more likely to produce synergies; therefore, the market responds better to M&As. Based on the above regression analysis, the empirical analysis results of this paper support both research hypothesis H and the game model proposed in this paper.

6.4.5 Robustness Test In this section, we measure the accumulated abnormal return of the main merger company’s stock by changing the time window of the merger announcement. We test whether the empirical results maintain the robustness of the different measurement methods of the core variables. Previous studies have shown that 30 days before and

208

6 Game Analysis of China’s Enterprise M&A Pricing Based …

after the announcement of a merger event [−30, 30] is the longest window period for short-term market performance of M&A (Croci and Petmezas, 2015). Therefore, we selected 30 days before and after the announcement of the merger event as the window period to calculate the acquirer’s stock. Table 6.7 shows the cumulative abnormal return CAR [−30, 30], the repeat regression analysis of model (6.1), and the relevant results. The robustness of the test results is consistent with the abovementioned OLS regression results, indicating that the empirical results of this study are robust. Table 6.7 Robustness test results of M&A premium and M&A short-term market performance Variable

(1)

(2)

(3)

(4)

CAR[−30, 30]

CAR[−30, 30]

CAR[−30, 30]

CAR[−30, 30]

0.042***

0.040***

0.043***

(25.50)

(24.00)

(26.32)

0.026*** (15.60)

−0.788*** (−7.53)

−3.725*** (−24.64)

−2.911*** (−19.07)

OCF i,t−1

−0.095*** (−37.99)

−0.075*** (−30.24)

Sizei,t−1

−0.241*** (−13.79)

−0.137*** (−7.37)

Growthi,t−1

0.063*** (2.86)

−0.062*** (−2.77)

TobinQi,t−1

−0.005*** (−5.06)

−0.010*** (−9.54)

MBi,t−1

−0.001 (−0.20)

−0.013*** (−4.33)

Levi,t−1

0.242*** (24.61)

0.239*** (23.27)

Outpricei,t WACC i,t

Intercept

−0.005 (−0.50)

0.029*** (2.67)

0.377 *** (6.80)

0.757*** (12.15)

Year

No

No

No

Yes

Industry

No

No

No

Yes

N

38,520

38,520

38,520

38,520

Adjusted R2

0.017

0.018

0.097

F

650.34***

353.96***

516.01

0.201 ***

359.03***

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses

6.5 Conclusion

209

6.5 Conclusion This article uses contract economics and information economics theories to construct a game model for both parties to an M&A from the perspective of the acquirer. The study analyzes the negotiation strategy of merger pricing under the asymmetric information conditions and limited rationality of the participants. It is concluded that transaction pricing is the focus of the merger game. As far as the acquirer is concerned, transaction pricing is a strategy based on expected excess returns in the stock market. Because of the scarcity of corporate resources, the cost of capital needs to be considered in the transaction pricing strategy. The expected market excess return is a combination of transaction pricing and capital cost function. To construct a mathematical model, we use the M&A experience data from Chinese A-share listed companies to conduct an empirical analysis, and explore whether the expected market benefits of transaction pricing strategies in the M&A game have been realized. The results reveal that the higher the M&A premium rate, the better the short-term market performance of the M&A. The empirical results support our theory and mathematical model. Under conditions of information asymmetry and the participants’ bounded rationality, the acquirer conducts the M&A game with the rational goal of maximizing total returns. The acquirer reaches the equilibrium state of the game at the intersection of short-term market excess return expectations and transaction pricing. In the process of realizing expected market excess returns, for M&A events with high M&A premiums, the short-term market excess returns will be higher. The research results of this article show that the price of M&A transactions is an important factor that can explain the income that an M&A can generate for the acquirer. This provides a new analysis angle and offers empirical evidence, enriching research on factors that influence the value creation of M&As. However, it should also be noted that the high price of M&A transactions can trigger a series of risks. Fu et al. (2013) found that under market timing, the stock price of a company is too high, and the acquirer is therefore likely to accept transactions with a high M&A premium. This will give rise to the Type I agency problem for the acquirer’s management, which is very likely to collude with the seller to acquire the target company at a high premium to serve their own private interests. After the completion of the M&A transaction, it is difficult for the M&A to achieve long-term performance improvement and create M&A value. Excessive M&A premiums will also bring about the problem of overestimated goodwill (Kin et al., 2013). The largescale impairment of goodwill and the “thunderstorm” of goodwill in China’s capital market in 2018 also highlights the importance and robustness of rational M&As. In the future, the risk issues under this type of merger premium should be studied to provide better decision support for the sustainable development of M&A.

Chapter 7

Trust, Innovation and M&A Value: An Empirical Study in China

This paper analyzes the relationship between trust mechanism, innovation ability and M&A value by employing the data of material assets reorganizations completed through mergers & acquisitions (M&A) by China’s stated-owned listed companies under mixed ownership from 1998 to 2011 and taking the period from 1997 to 2014 as a sample range. The trust mechanism and innovation ability affect the creation of M&A value of SOEs under mixed ownership. This paper examines the relationship between innovation ability of SOEs and M&A value of mixed ownership, and finds the improvement of innovation ability of SOEs after M&A of mixed ownership plays an important role in creation of the M&A value, and such role relates closely to trust mechanism. Two-stage regression is carried out according to 2SLS model, and it is discovered that internal trust mechanism with the sincerity of SOEs as core is utilized constantly by promoting knowledge inside and outside the organization to enhance the innovation ability of the enterprises. The sincerer the SOEs are, the more prominent the promotion effect of innovation ability on the M&A value of enterprises under mixed ownership is. In the robustness test, the structural equation is adopted to verify the mesomeric effect of innovation ability during the process of sincerity influencing the M&A value of enterprises under mixed ownership. The study in this paper indicates that the SOEs can still build enterprises’ M&A value in the M&A of mixed ownership through sincerity construction and innovation ability improvement though China’s system environment is not perfect.

7.1 Introduction China has gone through five stages of the M&A wave, among which, the fifth stage of equity division reform starting from April 2005 symbolizes the mature development trend of China’s capital market. According to statistics of CSMAR (China Stock Market & Accounting Research Database) database and Wind database, expansion © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_7

211

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7 Trust, Innovation and M&A Value: An Empirical Study in China

M&A dominated by M&A have become a major type of assets reorganization,1 which shows that more and more listed companies wish to optimize resource allocation and achieve business growth strategies by M&A. Nevertheless, in the practice of M&A, “Post-Merger Puzzle” (Grubb and Lamb, 2000) exists. M&A transactions can bring positive short-term market performance, but if the event window period is extended after M&A, it will be found that excess market return that M&A brings can hardly be maintained, and even lead to decline of long-term M&A market performance and M&A failure (Malmendier and Tate, 2008). In view of this, we wonder that, since it is difficult for M&A to create value for enterprises, and M&A is a material path to mixed ownership reform, why has the national government been strongly advocating the mixed ownership reform by SOEs in the form of M&A of mixed ownership? From the perspective of enterprises’ theoretical resource view and ability view, enterprises’ M&A value relates to interest realization degree of stakeholders, and it is also an increasing function of stakeholder trust and enterprise innovation ability (Jefferson et al., 2006; Moatti et al., 2015). Interests of shareholders of the acquiring firm are achieved by market performance and book performance, that of target company’s shareholders by M&A premium, and that of other stakeholders by book performance. We design a trust mechanism based on the encompassing interests of stakeholders,2 but we are faced with the inconsistency of the connotation of the M&A premium and the encompassing interests of stakeholders. Based on this, this paper will use sharebased payment as the main payment method, distinguish the M&A of SOEs under mixed ownership that have formed material assets reorganizations from M&A, use the market performance and book performance of M&A as proxy variables for the M&A premium to study how the shareholder first embed shareholder trust through short-term market performance as the holder of most encompassing interests, study how other stakeholders establish a trust mechanism based on the demonstration effect of shareholder trust, and study the relationship between the trust mechanism established according to the realization degree of stakeholders’ interests and the M&A value creation of SOEs under mixed ownership. The core competence of an enterprise is the unique innovation ability formed by the coordination and organic combination of dispersed technologies and skills (Medase & Basit, 2020). The transfer and integration of core competence and the improvement of innovation ability are the most important factors for the creation of M&A value. Compared with the growth of the enterprise, the innovation ability is formed in the environment of the expansion of organizational boundaries. The trust mechanism in M&A integration will affect the improvement of innovation 1

Wind database storage divides the asset reorganization of listed companies into four categories: merger and acquisition, equity transfer, asset stripping, and asset replacement. Merger and acquisition is defined as a listed company’s acquisition of target assets and property rights as a whole or part of physical assets, part of operating rights, and part of equity, that is, the listed company is the acquirer. This paper studies asset reorganization of mergers and acquisitions, referred to as M&A. 2 Mancur Olson put forward the term encompassing interests in “Power and Prosperity”. In enterprise M&A, when the M&A is successful, shareholder profits account for most of the enterprise value created by M&A. However, if the M&A fails, shareholders will suffer the most losses, and they are the most important holders of encompassing interests.

7.1 Introduction

213

ability (Colla et al., 2013). Therefore, this paper examines the role and path of trust mechanism in improving innovation ability and M&A value creation of SOEs under mixed ownership. Furthermore, in the endogenous analysis and robustness test, by discerning that the corporate sincerity is a trust mechanism beyond the trust of stakeholders, and the innovation ability plays an intermediary effect in the process of the sincerity affecting the M&A value creation of SOEs under mixed ownership, it provides direct evidence on the relationship between trust mechanisms and innovation abilities, and the M&A value creation of SOEs under mixed ownership. Compared with the existing research, the contribution of this paper is reflected in the following aspects. Firstly, this paper divides the trust mechanism into an outer mechanism and an inner mechanism. The outer trust mechanism is embodied by the encompassing interests of stakeholders, and the inner trust mechanism is reflected through sincerity. This deepens our understanding of the formal and informal systems in the theory of new institutional economics, and expands the process and path of the impact of trust mechanisms on the corporate M&A value (Hutton et al., 2015). At the same time, M&A completed through share-based payment will incorporate the target company’s shareholders into the body of encompassing interests, and the M&A premium will no longer be considered as a cost factor, eliminating the interference of the manager’s arrogance hypothesis and wealth transfer theory, focusing the M&A motivation on the creation of enterprise value, extending the existing literature on the main application of share-based payment in M&A payment methods (Ang & Cheng, 2006; Micah et al., 2009). Secondly, there are few studies on corporate culture in M&A of SOEs under mixed ownership. Most studies regard corporate culture as a fixed effect, which is excluded rather than analyzed through the fixed effect model of panel data. However, M&A of mixed ownership has brought about the expansion of organizational boundaries and corporate culture has formed an exogenous impact in the process of organizational changes. Scholars who have noticed this are mainly focused on the degrees of difference and integration between M&A organizations (Stahl & Voigt, 2008; Ahern et al., 2015). These studies return the degree of organizational integration of the M&A parties to company value and company risk, but fail to analyze the ways and mechanisms of the role of corporate culture. In this paper, through collecting the violations of laws and regulations of the M&A parties in three years before and after M&A, we measure the sincerity, and through the 2SLS regression model, we analyze the endogeneity of enterprise innovation ability, identify the missing variable that affects the value of SOEs under mixed ownership–the sincerity, and demonstrate the mesomeric effect of innovation ability in the influence of sincerity on the M&A value of SOEs under mixed ownership in the robustness test. This helps us to better understand the role and path of corporate culture in M&A of SOEs under mixed ownership. Thirdly, in the existing research on the influencing factors of corporate M&A value (Stahl & Voigt, 2008; Stahl et al., 2011; Prasadh & Thenmozhi, 2019), trust mechanism and innovation ability are independent research areas, and there is no literature to study the mutual effect mechanism of trust mechanism and innovation ability on corporate M&A value, especially in the research field of M&A of SOEs

214

7 Trust, Innovation and M&A Value: An Empirical Study in China

under mixed ownership. This paper finds that the trust mechanism can enhance the innovation ability of M&A and promote the M&A value creation of SOEs under mixed ownership more significantly. This trust mechanism comes from the sincerity in the inner layer of the enterprise rather than the outer layer of stakeholders’ encompassing interests, which helps us to solve the mystery of M&A profit and loss in the practice of SOEs under mixed ownership.

7.2 The Institutional Background from the Perspective of China Before the M&A, many enterprises generally only attach importance to strategic and financial factors and ignore the cultural compatibility after the M&A of the two enterprises. However, after some experts and scholars studied the process of the enterprise M&A, they have found that the enterprise has formed its own culture which is deeply rooted in itself before the M&A, and cultures of different enterprises may have something in common but are by no means the same in essence or even have conflicts. Due to cultural conflicts of the enterprises, the integration of trust mechanisms comes into being naturally and becomes the key to the enterprise M&A. In 2002, the M&A of Han Consulting by Lenovo in China resulted in the resignation of a large amount of former Han Consulting senior management and consultants. The reason lies in the serious enterprise culture conflicts of both sides of the M&A. Han Consulting is a knowledge-based enterprise with an enterprise culture of equality and greater freedom, but Lenovo is generally regarded as a market-based enterprise with strong control power. The cultural divide and conflicts between these two different enterprises led to a huge loss of employees. However, in the same year, the M&A of Compaq by Hewlett Packard in the United States had totally different results. Why could the M&A of Compaq by Hewlett Packard achieve such a great success? A very important reason is the successful cultural integration of both sides. Hewlett Packard and Compaq have entirely different enterprise cultures. Hewlett Packard is a longestablished enterprise with a history of over 60 years, and its enterprise culture is the HP Way: stay loyal to customers, trust and respect the individuals, pursue excellence, value team spirits and encourage creativity. But Compaq is a start-up computer manufacturer and its enterprise culture, which is more business-oriented, takes it as the primary target to quickly occupy the market. Compaq makes quick decisions, operates flexibly, worships no procedure, and emphasizes quick actions. When integrating the enterprise culture of Compaq, Hewlett Packard has absorbed the essence of the Compaq culture and established a more powerful enterprise culture which inherits the principle of sincerity of the HP Way and carries forward the flexibility and quick decisions of the Compaq culture, making the controversial M&A case a great achievement. It shows the importance of the enterprise culture integration, which has already become one of the keys to the success of the M&A. Especially in China, there is “hierarchical order” culture. The “hierarchical order” which takes

7.2 The Institutional Background from the Perspective of China

215

place in kinship relations and geographical relations is a social pattern that takes itself as the center and spreads like a ripple, and can stretch out or draw back freely. As the ripple spreads further, it becomes thinner. Also, the “hierarchical order” generates different circles with the temporal and spatial changes. Therefore, the mixed ownership M&A in China pays more attention to trust mechanisms in the M&A. Under the “new normal” economic situation, the SOEs are actively exploring realization approaches for them to promote the development of the mixed ownership with reconstructuring property rights reform of stock of resources and M&A. The Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee has proposed to make energetic efforts to develop the mixed ownership economy. The Fifth Plenary Session of the 18th CPC Central Committee has stressed to take public ownership as the main body and adhere to the common growth of economy belonging to diverse forms of ownership. The series of fundamental policies provide a clear guide direction for SOEs to develop the mixed ownership with the M&A and deepen the reform of SOEs. Taking the diversification of the subjects of property rights as an opportunity and by ways of the enterprise governance, resource integration, as well as combination of institutions and mechanisms, they create the enterprise value and enhance the vitality, control power, influence and risk resistance capacity of the stateowned economy. “Mixed but not integrated” is a common challenge faced by SOEs in the process of mixed ownership reforms. Lack of trust hinders the improvement of innovation capabilities and may be the main obstacle to the creation of enterprise value by the mixed ownership M&A. This chapter carries out an empirical study based on the above-mentioned problems.

7.3 Literature Review 7.3.1 Trust and Enterprise Value Since the 1990s, with the rapid development of enterprises, researchers have focused on the relationship between trust and enterprise value within microeconomic individuals. Barney and Hansen (1994) found that high degree of trust can promote the competitiveness of enterprises, whether within corporate organizations or network organizations. Trust mechanism will also transform into organizational behavior, affecting the behavior pattern of individuals, even if the individual is a manager (Lioukas and Reuer, 2015). Empirical researchers Guiso et al. (2008) found that trust affects the participation of investors in the stock market. Investors in regions with higher trust are more willing to invest in high-risk assets such as stocks than those in regions with low trust (Ahern et al., 2012). Generally speaking, the existing literature mainly uses political connections and relational capital to measure the trust of enterprises, and examines the relationship between trust and enterprise value. There is no in-depth discussion on the influence of

216

7 Trust, Innovation and M&A Value: An Empirical Study in China

trust of external stakeholders and internal trust culture on M&A value in the process of organizational boundary expansion brought by M&A.

7.3.2 Innovation and Core Competence of Enterprises Haspeslagh and Jemison (1991) first studied the core competence and M&A. They believed that the core competence construction is the core proposition of strategic management, the relationship between production factors forms resources, the internal relationship between resources and resources promotes the formation of competence, and the transfer of core competence is the most important factor of M&A success, that is, M&A creates enterprise value. Ahuja and Katila (2001) found that the knowledge correlation of both sides of M&A has a nonlinear relationship with the innovation output after M&A. When the knowledge accumulation of the target company is greater than that of the acquiring firm or complementary with the original knowledge accumulation of the acquiring firm. The acquiring firm has the ability to integrate the innovation from the target company and internalize the external innovation mechanism into the independent innovation ability characterized by the development of new products. The knowledge and core competence of the acquiring firm and the target company will be effectively integrated, and M&A will create value for the enterprise (Makri et al., 2010; Medase & Basit, 2020). Hall (2002) pointed out that the output of enterprise innovation activities is highly uncertain, which makes the process of innovation input–output contain the characteristics of information asymmetry. As a commercial secret, R&D activities are generally not disclosed to the public, while the innovation output is mostly manifested in intangible assets, goodwill or corporate culture which cannot be included in financial statements, and is related to the formation and accumulation of organizational capital. As a result, it is difficult to measure completely, which makes it difficult for investors to effectively monitor the input–output level of enterprise innovation ability (Anderson et al., 2013). In a word, the existing research on innovation ability and M&A value has been carried out, but there is still a lack of research on the relationship between innovation ability and M&A value from the perspective of trust. Based on the background of mixed ownership reform, this paper measures the inner trust mechanism of SOEs through sincerity, and investigates the relationship between enterprise innovation ability and trust, and the ways that affect the M&A value creation of SOEs under mixed ownership, which complements the literature in this field.

7.4 Research Hypotheses

217

7.4 Research Hypotheses 7.4.1 Mixed Ownership M&A and Enterprise Value Creation Sirower (1997) believed that, once the synergy in M&A is expected by the acquirer, the expected M&A value creation will be reflected in the form of M&A premium, and the enterprise value created by M&A will be the difference between the enterprise value created by the synergy and M&A premium. The intrinsic motivation of capital seeking profit makes the M&A parties keen on synergetic M&A (Wang & Xie, 2009). However, when the M&A premium is too high, the acquiring firm will eventually fall into the trap of M&A synergy. Empirical data showed that the M&A is difficult to create enterprise value, which is one of the evidences (Schijven & Hitt, 2012). This paper holds that when the M&A value of SOEs under mixed ownership includes M&A premium, the interest realization time and interest distribution basis of stakeholders tend to converge.3 We can investigate the relationship between M&A mobility and enterprise value of SOEs under mixed ownership through synergy. In M&A with material assets reorganization as the type, M&A and share-based payment as the main payment mode of consideration, stakeholders will converge in time for the realization of their interests.4 In M&A with material assets reorganization as the type, the target company is an important subsidiary of the acquirer, and the M&A synergy is mainly reflected in the coordination of finance, operation and management (Wang & Xie, 2009), which makes the enterprise value created by M&A easy to measure. Share-based payment makes M&A enterprises have a crossshareholding structure, and the three-year period of holding additional shares will promote shareholders to be more committed to corporate governance and enterprise value creation (Yang et al., 2017).

3

Jensen & Meckling (1976) held that contractual relationship is the essence of an enterprise. Based on the perspective of M&A, this paper studies the relationship between stakeholders. Therefore, the acquirer and target company of M&A are defined as M&A enterprises, and shareholders, creditors, suppliers and customers are defined as enterprise stakeholders. Among them, shareholders are the stakeholders of ownership and other groups that interact with enterprises economically, and creditors, suppliers and customers are economically dependent stakeholders (Hannan and Freeman, 1984). 4 “Measures for the Administration of Material Assets Reorganization of Listed Companies” stipulates the scope of material assets reorganization: the total amount of assets purchased and sold account for 50% or more of the total amount of end-of-period assets of that listed company in the consolidated financial and accounting report of the latest accounting year that has been audited; the business income from the purchased and sold assets in the latest accounting year accounts for 50% or more of the business income in the consolidated financial and accounting report of the same period that has been audited; the net assets purchased or sold account for 50% or more of the end-of-period net assets in the consolidated financial and accounting report of the latest accounting year that has been audited, and exceed RMB 50 million. “Measures for the Administration of Securities Issuance of Listed Companies” stipulates that the shares subscribed by domestic and foreign strategic investors introduced by the board of directors shall not be transferred within 36 months from the date of the end of the issuance.

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7 Trust, Innovation and M&A Value: An Empirical Study in China

Meanwhile, in M&A with material assets reorganization as the type, M&A and share-based payment as the main payment mode of consideration, the basis of stakeholder interest distribution will converge. Synergy creates enterprise value by improving the effectiveness of resource allocation, and stakeholders distribute interests on the basis of enterprise value realization (Wang & Xie, 2009). In modern corporate financial theory, enterprise value evaluation is usually based on the expected net present value of cash inflow from operating activities. Cash flow from operating activities is an important part of company surplus and is closely related to enterprise value (Healy et al., 1992). For an enterprise to grow significantly, it needs to have sufficient capital to meet the investment and expansion needs. In a fully effective capital market, endogenous financing and exogenous financing should not affect the value evaluation of the company. However, in the incomplete efficient capital market with asymmetric information, in order to prevent agency behavior and opportunistic behavior tendency, the external capital providers will demand higher return on investment as compensation (Fan et al., 2012). In short, in the M&A and reorganization of share-based payment, the interest realization time and the basis of interest distribution of stakeholders tend to converge, and M&A of SOEs under mixed ownership can create enterprise value by improving the level of operating cash flow of enterprises. We propose research hypothesis 1. H1: M&A of SOEs under mixed ownership creates enterprise value by improving the level of operating cash flow.

7.4.2 Stakeholder Trust, Innovation Capability and M&A Value of Mixed Ownership of SOEs M&A of SOEs under mixed ownership makes two different organizations -SOEs and private enterprises-expand and integrate into a new organization. The new contract makes the enterprise stakeholders form a new interest network. Shareholders are the largest holders of encompassing interests, and their trust is the most important and has a demonstration effect (Graebner, 2009). If shareholders show trust and support attitude towards M&A transaction of SOEs under mixed ownership, other stakeholders will show their trust in the M&A transaction based on expectation of interests. After the M&A, shareholders, based on their ownership interests and as representatives of encompassing interests, will use their own power to make the formal system fully effective, the incomplete contracts be fairly performed, and stakeholders realize and distribute the encompassing interests on the basis of M&A value creation (Moatti et al., 2015). Therefore, in the process of realizing the encompassing interests represented by shareholder interests, the stakeholder embedding trust mechanism will promote the mixed ownership of SOEs to create enterprise value.

7.4 Research Hypotheses

219

M&A is the main way to realize the strategic goal of rapid growth and diversified development of enterprises. Open innovation in M&A is also considered to be an effective way to acquire new technology and improve production capacity. Eisfeldt and Papanikolaou (2013) believed that, although the innovation brought by M&A is not independent innovation, the original innovation ability of both parties has become the internal element of the enterprise through M&A, which has created conditions and motive force for enterprises to realize independent innovation, brought new production functions for the input–output of technology and R&D, and promoted the innovation ability of enterprises to create enterprise value through M&A (Moretti & Biancardi, 2020). Colla et al. (2013) believed that, in the environment of asymmetric information, M&A takes a long time from motivation formation to integration completion, and the incompleteness of formal system may make stakeholders feel less confident in the protection of their rights and interests. The limited rationality of stakeholders may destroy the effective equilibrium of encompassing interests, reduce the trust and cooperation of stakeholders, and make M&A difficult to create enterprise value. By the same token, Hall (2002) believed that in the process of enterprise innovation input and output, outsiders are faced with more serious information asymmetry, and innovation input as a trade secret is generally not disclosed. Moreover, as an intangible asset, the output of innovation ability is attached to human capital and organizational capital, which is difficult to measure. Innovation “knowledge” is mainly contained in R&D personnel. Once R&D personnel are lost, the ownership of knowledge will no longer belong to enterprises and become the sunk cost of enterprises. This makes it difficult to measure the effect of innovation ability on enterprise value in M&A (Anderson et al., 2014). Since M&A and wealth transfer M&A are two heterogeneous M&As (Weston et al., 1998), encompassing interests can be effectively balanced based on enterprise value creation. In the environment of asymmetric information, it can enhance the confidence of stakeholders in the realization of encompassing interests and promote M&A to create enterprise value. Similarly, in the environment of asymmetric information, the trust of stakeholders becomes a supervision mechanism of innovation activities, and promotes the innovation ability in M&A activities to create enterprise value. On the basis of the above analysis, we propose hypotheses 2a and 2b: H2a: In the enterprise environment of stakeholder trust, the enterprise innovation ability is enhanced, and the M&A of SOEs under mixed ownership is promoted to create enterprise value; H2b: In the enterprise environment with strong innovation ability, the trust degree of stakeholders is improved, and the M&A of SOEs under mixed ownership is promoted to create enterprise value.

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7 Trust, Innovation and M&A Value: An Empirical Study in China

7.5 Research Design 7.5.1 Research Samples and Data Sources This paper selects the mixed ownership M&A events of China’s A stock stateowned companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange from 1998 to 2011 as the initial samples. The main data are from the CSMAR and CCER databases. The sincerity further discussed is improved according to the Wind database. According to the research needs, we screen the samples as follows: (1) exclude financial acquirer enterprises; (2) select M&A type as material assets reorganization; (3) the method of payment is a mixture of stock payment, stock payment and cash payment; (4) exclude the samples of the acquirer which has been listed for less than three years from the date of the first announcement of the M&A event; (5) exclude the samples of the acquirer which has been delisted in less than three years after the date of the first announcement of the M&A event, and ensure the data integrity of the three years before and after the M&A; (6) exclude the samples of successful M&A of ST companies which have been suspended from listing, and no limit of rise or fall is set on the first day of trading after the resumption of losses, so as to ensure that the excess return rate of listed companies in the market is comparable. Finally, 186 research samples were obtained. For the purpose of eliminating the influence of outliers on the empirical results, this paper deals with the winsorize of the main continuous variables by 1% up and down. Data processing is mainly done with SAS9.4.

7.5.2 Research Model and Variable Definition (1) M&A and enterprise value creation. In this paper, the index of cash income is used to evaluate the value creation of M&A. The reasons for choosing this index are as follows: First, the discounted cash flow valuation of enterprises is close to the theoretical value of enterprises (Copeland et al., 1990). Second, the acquirer has acquired the control right of the target company by means of share-based payment, and the M&A premium becomes the strategic investment of the original shareholders of the target company on the acquirer. The M&A premium needs to be realized through the M&A value creation, and cash income is the most core factor to reflect the change of enterprise value. Third, measuring enterprise value by cash income can avoid accounting manipulation, reduce the inconsistency between accounting system and enterprise accounting policy change, and make the index more reasonable (Gregory, 2005). On the measurement model, we used the Healy et al. (1992) model to analyze the influence of M&A on value creation of enterprises and test research hypothesis H1.

7.5 Research Design

221 ad just

ad just

Cashr etur n i,1→3 = α + βCashr etur n i,−1→−3 + εi,t There is a lot of information in Cashreturni,t . In order to reduce the voice, such as excluding other factors like macroeconomic situation, industry characteristics and year, this paper adjusts it by industry5 and by year, so that ad just can reflect the influence of M&A events as much as possible. Cashr etur n i,t ad just Cashr etur n i,1→3 represents the average cash return of i companies in three years ad just after M&A, Cashr etur n i,−1→−3 represents the average cash return of i companies in three years before M&A, the slope β represents the long-term change of cash return, and α represents the abnormal change of cash return caused by M&A. Healy model considers the possible long-term factors that cause the change, and controls the influence of this factor on the cash income of the company after acquisition, which is better than the method of comparing the value of cash income before and after M&A in descriptive statistics. The selection of cash income data of 3 years after M&A is mainly based on the following considerations of Healy et al. (1992): First, the sharebased payment method was mainly used after the reform of equity allocation in 2005. Choosing a longer time to measure the value of M&A will reduce the sample data and reduce the validity and universality of the conclusion. Second, existing studies have shown that if the time span is too long, dividends, capital increase and other major events will affect the persuasive effect of M&A on cash income changes, so it shall not be more than 5 years (Givoly and Hayn, 2000). (2)

Stakeholder trust, innovation ability and M&A value 1.

The Measurement of Short-Term Market Performance of M&A and Shareholder Trust

In the M&A transaction, the shareholder interests demand is realized through the event window period, the short-term market performance evaluation of M&A is used to determine the first announcement date of M&A as the 0th day, and the market model method is used for calculation. In this paper, [−240, −3] is selected as the cleaning period6 estimated by the market model, and the event period window is determined as two days before and after M&A [−2, 2]. With Ittner and Larcker (1998) method as reference, it’s calculated according to the capital asset pricing (CAPM)   2  theoretical model. C A Ri,t = A Ri,t αi + βi Rmt , Rit indicate the expected rate 





t=−2

of return if the company does not take place during the same period. Based on the CAPM (Capital Asset Pricing Model), Rm,t is the market index yield, αi and βi are the regression coefficients obtained by OLS regression between the return on stock and the return on market index in the cleaning period, A Rit = αi +βi Rmt ; ARi,t is the 



5





The industry classification follows the classification standard of China Securities Regulatory Commission. The manufacturing industry is classified into two levels, and other industries are classified into just one level. 6 Servaes (1991) selected -210 to -11 days; Travlos (1987) selected -136 to -16 days as the cleaning period; the selection of event period was based on the literature of Otto et al. (2020).

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7 Trust, Innovation and M&A Value: An Empirical Study in China 

difference between the real yield Rit and the expected yield Rit of the daily sample stock during the event period. A Rit = Rit − Rit ; CARi,t is the  sum of the abnormal returns of ARi,t in each day within the event period, C A Rit = 10 t=−10 A Rit . 

2.

The Measurement of Long-Term Performance of M&A and Stakeholder Trust

After the successful M&A, the interests of shareholders are the long-term market performance and book performance of the enterprise, and the other interests are book performance. Shareholders, as representatives of encompassing interests, measure stakeholder trust by long-term performance TobinQ covering stock market and book data. According to the TobinQ theory of Tobin (1969), if the capital is fully durable (i.e., 0% depreciation), the level of enterprise investment depends on the ratio of the added capital market value MV to the replacement cost RC, Q = MV/RC, MV = Market value, RC = Replacement cost. If MPK = Marginal cost of capital and δ = Depreciation rate, return on capital r = MMPVK + dMMVV − δ . When expected capital return E(r) conforms to investors’ expected return rate r k , PK) + dMMVV − δ, and the integral is the capital market keeps balance, rk = E(M MV ∞ M V = 0 [E(M P K (t))]e(−ηk +δ)t dt. As MPK is a constant under specific circumstances, RC = MPK/(R + δ). Therefore, TobinQ can be expressed by capital marginal efficiency and discount rate function: Q = (R + δ)/(r k + δ). TobinQ theory connects the market value and book value of enterprises organically, and becomes the stakeholder trust evaluation index based on the degree of interest realization. Although China has completed the reform of equity division, it is difficult to obtain the marginal efficiency and discount rate of capital needed to calculate TobinQ. Chung and Pruitt (1994) put forward the alternative formula Q = (MVE + PS + DEBT)/TA, of which MVE = Circulating market value of listed companies, PS = Preferred stock value, DEBT = Net debt of the company, TA = Book value of total assets of the company. This paper calculates TobinQ by this method and ad just makes adjustments by industry and by year, making the index T obin  Q_di f f i,1→3 reflect the change of stakeholder trust degree caused by M&A events of the company as far as possible. 3.

The Measurement of Innovation Ability

This paper uses the intangible assets after excluding the amortization of land use rights and the increment measurement of goodwill value at the end of the period to that at the beginning of the period to express the innovation ability of the enterprise. The reasons are as follows: first, the increase of intangible assets is the output of enterprise innovation input, which can be regarded as the comprehensive reflection of innovation ability (Smith, 2005). Second, goodwill recognized in M&A is economic resources that have no physical form, can’t be identified and traded separately, and can bring future economic benefits to enterprises. Holderness (2014) believed that this kind of economic resources is the core competitiveness gradually accumulated by enterprises in the past continuous operation, and its essence is innovation ability. Third, the innovation ability of an enterprise doesn’t only refer to R&D expenditure, which only reflects a part of innovation activities. The innovation culture, human

7.5 Research Design

223

capital development and the transformation process from open innovation to independent innovation are not reflected in R&D. Intangible assets and goodwill contain more information about innovation ability than R&D (Khan et al., 2019). Fourth, most of China’s non-listed companies have not published R&D data, and even listed companies disclose little information about them, so it is difficult to obtain complete R&D data. And it’s also difficult to reasonably estimate with Probit model due to very little disclosed information. Therefore, this paper considers that the intangible assets excluding the land use rights and goodwill increment are more reasonable indicators to reflect the M&A innovation ability of the enterprise. As intangible assets and goodwill may vary greatly by industry and year, this paper also controls the industry and time effect, and uses the indicators adjusted by industry and year to reflect the M&A innovation ability of the enterprise. On the basis of determining the main explanatory variables, we use the ideas of Beaver et al. (1980) and Healy et al. (1992) for reference, and use the basic model (2) to analyze the relationship among innovation ability, stakeholder trust and M&A value creation of SOEs under mixed ownership to test hypotheses H2a and H2b. Cashr etur n_di f f i,1→3 = α + β1 C A R + β2 T obin  Q_di f f i,1→3 ad just

ad just

ad just

ad just

+ β3 I nnov_di f f i,1→3 + β4 E P S_di f f i,1→3 + β5 Statei + β6 Restr ucturingT ypei + β7 U nderlyingT ypei + εi,t ad just

The explained variable Cashr etur n_di f f i,1→3 on the left side of the model represents the increment of the average cash return through adjustment by industry and year three years after the company’s M&A. In the model, we also consider the following control variables: EPS represents earnings per share; shareholders’ interests are reflected in the stock market value; in addition, the net profit in book performance represents the residual equity of shareholders, and EPS represents the residual equity of each share held by shareholders every year. Therefore, EPS before and after M&A is used to represent the change of shareholders’ residual equity through the book performance of the enterprise (Leuz ad just et al., 2003). Similarly, we use the average change E P Si,1→3 of EPS after the adjustment by industry and year three years before and after M&A to represent the change of shareholders’ residual equity. Previous studies have shown that the type of M&A and reorganization, and the type of target company’s object all affect the M&A value creation of the enterprise (Guo et al., 2019; Prasadh & Thenmozhi, 2019). Referring to the above literature, we select the controlled variables, and the definitions of the main variables are shown in Table 7.1.

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7 Trust, Innovation and M&A Value: An Empirical Study in China

Table 7.1 Variable definition. Variables M&A value

Definition Cashreturn_diff

The three-year mean value of the ratio of operating cash flow to total assets after M&A after industry and year adjustment and the change in the three years before merger and acquisition ad just

MeanCashr etur n i,1→3 − ad just

MeanCashr etur n i,−1→−3 Short term performance of M&A

CAR

Calculation of [−2,2] window period before and after the first announcement of M&A

Long term performance of M&A

Tobin’Q_diff

Changes of TobinQ after industry and annual adjustment in three years after M&A and changes in the first three years MeanT obin  Q_di f f i,1→3 − ad just

MeanT obin  Q_di f f i,−1→−3 ad just

Innovation ability

Innov_diff

First, the annual output of innovation capacity is calculated as: (intangible assets—land use right + goodwill)/total assets at the beginning of the period, then calculate the average value of innovation capability after industry and annual adjustment in the three years after M&A and the change in the first three years ad just

MeanI nnov_di f f i,1→3 − ad just

MeanI nnov_di f f i,−1→−3 Residual equity of shareholders

EPS_diff

The change of the average earnings per share after industry and year adjustment in the three years after M&A   ad just Mean E P Si,1→3 −   ad just Mean E P Si,−1→−3

Types of M&A

RestructringType

Take 0 for asset acquisition, 1 for asset replacement, 2 for merger and acquisition, and 3 for others

Types of M&A targets

UnderlyingType

Take 0 for asset, 1 for equity and 2 for asset and equity

7.6 Empirical Analysis

225

7.6 Empirical Analysis 7.6.1 Descriptive Statistics (1)

Short term performance of M&A.

In the opinion of Ittner and Larcker (1998), the abnormal return rate CAR due to the calculation of a M&A event is used to evaluate the short-term performance of M&A of SOEs under mixed ownership. Referring to the existing literature on the selection of window period of M&A events, this paper sets the window period of M&A events as review in a multi-window period, with the maximum window period of 30 days before and after M&A [−30, 30] and the minimum window period of 1 day before and after M&A [−1, 1], and calculates by the market model method. The calculation results of multi-window CAR value are shown in Table 7.2 and the distribution trend is shown in Fig. 7.1. Through T test (mean test different from 0) and Sign Test (sign rank sum test), it is found that CAR is greater than zero at 1% significance level, indicating that the M&A event has achieved positive excess return and won the shareholder trust. At the same time, according to Fig. 7.1, CAR shows an increasing trend in the window period [−10, 0], and reaches the maximum on the day of announcement and two days before that (CAR is 44.196%, and average daily abnormal return rate AAR reaches 8.839%), and then it shows a decreasing trend, which indicates that the information on M&A events of listed companies is known by investors in advance. Based on the above analysis, this paper uses the CAR two days before and after [−2, 2] the announcement of the M&A event with the largest stock price volatility as the representative value of multi-window CAR in regression analysis. (2)

Descriptive statistics of main variables.

Table 7.3 shows the descriptive statistical results. The results show that the average and median values of cash income difference through adjustment by industry and year three years before and after M&A are greater than 0, which also shows the role of M&A in promoting enterprise value. However, the mean and median values of Table 7.2 Descriptive statistics of CAR Label

N

Mean

SD

Min

Max

T test

Sign Test

CAR1

CAR[−1,+1]

186

0.105

0.112

−0.176

0.295

21.680***

55,905.5***

CAR2

CAR[−2,+2]

186

0.144

0.156

−0.202

0.442

21.208***

55,370.5***

CAR3

CAR[−5,+5]

186

0.180

0.233

−0.267

0.714

17.862***

50,747.5***

CAR4

CAR[−15,+15]

186

0.184

0.314

−0.433

1.055

13.519***

40,809.5***

CAR5

CAR[−30,+30]

186

0.170

0.407

−0.713

1.434

9.611***

30,241.5***

CAR6

CAR[+1,+30]

186

0.022

0.186

−0.535

0.533

2.724***

9551.5***

CAR7

CAR[−15, −1]

186

0.102

0.276

−0.398

1.020

8.489***

23,106.5***

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7 Trust, Innovation and M&A Value: An Empirical Study in China

Fig. 7.1 CAR and AAR under market model

Table 7.3 Descriptive statistics of main variables Mean

SD

Min

Median

Max

Cashreturn_diff

0.764

8.203

−24.989

0.498

26.427

Tobin’Q_diff

-0.093

1.243

−5.044

−0.156

4.775

Innov_diff

2.294

5.015

−11.381

1.090

13.081

EPS_diff

0.154

0.458

−1.241

0.085

1.770

RestructringType

0.258

0.596

0.000

0.000

2.000

UnderlyingType

0.801

0.538

0.000

1.000

2.000

Tobin’Q difference (long-term M&A performance) through adjustment by industry and year three years before and after M&A are less than 0, which is contrary to the results of CAR (short-term M&A performance) in Table 7.2. It just reflects the “mystery of M&A profit and loss” that the short-term performance is good and the long-term performance is poor in the M&A practice of SOEs under mixed ownership. The difference of the average value of enterprise innovation ability through adjustment by industry and year three years before and after M&A is 2.294%, and the innovation ability of different enterprises varies greatly (standard deviation is 5.015%). Other information shows that the residual equity realized by shareholders through book is relatively stable, and the EPS per share before and after M&A has no significant difference, with an average of 0.154; the average value of the type of M&A and reorganization is 0.258, which is dominated by asset acquisition; the

7.6 Empirical Analysis Table 7.4 Regression analysis on the influence of mixed ownership M&A on cash income of SOEs.

227 ad just

Cashr etur n i,1→3 _cons

Coefficient

P_value

1.121**

0.024

(2.07) Cashreturn_diff

0.264***

0.001

(3.44) N

186

Adj-R2

0.055

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses

average value of the target company’s object type is 0.801, which is dominated by asset object.

7.6.2 Regression Results (1)

M&A and enterprise value.

The regression results in Table 7.4 show that the intercept is positive 1.21, and it is significant at the level of 5%. This shows that after controlling the cash income of the company before M&A, the cash income of the company has increased significantly. M&A creates enterprise value, and hypothesis H1 is supported. Figure 7.2 is a fitting figure of the impact of M&A on enterprise value. (2) The influence of stakeholders’ trust and innovation ability on the value creation of SOEs’ M&A. In the regression analysis in Table 7.5, we mainly analyze the short-term market performance CAR of the M&A of SOEs under mixed ownership representing the shareholder trust, the long-term performance of the M&A of SOEs under mixed ownership representing the stakeholder trust Tobin’Q_diff and the impact of innovation ability of SOEs under mixed ownership Innov_diff on the M&A value creation of SOEs under mixed ownership Cashreturn_diff . According to Model 1, the correlation coefficient of CAR is 0.106, but it has no significant relationship with the M&A value of SOEs under mixed ownership, showing only shareholder trust can’t promote the SOEs under mixed ownership to create enterprise value. According to Model 2, the correlation coefficient of Tobin’Q_diff is 0.835, and shows a positive correlation with the M&A value creation of SOEs under mixed ownership at the significance level of 10%, which indicates that the stakeholder trust will promote the value creation of SOEs under mixed ownership, but the result is not stable. It’s also consistent with the negative Tobin’Q_diff mean in descriptive

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7 Trust, Innovation and M&A Value: An Empirical Study in China

Ratio of average operating cash flow to assets in 3 years after M&A

Observations: 186 Number of parameters: 2 Error degree of freedom: 184 MSE: 45.114 R2: 0.060 Adj-R2: 0.055

Ratio of average operating cash flow to assets in the three years before M&A Fitting value

95%Confidence limit

95%Prediction limit

Fig. 7.2 Fitting chart of the impact of M&A on enterprise value Table 7.5 Stakeholder trust, innovation ability and M&A value Model 1 CAR

Model 2

Model 3

0.106 (0.03)

Tobin’Q_diff

Model 4

Model 5

−0.012 (−0.00)

0.130 (0.04) 0.835* (1.74)

Innov_diff

Model 6

0.891* (1.87)

0.891* (1.86)

0.232* (1.94)

0.232* (1.94)

0.245** (2.06)

0.245** (2.05)

EPS_diff

3.697*** (2.83)

3.846*** (2.96)

3.185** (2.41)

3.187** (2.41)

3.318** (2.53)

3.318** (2.52)

RestructuringType

−0.665 (−0.59)

−0.580 (−0.52)

−0.657 (−0.59)

−0.658 (−0.59)

−0.568 (−0.51)

−0.568 (−0.51)

UnderlyingType

−2.311* (−1.84)

−2.101* (−1.68)

−2.237* (−1.80)

−2.235* (−1.79)

−2.007 (−1.61)

−2.007 (−1.61)

_cons

2.086 (1.43)

2.058 (1.53)

1.562 (1.14)

1.541 (1.05)

1.485 (1.09)

1.487 (1.02)

N

186

186

186

186

186

186

Adj-R2

0.029

0.045

0.049

0.044

0.062

0.057

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses.

7.6 Empirical Analysis

229

statistics and insignificantly improved long-term performance of M&A. The interests of stakeholders are not fully realized. In the environment of asymmetric information, its bounded rationality may reduce the trust degree, which shows that although the M&A of SOEs under mixed ownership creates enterprise value, its relationship with the stakeholder trust degree is not strong. In Model 3, the correlation coefficient of Innov_diff is 0.232, and shows a positive correlation with the M&A value creation of SOEs under mixed ownership at the significance level of 10%, which indicates that the improvement of enterprise innovation ability will promote the SOEs under mixed ownership to create enterprise value, but the result is not stable possibly because the “resources” formed by innovation ability are difficult to “store” and converted into business income or profit and other commercialization processes for a long time (Hall, 2002). There is no significant correlation between the innovation ability brought by M&A and the M&A value creation of the enterprise possibly because more than 50% of the investment is used to pay the wages of R&D personnel in the formation of innovation ability and the “new knowledge” created by them is human capital or organizational capital, which can’t be included in intangible assets or goodwill. Once R&D personnel are lost, “new knowledge” may leave the enterprise and become an investment loss (Acemoglu and Cao, 2015). It may be also because the stakeholders and other outsiders are difficult to monitor the efforts of the innovation personnel, and lack confidence in the improvement of innovation ability (Smith, 2005), fail to give trust and deep cooperation in the commercialization of innovation ability, etc. In Model 4, we put CAR and Innov_diff into the regression model at the same time, and obtain basically the same results as those in Models 1 and 3, showing that shareholder trust can’t change the relationship between innovation ability and M&A value of SOEs under mixed ownership. In Model 5, we put Tobin’Q_diff and Innov_diff into the regression model at the same time and find the relationship between Tobin’Q_diff and the M&A value creation of SOEs under mixed ownership is basically unchanged, but the regression coefficient of the innovation ability brought by M&A Innov_diff to the M&A value of SOEs under mixed ownership Cashreturn_diff is increased to 0.245, and it shows a positive correlation with the M&A value creation of SOEs under mixed ownership at the significance level of 5%, showing that after controlling the factor of stakeholder trust, the innovation ability brought by M&A will promote the M&A value of SOEs under mixed ownership significantly. From the fitting situation of the model, the adjusted R side increases from 4.9% to 6.2% in Model 3. We believe that 1.3% of the explanatory power of the model is brought by the factor of M&A innovation ability after the influencing factor of stakeholder trust is controlled. We can think that in the environment of asymmetric information, stakeholder trust will boost the confidence of outsiders in the future economic benefits brought by the improvement of M&A innovation ability, and the cooperation of stakeholders will also accelerate the enterprises’ commercialization process of innovation ability and its transformation into business income and net profit. The stakeholder trust is different from the shareholder trust. The trust of economic dependent stakeholders will win the opportunity of innovation ability commercialization cooperation for enterprises, which will promote the value of enterprises with operating cash flow as the core element. Hypothesis H2b is supported. In

230

7 Trust, Innovation and M&A Value: An Empirical Study in China

Model 6, we put shareholder trust CAR, stakeholder trust Tobin’Q_diff and M&A innovation ability Innov_diff into the regression model and find the regression coefficient of CAR to the M&A values of SOEs under mixed ownership is negative 0.012, but not significant. Other results are basically consistent with the results in Model 5.

7.7 Further Analysis: Missing Variables and Endogeneity There are two main explanatory variables in Model 2 of this paper, namely stakeholder trust and innovation ability. Regression analysis in Table 7.5 (Model 5) supports the hypothesis Hb2. In the enterprise environment of stakeholder trust, the improvement of M&A innovation ability will greatly promote the enterprise value creation by M&A. However, it’s not obviously found in the enterprise environment with high innovation ability that stakeholder trust will promote the enterprise value creation by the M&A of SOEs under mixed ownership. Therefore, there may be endogenous problems caused by missing variables in this paper. For example, in addition to stakeholder trust, there is also an unobservable trust mechanism, which may affect the innovation activities of enterprises, and make the difference of innovation ability output of innovation activities invisible to the outside world, but it is related to the M&A value creation of the enterprise. Amir and Lev (1996) believed that sincerity is not only an important intangible resource, but also the core competence of an enterprise. Sincerity influences enterprise value creation by organizational capital. First, sincerity exists in an organization in the form of organizational behavior, which simplifies information processing. Second, as an informal system, it reduces the supervision cost and control cost of formal system implementation (Eisfeldt and Papanikolaou, 2013). In addition, it promotes trust and cooperation, and improves enterprise performance by improving work efficiency (Deng et al., 2013). The improvement of innovation ability is completed in the process of M&A integration and organizational boundary expansion. However, as the innovation output is intangible assets or goodwill, it is difficult to measure. In addition, the output is uncertain, and the enterprise discloses R&D output and other innovation ability factors prudently. In the environment of asymmetric information, sincerity constitutes the inner trust mechanism of the enterprise and becomes the Bayesian condition for the improvement of innovation ability. The convergence of core values, mutual trust and non-institutional constraints provide an alternative mechanism to make up for the deficiencies of formal institutions and internal contracts (Erel et al., 2012). Under the guidance of sincerity, enterprise innovation ability is the result of knowledge learning and organizational innovation. External knowledge is introduced in the process of adapting M&A enterprises to the external environment, and internal knowledge is integrated and mutually learned under the guidance of sincerity values, forming a knowledge accumulation path of internalization of external knowledge and diffusion of internal knowledge to the whole organization, and knowledge is

7.7 Further Analysis: Missing Variables and Endogeneity

231

continuously used so as to improve the innovation ability of enterprises (Acemoglu and Cao, 2015), and promote enterprise value creation by M&A. With the rapid development of the capital market, the state has promulgated a series of laws and regulations7 to guide enterprises to operate sincerely. However, there are still some non-standard phenomena such as the imbalance of corporate governance and the violation of information disclosure, which lead to the punishment of regulatory authorities. We believe that enterprise culture, as an informal system, affects the effectiveness of the formal system. Before the M&A of SOEs under mixed ownership, if the acquirer or target company of the listed company is punished, it will release the signal that the enterprise lacks sincerity. If the enterprise is punished after the M&A, it will release the signal that the enterprise lacks the core culture of sincerity values. These signals will affect the trust mechanism in the M&A and integration process of SOEs under mixed ownership. The lack of trust will hinder the integration and mutual learning among the organizations within the enterprise, the innovation activities from being transformed into the innovation ability, and the enterprise from creating the M&A value. In this paper, enterprise trust culture is represented by Sincerity, which is measured by the total number of public punishments of a listed company for violation of laws and regulations three years before and after M&A. If the company is not punished, Sincerty = 0; if it’s punished once, Sincerty = −1. The higher the value of Sincerity is, the more sincere the enterprise is. The smaller the value of Sincerity is, the less sincere the enterprise is. The data are from CCER and Wind database. This paper uses the 2SLS model with ΔInnov_diff as the endogenous variable and Sincerity as the instrumental variable. In the first stage of regression, we use Sincerity and M&A innovation ability Innov_diff and Sincerity and the M&A value of SOEs under mixed ownership Cashreturn _diff for linear regression analysis. Then, I nnov_di f f we use the forecast period of M&A innovation ability in the first stage of regression model and the M&A value of SOEs under mixed ownership Cashreturn _diff for the second stage of linear regression analysis and compare it with OLS regression model. Models 3 and 4 of the first stage of regression are as follows, and the second stage of regression model in 2SLS is Model 5. According to the theoretical analysis, in Model 3, β 1 is the test coefficient, which is expected to be significantly negative, indicating Sincerity and the M&A innovation ability Innov_diff is positively correlated. Furthermore, in the second stage of regression model (Model 5) in 2SLS, the expected test coefficient β 1 is higher than that in OLS regression, P value decreases, the innovation ability Innov_diff is endogenous, and Sincerity is a missing variable. 

I nnov_di f f i,1→3 = α + β1 Sincerit y + β2 T obin  Q_di f f i,1→3 ad just

ad just

ad just

+ β3 E P S_di f f i,1→3 + β4 Statei + β5 Restr ucturingT ypei + β6 U nderlyingT ypei + υi,t 7

It includes “Company Law”, “Securities Law, “Trading Rules”, and “Enterprise Internal Control Application Guideline”.

232

7 Trust, Innovation and M&A Value: An Empirical Study in China ad just

ad just

Cashr etur n_di f f i,1→3 = α + β1 I nnov_di f f i,1→3

+ β2 T obin  Q_di f f i,1→3 + β3 E P S_di f f i,1→3 + β4 Statei ad just

ad just

+ β5 Restr ucturingT ypei + β6 U nderlyingT ypei + εi,t Cashr etur n_di f f i,1→3 = α + β1 Sincerit y + β2 T obin  Q_di f f i,1→3 ad just

ad just

ad just

+ β3 E P S_di f f i,1→3 + β4 Statei + β5 Restr ucturingT ypei + β6 U nderlyingT ypei + υi,t The descriptive statistics of sincerity are shown in Table 7.6. The average value of Sincerity is −0.597, which indicates that the public punishment and public condemnation of listed companies due to violations of laws and regulations are common in recent years. The standard deviation is 1.102, indicating that there is a big difference in the sincerity of listed companies. The minimum value is −6, indicating that there are companies that have been punished and publicly denounced in the three years before and after M&A, and the maximum value is 0, indicating that they have not been punished and publicly denounced in the three years before and after M&A and enterprises have good sincerity. The 2SLS regression results are shown in Table 7.7. Among them, the first and second columns are the first stage regression results of the 2SLS model, the third column is the second stage regression results of the 2SLS model, and the fourth column is the OLS regression results. The regression results of the first and the second columns show that Sincerity and innovation ability Innov_diff are positively correlated with the significance level of 1%, and the Adj-R2 is 0.366, which indicates that there is a strong positive correlation between sincerity and innovation ability, while there is no significant relationship between stakeholder trust Tobin’Q_diff and innovation abilityInnov_diff . (3) column estimates the enterprise innovation ability according to the regression results of the first stage I nnov_di f f , and brings it into the regression model of the second stage, finding that the regression coefficient of enterprise innovation ability Innov_diff (β 1 = 0.469) is 0.224 higher than that of the OLS regression of (4) column (β 1 = 0.245), P = 0.020, which further decreases compared with the P value (0.041) of OLS regression, indicating that there is an endogenous problem that sincerity affects the M&A innovation ability. 

Table 7.6 Descriptive statistics of Sincerity Sincerity

Mean

SD

Min

Median

Max

−0.597

1.102

−6.000

0.000

0.000

7.8 Robustness Test

233

Table 7.7 Results of 2SLS regression and OLS regression model 2SLS

OLS

First Stage Innov_diff _cons

Second Stage Cashreturn_diff

Cashreturn_diff

(1)

(2)

(3)

(4)

3.488***

2.598 *

0.960

1.485

(5.14)

(1.93)

(0.67)

(1.09)

0.469**

0.245**

(2.34)

(2.06) 0.891*

Innov_diff Tobin’Q_diff

Cashreturn_diff

−0.181

0.856*

0.941*

(−0.76)

(1.81)

(1.95)

(1.87)

EPS_diff

2.303***

3.915***

2.833**

3.318**

(3.56)

(3.05)

(2.07)

(2.53)

RestructuringType

−0.070

−0.589

−0.556

−0.568

(−0.13)

(−0.53)

(−0.50)

(−0.51)

0.039

−1.902

−1.921

−2.007

(0.06)

(−1.53)

(−1.53)

(−1.61)

Sincerity

2.679***

1.258**

(10.01)

(2.37)

N

186

186

186

186

Adj-R2

0.366

0.069

0.067

0.062

UnderlyingType

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses.

7.8 Robustness Test In the endogenous discussion, through 2SLS two-stage regression analysis, it is found that sincerity affects the value of M&A through the influence of innovation ability. Therefore, this paper examines the mesomeric role of innovation ability in sincerity and M&A value, and conducts robustness test. According to Baron and Kenny (1986), Structural Equation Model (SEM) was used for the three-step test program for mesomeric effect. The model is as follows: ad just

Cashr etur n_di f f i,1→3 = α + cSincerit yi,−3→3 + εi,t ad just

I nnov_di f f i,1→3 = α + aSincerit yi,−3→3 + εi,t Cashr etur n_di f f i,1→3 = α + c Sincerit yi,−3→3 + bI nnov_di f f i,1→3 + εi,t ad just

ad just

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7 Trust, Innovation and M&A Value: An Empirical Study in China

Table 7.8 The intermediary effect test on the innovation ability of SOEs’ mixed ownership M&A. Dependent variable First step

Second step

Third step

Cashreturn_diff

Innov_diff

Cashreturn_diff

Independent variable

1.255**

2.648***

0.73

Sincerity

(2.33)

(4.17)

(1.02)

Intermediary variable

0.198

Innov_diff

(1.26)

Note: ***, **, and * indicate significance at the 1%, 5%, and 10% significance levels respectively, and the regression t value is in parentheses

In Table 7.8, in the first step, the explanatory variable (Sincerity) and the explained variable (corporate M&A value Cashreturn_diff ) are significantly correlated (c = 1.255, p = 0.02); in the second step, the explanatory variable (Sincerity) and the intermediate variable (Innov_diff ) are significantly correlated (a = 1.255, P < 0.001); in the third step, the explained variable (Cashreturn_diff ), the explanatory variable (Sincerity) and the intermediary variable (Innov_diff ) are regressed at the same time, and there was no significant relationship between the intermediate variable (Innov_diff ) and the explained variable (Cashreturn_diff ) (b = 0.198, P = 0.209). According to MacKinnon et al. (1995), a is bigger while b is smaller. The mesomeric effect is not significant by sequential tests, but ab = 0, the threestep test tends to make the second type of error. Therefore, Sobel test is used to test whether the coefficient of ab is significant. The test statistics are Z = ab/S ab ,  Sab = a 2 S 2 + b2 Sa2 , and S a and S b are the standard errors of a and b, respectively. It is found that Z = 1.207 is greater than the critical value za/2 > 0.97 (p < 0.05), and the mesomeric effect is significant. In Table 7.8, the regression coefficient of the third explanatory variable (Sincerity) decreases (c’ = 0.730, p > 0.1), indicating that innovation ability has a complete mesomeric effect, and the proportion of mesomeric effect in the total effect is 2.648 × 0.198/1.255 = 41.72%. In the process of sincerity influencing the M&A value of SOEs under mixed ownership, M&A innovation ability has a complete mesomeric effect, accounting for 41.72% of the total effect.

7.9 Conclusion This paper analyzes the influence of trust mechanism and innovation ability on the M&A value of SOEs under mixed ownership based on 186 samples from 1998 to 2011. The results showed that the sincerer the M&A parties are, the stronger the promotion effect of innovation ability brought by the M&A value creation of SOEs under mixed-ownership. In the robustness test, we verify the mesomeric effect of innovation ability in the process of sincerity influencing the M&A value of SOEs under mixed ownership using structural equation, and get the same conclusion as

7.9 Conclusion

235

before. Therefore, we believe that the trust mechanism with “sincerity” as the core culture of enterprises can promote the M&A value of SOEs under mixed ownership through influencing the innovation ability of M&A. Haspeslagh and Jemison (1991) believed that the transfer of core competence is the success of M&A, namely, the most important factor of creating enterprise value by M&A. Eisfeldt and Papanikolaou (2013) proposed that although the innovation brought about by M&A is not independent innovation, the innovation ability of M&A parties forms the internal elements of the enterprise through M&A, which brings new production function for the input–output of technology and R&D. This has the same meaning as what is proposed in this paper that the M&A innovation ability is the driving force to promote the M&A of SOEs under mixed ownership to create enterprise value. It can be said that this paper provides micro support for the “theory of enterprise innovation and M&A value addition”. In addition, trust mechanism is indispensable in the process of innovation ability acquisition, transfer and integration. As an important informal system, sincerity has a more significant impact on enterprise innovation and M&A value addition than stakeholder trust as a formal system and provides a new perspective to explain how to realize the enterprise innovation and M&A addition of SOEs under mixed ownership under the current imperfect institutional environment. The conclusion of this paper not only enriches M&A research literature, but also analyzes the phenomenon and economic consequences of enterprise innovation ability alienation in the M&A of SOEs under mixed ownership from the perspective of informal system. It not only provides a new countermeasure reference for the effective implementation of the formal system, but also provides a reference for how SOEs can integrate trust and innovation mechanisms into mixed-ownership M&A in order to better implement mixed-ownership reforms under the background of promoting mixed-ownership economic development.

Chapter 8

Trust Mechanism and M&A Performance: Trust Mechanism in Chinese SOEs’ Mixed Ownership-Oriented M&A

8.1 Introduction Asset reorganization (M&A) is considered an important way for companies to seek development. The expansion of companies through merging competitors is a prominent phenomenon in modern times (Stigler 1950), in which major asset restructuring has become a path for listed companies to conduct industry integration and industrial upgrading. Regarding whether M&A creates value, existing studies have found that the shareholder wealth effect when an asset reorganization event is announced, the market response after merger integration, and financial performance are inconsistent. Reasons for the similarities and differences in M&A performance from the perspectives of agency theory, executive transition confidence hypothesis, and free cash flow hypothesis were explained (Jensen and Ruback 1983; Billett and Qian 2008). As a developing country in the period of economic transition, in order to promote the healthy development of the capital market, China has gradually improved formal institutional arrangements for promoting corporate M&A. For example, in July 2014, China Securities Regulatory Commission issued the Administrative Measures for the Reorganization of Major Assets of Listed Companies and the Administrative Measures for the Acquisition of Listed Companies, which eliminate administrative approvals for asset reorganization other than “backdoor listing”. The Chinese government reduces administration, delegates power to lower authorities, improves efficiency, further promotes listed companies to carry out M&A, and realizes industry integration and industrial upgrading. However, judging from legislation and the effect of law enforcement, the legal systems of countries in transition or emerging economies are not complete, the marketization of different regions is quite different, government intervention in the economy is widespread, and informal systems can promote economic growth in countries and regions with relatively imperfect formal systems. Williamson (1977), a representative scholar of new institutional economics, believes that the system involves enterprise organization and market organization, © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_8

237

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8 Trust Mechanism and M&A Performance: Trust Mechanism …

and emphasizes enterprises and other organizations must take norms, traditions, property rights, and legal environment into consideration while conducting business. Fan et al. (2003) believe that institutional environment refers to the system reform of China’s transition from a planned economy to a market economy, instead of mere changes in rules and regulations. In recent years, the relationship between institutional environment and investors such as corporate marketization has aroused the interest of researchers. Peng (2003) believes that when the basic conditions for operating market mechanism are improved and developed or the degree of marketization increases, the degree of investor protection will increase accordingly. In countries and regions with relatively imperfect formal systems, informal systems can better promote economic growth. There are two relevant hypotheses in the academia: one is that informal systems such as relationship and reputation can play an alternative role to formal systems like legal protection (Allen et al. 2005); the other is that social capital is also an alternative mechanism to formal systems like legal protection (Ang et al. 2009; Pan et al. 2009). However, some scholars objected to the conclusion of Allen et al. (2005). For example, Ayyagari et al. (2010) criticized Allen et al. (2005) for exaggerating reputation and relationship mechanisms in the financing of Chinese companies, saying that China’s legal protection is worse than that in developed countries, but its economic growth is faster than that in developed countries, which is not because its legal system does not work, but because it has a relatively low starting point of economic aggregate. In a country with weak legal protection like China, can informal institutional factors really play a role in supporting strong economic growth? In respond, this book attempts to explore the mechanism of influence of informal institutional factors such as social trust on the M&A behavior of Chinese companies from the perspective of value creation in the capital market, thereby further explore the answer to “China Mystery” and provide new evidence for this topic o international academic debate. According to the theory of information asymmetry, the asymmetric distribution of information on both parties to a transaction or the incompleteness of information for one party hinders market transaction and reduce the efficiency of market operation. In fact, there are serious information asymmetries in each link of M&A, which has caused failure of some very attractive M&A transactions and creation of most likely M&A value, thus leading to losses in social welfare (Aliberti and Green 1999). In the entire socio-economic system, the less trust between the parties to a transaction, the more guarantees are needed, the higher the cost. Allen et al. (2005) believe that informal institutions based on trust and personal relationships are one of the important reasons for the rapid development of Chinese enterprises. Deutsch (1958) defined trust as “expectation for the future” and pointed out that this expectation will have an impact on the behavior and decision-making of trustees. Stahl et al. (2011) hold that trust as a link plays an important role in integration after M&A. For example, interpersonal trust and organizational identity within an organization help reduce conflicts between the acquiring company and the target company and promote mutual integration (Weber and Drori 2011). Companies to M&A and external stakeholders trust each other, which can reduce market friction and transaction costs (Rossi

8.1 Introduction

239

and Volpin 2004). Schul et al. (2004) found that in the case of information asymmetry, trustees are in a passive position and takes certain risks to expected behaviors, while the effective transmission of information can reduce the degree of information asymmetry and reduce the risk of trust. M&A is a mechanism for redrawing corporate boundaries (Rhodes-Kropf and Robinson 2008). With changes in corporate organizational environment, expected risks of trustees increase. As uncertainties in integration increase, risks taken by trustees will also increase, which may reduce trust acquired by the M&A company, making it difficult for the M&A to create value (Milgrom and Stokey 1982). M&A information is a bridge between M&A companies and stakeholders (Haspeslagh 1991). The effective transmission of information can help M&A companies gain trust. Feedback of trust can promote the integration of parties to M&A and facilitate integration under the expectations of trustees. Haspeslagh (1991) believes that integration is the entire source of value creation after M&A, and that trust transfer effect of M&A information accompanies each step of integration. Trust mechanism generated by M&A will improve the performance of the post-merger enterprise to achieve stakeholders’ expected benefits. Therefore, trust mechanism generated by M&A information transmission may become a new dimension to explain the value creation of M&A. However, in a developing country experiencing economic transition, will trust, as the basic informal system of the economy and society, affect M&A pricing and performance? Under the research framework of informal institutions, this book explores whether and how trust affects corporate M&A performance. In view of above situation, this book takes the corporate M&A and reorganization of China’s A-share listed companies on Shanghai Stock Exchange and Shenzhen Stock Exchange during 1998–2014 as samples to analyze whether the degree of social trust in the location of the acquiring firm affects trading behavior in M&A. It first examines whether social trust in the region where the acquiring firm is located will improve the performance of corporate M&A, then studies whether this effect is influenced by the formal legal system of the region and the characteristics of the acquiring firm’s control rights, and finally examines the mechanism of regional social trust on corporate M&A performance from the perspective of the M&A entity hiring an intermediary agency. The book finds that the higher the degree of social trust in the region where the acquiring company is located, the more conducive it is to cooperation, which makes transactions between economic entities easier, reduces transaction costs, improves the efficiency of other capital such as financial capital, and increases regional social trust. The higher the level of regional social trust, the more it can reduce opportunism and free-riding through trust and reciprocity, urge parties to M&A to cooperate in honesty and trustworthiness, reduce uncertainties, and ultimately promote cooperation in M&A, and enhance the ability to create value. This effect is more significant in private enterprises and areas with lower levels of regional laws. Findings of this book also have certain reference value for the M&A and restructuring of Chinese enterprises and the assessment of M&A events by stakeholders. Although the short-term benefits of M&A can make companies recognized, in the long run, merging and restructuring companies to gain trust and create corporate

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8 Trust Mechanism and M&A Performance: Trust Mechanism …

value mainly rely on M&A and the integration of formal institutions, and help achieve the integration of formal systems and institutional environments, which is of great significance to the sustainable development of China’s M&A. The significance of this book lies not only in theoretically putting forward the influence of social trust as an informal system on the efficiency of M&A during economic transition, but also helping fully understand the role of informal institutions to M&A in China’s capital market. First, this book empirically examines the impact of informal systems on the performance of Chinese companies’ M&A, makes up for the lack of social perspectives caused by traditional financial theories that ignore the social “embedding” factors of corporate behaviors, and accumulates new knowledge for domestic academic circles in the interdisciplinary research of informal systems and corporate M&A. A comprehensive theoretical and empirical study of the relationship between informal institutions and corporate M&A helps systematically understand the influence mechanism of informal systems, provides enterprises with empirical evidence and new theoretical guidance in establishing a more comprehensive M&A decision analysis framework, and on this basis, provides decision-making basis for government departments to cultivate regional social trust, guide various relationship networks to play an active role, and promote the development of enterprises and even the financial market. Remaining parts of this chapter are structured as follows: institutional background, theoretical analysis and research hypotheses; research design; report and analysis of the results of the empirical test; research conclusions.

8.2 Institutional Background Based on China Perspective The primary goal of enterprise M&A is to optimize resource allocation and promote industrial upgrading. Since the end of the last century, functional departments such as the China Securities Regulatory Commission, the Ministry of Commerce, and the State-owned Assets Supervision and Administration Commission have issued a series of regulatory documents to guide the healthy and standardized development of corporate M&A. To promote enterprises’ market-oriented M&A and improve the efficiency of M&A, the State Council issued the Opinions on Further Optimizing the Market Environment for Mergers and Reorganizations of Enterprises in March 2014, which eliminates administrative approvals for asset reorganization other than “backdoor listing”. Through simplifying procedures for administrative approval and reducing the scope of examination and approval, enterprises embrace greater flexibility in payment and pricing options for M&A. However, after more than 30 years of market reforms, although China has basically shifted from a planned economy to a market economy, there is still a big gap in marketization in different places (Fan et al. 2003). China’s securities market does not enjoy a long history. The M&A of some listed companies have deviated from institutional goals. For example, an acquiring company rashly releases information on M&A and reorganization, but announces the termination of the reorganization after

8.2 Institutional Background Based on China Perspective

241

it is completed. After some listed companies completed M&A, the target company’s performance is significantly lower than profit forecast than evaluation, which results in damage to the corporate value of the listed company. Some stakeholders would take advantage of corporate M&A and reorganizations for insider trading, which damages the optimization of resource allocation. With the promulgation of the formal system for abolishing the administrative review of corporate M&A in 2014, both theoretical and practical circles are actively exploring informal systems that can integrate with formal systems. In the marketization process of corporate M&A, parties to it are urged to be honest and trustworthy, improve the efficiency of M&A, and create value after M&A. In view of the above context, this book will focus on investigating if social trust as an informal system in marketization during M&A can make up for the imperfect system of corporate M&A and help enterprises create value by gaining trust.

8.3 Theoretical Analysis and Research Hypothesis Social trust, as a type of social capital, constitutes the basis of economic transactions. It affects economic behavior through information sharing and decision-making mechanisms, and affects the signing and execution of contracts between entities of economic transaction. It has been found in existing studies that social capital plays an important role in economic development. For example, social network has a significant impact on economic development and welfare at family (Narayan and Pritchett 1999) and community (Grootaert 1999; Zhang et al. 2007) levels. Social trust significantly promotes economic growth (Knack and Keefer 1997; Zak and Knack 2001). Knight and Yueh (2008) analyzed data on China’s labor market and found that the rate of return of social capital in the private sector is higher than that in the state sector, which is positively correlated with the degree of marketization. However, they did not provide evidence on if the role of social capital as a non-market force can be strengthened by marketization. Zhang et al. (2007) found that social networks and public trust can significantly reduce poverty, which is positively correlated with the degree of marketization. Guiso et al. (2004) studied the relationship between the degree of social capital in different parts of Italy and local financial development, and found that in areas with high levels of social capital, households seldom invest with cash, but more likely with checks and institutional credit instead of informal credit. This is because when law enforcement is limited and the level of education of local residents is relatively low, individuals have limited understanding of contract mechanism, which will force them to rely more on financing based on mutual trust. They further emphasized that social capital plays an important role in promoting financial development, which is especially true in developing countries. The role of social trust as an informal system is embodied in its complement or substitution with market-based exchange and distribution system (Stiglitz 2000). The role of social capital is in an inverted U-shaped relationship with the level of market-oriented development. When an economy just begins to develop, due to the

242

8 Trust Mechanism and M&A Performance: Trust Mechanism …

incomplete market and imperfect government functions, social networks play a role in resource allocation. As the market continues to develop, social networks will eventually be replaced by some kind of “social consensus”. However, Zhao and Lu (2010) found that due to differences in the degree of marketization, the effect of social networks in east China on income increase is significantly higher than that in central and west China. With the continuous advancement of marketization, the impact of social network inequality on income gap will gradually increase. An important document on the impact of China’s informal institutional arrangements on corporate governance and finance is written by Allen et al. (2005), who believe that informal financing channels and corporate governance mechanisms based on reputation and relationships can replace formal channels and mechanisms. This research enlightens the authors that when exploring factors affecting China’s financial development, attention should be paid to the complement or even substitution of informal systems to formal systems (Zheng 2007). Allen et al. (2005) pointed out that legal and financial system is not the only development path for a country, and that Eastern values under Confucian culture are significantly different from those of the West, thus questioning whether China has accepted Western model for formal institutional reforms. Zhang and Ke (2002) conducted a cross-provincial survey on trust and found that whether a region can be trusted has little to do with regional culture, and is closely related to the possibility of transactions being repeated, the degree of development of transactions, and education levels. It is worth noting that this article defines regional culture as southern culture and northern culture. On the basis of above-mentioned data on “trust”, Pan et al. (2009), for the first time, empirically studied the impact of the differences in social capital among Chinese provinces on foreign investment decision-making, the choice of type of equities invested, and the diversified investment decision-making of listed companies, and then discussed in depth the mutual substitution of social capital and corporate political relations in influencing companies’ investment decisions. Furthermore, Pan et al. (2010) empirically studied the impact of differences in social capital in Chinese provinces on the IPO earnings management behavior of listed companies, and further explored the impact of social capital and legal protection, two external restraint mechanisms, on mutual substitution of corporate earnings management decisions. Xin and Pearce (1996), researchers on social capital and corporate governance behavior, pointed out that in the absence of formal systems, managers usually seek informal systems for support through their social bonds (or relationships) to reduce the operational risks and transaction costs of enterprises. An important network social capital of managers is political connections or political connections. Information asymmetry between parties to a M&A transaction is the main factor that hinders the progress of M&A transaction and affects M&A performance (Faccio and Masulis 2005). A higher degree of social trust contributes to the increase of corporate investment and combined income (Bottazzi et al. 2016). The higher the degree of social trust in a region, the lower the degree of information asymmetry between the acquiring firm and the target firm. Parties to a transaction generally move towards more valuable goals. For companies, the degree of information asymmetry

8.3 Theoretical Analysis and Research Hypothesis

243

determines to a large extent whether or not to conduct acquisition and whether the acquisition can create value. Trust, as this kind of social capital, can reduce transaction costs for parties to M&A and facilitate them to achieve more efficient transactions. M&A costs include research costs before M&A, negotiation costs during M&A and integration costs after M&A. To complete M&A, a lot of transaction costs are incurred. Information transmission between the acquiring firm and the target firm can facilitate reasonable and scientific M&A decisions in transactions. In an M&A transaction, the higher social trust in the region where the acquiring firm is located, the more willing it is to trust information provided by the target firm, and the more likely it makes a reasonable value evaluation, reduces merger costs and improves merger performance. post merger integration is carried out under the leadership of the acquiring firm. Informal systems such as the reputation and culture of the acquiring firm have an important impact on the degree of investor protection and the efficiency of M&A during integration (Wang and Kan 2014). The higher the degree of social trust, the less expected uncertainties there are, the more friendly negotiation between parties to M&A will be, the less negotiation time will be taken, the more recognition there are between parties, and the less conflicts in integration. In this way, transaction costs are reduced. Based on above theoretical analyses, research hypothesis H1 is proposed: Hypothesis H1: The higher social trust in the region where the acquiring firm is located, the higher the value created by M&A. North (1991), the master of new institutional economics, divides systems into formal systems and informal systems (North 1981). North pointed out that systems are the rules of the game in a society, or more canonically, constraints artificially set by humans to determine the relationship between people, which include formal systems (such as rules and laws), informal systems (such as values, morals and social ethics), and system implementation. The emergence of “law and finance” represented by LLSV in the late 1990s provided a new theoretical perspective for studying the impact of formal systems on corporate financial behavior. Main topics discussed include how legal systems protect the interests of investors, promote the investment and financing activities of enterprises, and boost the prosperity and development of enterprises and financial markets. Whether and how informal systems and formal systems affect micro-market investment decisions have become two main lines of research. In the M&A market, whether there is a substitute or complementary relationship between legal systems and informal systems in effecting social trust on M&A performance still needs to be discussed. Megginson and Netter (2001) found that in regions with a higher degree of marketization, the fierce competition between the factor market and the product market can not only encourage managers to work harder to serve the interests of shareholders, but also enable external shareholders to understand a company’s situation more clearly through information transmission and to protect the interests of investors via external supervision. If the level of property rights protection provided by formal systems and legal system cannot protect the interests of investors, transaction behavior will rely more on trust (Knack and Keefer 1997). Guiso et al. (2004) studied Italian provinces and revealed that informal

244

8 Trust Mechanism and M&A Performance: Trust Mechanism …

systems have a stronger effect on financial development in provinces with low judicial efficiency than formal systems. Therefore, trust makes up for the weakness of formal systems to a certain extent. Pan et al. (2009, 2010) believe that social capital and legal protection play an alternative role in companies’ decision-making on IPO earnings management. Wang and Miao (2015) found that the degree of marketization of the target firm is the main motivation for the promotion of remote M&A, and that the acquiring firm can obtain proceeds from it (Tang and Chen 2010). In the case of information asymmetry, it is difficult to directly observe informal systems such as corporate reputation and culture in post merger integration. The marketization process of the region where the company is an institutional environment has become an important indicator for evaluating the degree of investor protection in post merger integration. The higher the degree of regional marketization, the stronger the awareness of systems and rules of the acquiring firm, the greater the degree of investor protection in M&A. Therefore, when the degree of regional marketization is high, the acquiring firm can obtain trust with the help of public information about an enterprise, which will prompt parties to M&A to strengthen the awareness of rules in integration, promote the efficiency of M&A, and improve M&A performance. If the level of legal protection in the place where the acquiring firm is located is low, the opportunistic behavior and encroachment motives of listed companies are less restrictive, the interests of investors cannot be effectively protected, and the transaction behavior will depend on the degree of trust between parties to the transaction. In this case, the level of regional social trust plays an important role in regulating transaction behavior, reducing transaction costs, and facilitating transactions. China’s economic structure presents a typical “duality”. SOEs and private enterprises face different operating environments. The former has a natural close connection with the government and can obtain resources more easily. In contrast, the latter is challenged with unequal treatments in industry access, financing, government subsidies, and policy support. Some fields and industries are monopolized by government departments, allowing the access of SOEs only. In the process of economic transition, China’s private enterprises are facing the dilemma of insufficient resource endowments. Under the guidance of economic interests, their organizational environment is featured with flexibility and variability, but doesn’t have strong institutional constraints. Goyal and Park (2002) found that in corporate governance structure, large shareholders and insiders of private enterprises are more likely to serve as CEOs, and that chairman and CEO is usually assumed by one person. There will be more problems with the first type of agency, which makes it difficult for stakeholders such as investors to completely rely on information on formal systems to sign and perform contracts with private enterprises (Jiang et al. 2014). SOEs can not only obtain government support in terms of policy resource, capital allocation, etc., but also have a formal bureaucratic organizational structure and perfect regulations. Some leaders of SOEs also assume positions as public officials, whose behaviors are subject to both market mechanisms and laws. Therefore, the formal institutional environment of SOEs is better than that of private enterprises. As mentioned above, in the research on the relationship between informal systems and formal systems, scholars generally believe informal systems are more effective in

8.3 Theoretical Analysis and Research Hypothesis

245

an environment with weak supervision (McGuire et al. 2012). Following this logic, the formal institutional environment of China’s SOEs is better than that of private enterprises, but informal systems will be more effective in private enterprises. Wang et al. (2015) found that under the background of financing difficulties for private enterprises, creditors (banks) are more inclined to cooperate with private enterprises with higher social trust, who will receive longer loan period with relatively low borrowing cost. Xin et al. (2016) found that the social trust of private enterprises reduces information asymmetry between managers and stakeholders, and therefore greatly resolves agency problems that may occur between them. Li et al. (2015) found that in M&A where the acquiring firm is a private company, when social trust in the region where the company is located is high, the M&A premium decreases. Therefore, compared with SOEs, in M&A transactions, it is difficult for investors and stakeholders to completely rely on information on formal systems of private enterprises to make transaction decisions, while private enterprises can gain social trust and reduce information asymmetry in M&A negotiations and reduce integration costs in M&A. Based on above theoretical analyses, a pair of research hypotheses is proposed: Hypothesis H2a: The role of social trust in promoting M&A value creation is more obvious in regions with a lower degree of legal protection; Hypothesis H2b: Compared with SOEs, the role of social trust in promoting M&A value creation is more obvious in private enterprises.

8.4 Research Design 8.4.1 Sample Selection and Data Sources This book takes M&A conducted and completed during 1998–2014 as initial samples. Basic information of M&A events comes from CSMAR M&A database and Wind Corporate Governance database. With reference to existing literature (Guest et al. 2004; Song 2007; Wu et al. 2008), the samples were screened in the following order: (1) exclude financial enterprises as stipulated in the Guidelines for the Industry Classification of Listed Companies (2012) issued by the China Securities Regulatory Commission to ensure the comparability of financial data; (2) select listed companies acting as “buyer” in M&A to conduct research from the perspective of listed companies as the acquiring firm; (3) The amount of M&A transactions should be greater than CNY 1 million; (4) For companies that completed multiple M&A transactions in the same year, keep their first M&A transaction to reduce the impact of different M&A transactions; (5) remove samples with missing data. At last, 11,656 sample values were chosen, whose year and industry distributions are shown in Table 8.1.

0

36

Extractive industry 0

13

0

1

2

0

0

0

Manufacturing industry

Electricity, heat, gas and water production and supply industry

Construction industry

Wholesale and retail industry

Transportation, storage and postal industry

Accommodation and catering industry

Information transmission, software and information technology service industry

14

0

3

2

0

2

0

1

Agriculture, forestry, animal husbandry and fishery

1999

1998

Industry\year

Table 8.1 Sample year and industry

9

0

8

16

1

5

89

3

6

2000

15

3

12

12

3

12

124

2

7

2001

17

0

13

23

10

13

196

0

6

2002

24

0

27

32

7

16

231

3

13

2003

12

0

14

41

1

31

268

5

12

2004

3

1

26

22

5

16

207

3

16

2005

14

1

14

30

17

25

279

9

8

2006

31

4

41

71

24

44

451

12

21

2007

32

8

40

73

33

50

649

34

24

2008

37

3

41

70

30

69

484

45

9

2009

37

10

39

65

41

50

574

31

13

2010

59

5

31

85

28

48

630

36

19

2011

61

4

46

87

23

40

729

52

23

2012

75

7

23

84

24

47

772

19

21

2013

106

8

31

73

28

47

880

35

22

546

54

409

788

276

515

6612

289

221

Total

(continued)

2014

246 8 Trust Mechanism and M&A Performance: Trust Mechanism …

0

0

0

0

0

13

0

0

0

0

26

Resident services, repairs and other services

Education

Health and social work

Culture, sports and 1 entertainment industry

5

Scientific research and technical service industry

Water conservancy, 0 environment and public facilities management industry

2

Leasing service industry

Comprehensive

Total

74

0

3

1

1

Real estate industry

1999

1998

Industry\year

Table 8.1 (continued)

177

17

0

0

0

1

2

0

1

19

2000

228

20

1

0

0

3

1

0

5

8

2001

334

28

1

0

0

2

1

0

6

18

2002

405

24

2

0

0

1

0

0

3

22

2003

457

23

1

0

0

5

7

0

10

27

2004

366

24

2

0

0

1

9

0

8

23

2005

471

31

0

0

0

3

2

0

7

31

2006

906

42

5

1

0

3

12

0

12

132

2007

1111

52

4

0

0

4

14

0

5

89

2008

956

32

3

0

0

1

7

0

8

117

2009

1068

34

7

3

0

5

6

2

7

144

2010

1120

28

8

4

0

4

5

4

6

120

2011

1226

13

7

3

0

1

13

7

12

105

2012

1293

14

18

0

1

0

11

10

17

150

2013

1438

9

18

0

0

0

19

19

16

127

2014

11,656

409

78

11

1

36

109

42

126

1134

Total

8.4 Research Design 247

248

8 Trust Mechanism and M&A Performance: Trust Mechanism …

The measurement of social trust (trust) as an informal system refers to the data of Chinese General Social Survey (CGSS) conducted by WVS.1 Data on corporate finance come from Wind and CSMAR databases. Data on corporate nature come from CSMAR Corporate Governance database. Industries companies belong to are determined following the Guidelines for the Industry Classification of Listed Companies (2012) issued by the China Securities Regulatory Commission. For some suspicious data, this study checked temporary announcements issued by listed companies. To avoid the influence of extreme values, a 1% Winsorize processing on all continuous variables was performed. Data in this book are all processed with SAS9.4 software.

8.4.2 Model Setting and Definition of Main Variables Based on the model of Healy et al. (1992), this study established models (1), (2) and (3), used OLS regression method to examine the impact of social trust on post merger performance, and tested research hypothesis H1 proposed in this study: CAR = α0 + α1 T r ust + αi Contr ol + α j Y ear + αk  I ndustr y + ξ

(8.1)

B H A R = β0 + β1 T r ust + βi Contr ol + β j Y ear + βk  I ndustr y + ε (8.2) R O E = η0 + η1 T r ust + ηi Contr ol + η j Y ear + ηk  I ndustr y + θ (8.3) In above models, main explanatory variables are the post merger performance of target firms, namely short-term market performance CAR, long-term market performance BHAR, and long-term financial performance ΔROE in M&A. In model (1), short-term M&A performance CAR is measured by the cumulative excess return rate of stocks in the short window period before and after the first day of announcing M&A. Stock excess return rate is measured with market model method, in which Rˆ it is the estimated return rate of the sample company if there is no M&A in the same period, Rˆ it = αˆ i + βˆi Rmt . According to capital asset pricing model (CAMP), αˆ i and βˆi are regression coefficients obtained by regressing the sample company’s stock return rate and market index return rate during the cleaning period with ordinary least squares method. Since the research sample belongs to both Shanghai Stock Exchange and Shenzhen Stock Exchange, Shanghai Stock Exchange employed Shanghai Composite Index when calculating corresponding market index return rate, while Shenzhen Stock Exchange used Shenzhen Composite Index. ARit is 1

Specifically, social trust indicator Trust used in this project deals with the question “In general social interactions/contacts that do not directly involve monetary interests, do you think strangers can be trusted?” Respondents may choose from “mostly untrustworthy”, “mostly untrustworthy”, “50% trustworthy and 50% untrustworthy”, “mostly trustworthy” and “mostly untrustworthy”. This study assigns values 1, 2, 3, 4, and 5 to these 5 options, and then calculates the average value of all respondents in each province and city.

8.4 Research Design

249

excess stock return, being the difference between actual return rate Ri,t and estimated return rate Rˆ it of daily sample stocks during M&A period, A Rit = Rit − Rˆ it . CAR is the cumulative sum of excess  returns on stocks ARit during the short-term window A Rit . Referring to common methods used in relevant period of M&A, C A Ri,t = literature (Tang and Chen 2010; Liu et al. 2015), this study calculated the cumulative excess return rate of M&A events with three window periods [−1, 1], [−2, 2], [−5, 5] to test the relationship between social trust and short-term M&A performance. This study believes that the higher social trust in the region where the acquiring firm is located, the better the short-term market performance of M&A, and the regression coefficient α 1 is expected to be positive. In model (2), explanatory variable BHAR measures how much the acquiring firm’s stock return exceeds market portfolio or corresponding portfolio return until the end of the investigation period. Drawing on the research of Gregory (1997) and Li and Zhu (2006), we calculated BHAR [0, T] months after the acquiring firm i has carried out T

T

t=0

t=0

a major asset reorganization with formula B H A Ri,T =  (1 + Rit ) −  (1 + R pt ), where Rit is the return rate of the acquiring firm i at t, and Rpt indicates the monthly returns of corresponding portfolio. We divided the 36 months T after M&A into three groups: 0–12, 0–24, and 0–36. t = 0 means current month of conducting M&A, t = 1 means one month after the M&A, and so on. Drawing on the method of Li and Zhu (2006), we calculated Rpt using cross-grouping: divide companies into 5 groups from small to large based on their circulating market value in June of year t, calculate their equity book-to-market ratio (earnings per share/year-end closing price) on the basis of data at end of last year (t − 1), and divide the ratios into 5 groups from small to large. Therefore, every year, all listed companies are equally divided into 25 groups, whose equal weight monthly return rate Rpt can be calculated correspondingly. This study selects 12 months, 24 months, and 36 months after M&A as the observation period for long-term market performance after M&A, and believes that the higher the social trust in the region where the acquiring firm is located, the better the longterm market performance of its M&A activities, and the regression coefficient β 1 is expected to be positive. In model (3), based on the practice of existing literature (Feng and Wu 2001; Li and Zhou 2007), this study emphasized assets ΔROE measurement for each year before and after the first day of announcing the M&A, and analyzed the difference between the acquiring firm’s return on net assets one year (ΔROE t-1, t+1 ), two years (ΔROE t-2, t+2 ), and three years (ΔROE t-3, t+3 ) before and after M&A. It believes that the higher social trust in the region where the main merged company is located, the better the long-term financial performance of its M&A activities, and the expected regression coefficient η1 is expected to be positive. This study further divided legal environment into good legal environment group and poor legal environment group for models (1) to (3), performed sub-sample regression, and tested research hypothesis H2a. Legal environment was measured according to marketization index in China’s Marketization Index Report by Provinces (2016) (Wang et al. 2017). Marketization index is a comprehensive index integrating the

250

8 Trust Mechanism and M&A Performance: Trust Mechanism …

relationship between the government and the market, the development of the nonstate economy, the development of the product market, the degree of development of the factor market, and the market intermediary organization and the legal system environment, which represents the marketization process and legal environment of each province in China. The median of marketization index of the province where all sample companies are located was adopted. If the marketization index of the region where the acquiring firm is located is higher than the median, the company is classified into a sub-group with a good legal environment. If the marketization index of the region where the acquiring firm is located is lower than the median, the company is classified into a sub-group with a poor legal environment. This study uses sub-sample regression to investigate the similarities and differences of social trust as an informal system in different formal legal system environments. According to theoretical analysis, this research predicts that in sub-samples with poor legal environment, social trust as an informal system will promote M&A performance more significantly. Next, this research performs sub-sample regression based on the nature of corporate property rights to test research hypothesis H2b. According to the corporate nature information of listed companies in CSMAR database, this study divides samples into two groups: private companies and state-owned companies. Based on theoretical analysis, it predicts that, in the private enterprise group, social trust as an informal system will promote M&A performance more significantly. The vector Control in models (1) to (3) represents all control variables. Previous studies have shown that the size of M&A, related transactions, payment methods, types of M&A, types of target firms, major asset restructuring, and the size, risks, cash flow, and growth of acquiring firms all affect the performance of M&A (Moeller et al. 2004; Chen et al. 2007; Wu et al. 2008; Liu et al. 2015). With reference to above-mentioned literature, this study controls above-mentioned factors in regression analysis. Among them, relative size is the ratio of the amount of M&A transaction to the assets of acquiring firms; merger related is a dummy variable, where 1 means the M&A is related transaction and 0 means otherwise; merger pay is a virtual variable, where 1 indicates cash payment and 0 share payment; merger type is a categorical variable, with 0 for asset acquisition, 1 for asset replacement, 2 for merger by absorption, 3 for others; underlying type is a dummy variable, with 1 for equity mergers, 0 for asset mergers; firm size is the natural logarithm of the acquiring firm’s total assets; leverage is the natural logarithm of its assets; cash flow is its ratio of operating cash flow to assets; firm growth is the quarter-on-quarter growth rate of its operating income for two adjacent fiscal years. In the regression study, industry and annual fixed effects are also controlled, in which industries are controlled in accordance with the 2012 industry classification standard of the China Securities Regulatory Commission. To alleviate possible endogenous problems such as reverse causality, the variables whose control variables change with time in the regression analysis are lag by one period. Main variables involved in the empirical test in this book are defined in Table 8.2.

8.4 Research Design

251

Table 8.2 Definition of main variables Name

Meaning

Description

CAR

Short-term market performance of M&A

CAR[−1,1] is cumulative excess return on stocks 1 day before and after the first day of announcing M&A CAR[−2,2] is cumulative excess return on stocks 2 days before and after the first day of announcing M&A CAR[−5,5] is cumulative excess return on stocks 5 days before and after the first day of announcing M&A

BHAR

Long-term market performance of M&A

BHAR12 indicates 12 months after buying and holding the stocks of the acquiring firm, the stock yield exceeds the market portfolio yield BHAR24 indicates 24 months after buying and holding the stocks of the acquiring firm, the stock yield exceeds the market portfolio yield BHAR36 indicates 36 months after buying and holding the stocks of the acquiring firm, the stock yield exceeds the market portfolio yield

ΔROE

Long-term financial performance of M&A

ΔROE t-1,t+1 = ROE t+1 - ROE t-1 , changes in return on net assets 1 year before and after the M&A ΔROE t-2,t+2 = [ROE t+2 + ROE t+1 ]/2-[ROE t-2 + ROE t-1 ]/2, changes in return on net assets 2 years before and after the M&A ΔROE t-3,t+3 = [ROE t+3 + ROE t+2 + ROE t+1 ]/3-[ ROE t-3 + ROE t-2 + ROE t-1 ]/3, changes in return on net assets 3 years before and after the M&A

Trust

Social trust

Taken from data in China Comprehensive Social Survey (CGSS), the social trust index of each province

Relative size

Transaction size

The acquiring firm’s M&A transaction amount/total assets one year before the M&A

Merger related

Related transaction

1 for related transaction, 0 for unrelated transaction

Merger pay

Payment method

1 for cash payment, 0 for share payment

Merger type

Type of M&A

0 for asset acquisition, 1 for asset replacement, 2 for merger by absorption, 3 for others (continued)

252

8 Trust Mechanism and M&A Performance: Trust Mechanism …

Table 8.2 (continued) Name

Meaning

Description

Underlying type

Target type

1 for equity acquisition, 0 for asset acquisition

Merger major

Major asset restructuring

1 for major asset restructuring, 0 for non-major asset restructuring

Firm size

Scale

The natural logarithm of the acquiring firm’s assets one year before the M&A

Leverage

Risk

The acquiring firm’s debt-to-asset ratio one year before the M&A

OCF

Cash flow

The ratio of the acquiring firm’s operating cash flow to assets one year before the M&A

Firm growth

Growth

The acquiring firm’s month-on-month growth rate of main business income one year before the M&A

8.5 Empirical Results and Analysis 8.5.1 Descriptive Statistical Analysis Table 8.3 reports the results of descriptive statistics. Panel A shows the statistical results of explained variables short-term market performance of M&A, long-term market performance of M&A and long-term financial performance of M&A, while Panel B reveals the statistical results of remaining variables. It is not difficult to find from Panel A that M&A have achieved better short-term market performance, and the excess returns of stocks in the three window periods of CAR[−1,1] , CAR[−2,2] , and CAR[−5,5] were significantly greater than zero. The mean values of long-term market performance of M&A BHAR12 , BHAR24 and BHAR36 were −0.106, −0.307, and −0.517, respectively, and their standard deviations were 0.614, 0.835, and 1.026, respectively. These results indicate that M&A has not achieved long-term positive returns, and that there are big differences in companies’ stock returns in different periods. The mean and median of financial performance ROE of one to three years after M&A were significantly less than zero. M&D did not produce longterm financial performance, which is consistent with the performance of long-term market performance of M&A. In Panel B, the minimum value of trust was 0.993 and its maximum value was 5.389, indicating that the legal environment in the region where the acquiring firms are located is quite different.

11,656

11,656

11,656

11,656

11,656

11,384

11,656

11,656

10,218

CAR[−1,1]

CAR[−2,2]

CAR[−5,5]

BHAR12

BHAR24

BHAR36

ΔROE t-1,t+1

ΔROE t-2,t+2

ΔROE t-3,t+3

−0.337 −0.518

−0.307

−0.517

−0.013

−0.019 −0.012

−0.011

−0.006

−0.177

−0.106

−0.014

0.004

0.004

0.005

Median

0.037

0.028

0.024

Mean

0.410

0.354

0.344

1.026

0.835

0.614

0.159

0.106

0.085

SD

3.835

0.177

0.392

0.079

0.085

0.648

0.046

21.814

Trust

Relative size

Merger related

Merger pay

Merger type

Underlying type

Merger major

Firm size

Mean

Variable

21.669

0.000

1.000

0.000

0.000

0.000

0.018

4.353

Median

1.334

0.209

0.478

0.122

0.270

0.488

1.718

1.165

SD

Panel B: Descriptive characteristics of explanatory variables and control variables

N

Variable

Panel A: Descriptive characteristics of long-term M&A performance

Table 8.3 Descriptive statistics

0.450 0.727

−0.172 −0.222

−2.160

−1.921

−1.943

−3.125

−2.368

2.325

1.882

1.832

3.209

2.853

2.720

0.467

−0.135

−1.403

Max

Min

18.838

0.000

0.000

0.000

0.000

0.000

0.001

0.993

Min

Max

26.055

1.000

1.000

3.000

1.000

1.000

145.61

5.389

−2.37***

(continued)

−1.99***

−1.81***

−14.49*** −8.51***

−8.77***

−7.25***

−11.64***

−5.47***

−101.87*** −139.52***

1.78***

2.68***

74.03*** −47.56***

3.19***

78.38*** 65.37***

Signedrank test

T test

8.5 Empirical Results and Analysis 253

Firm growth

0.820

0.085

0.259 0.278 0.939

−0.232 −6.166

1.796

0.055

Note: Due to the fact that the long-term (36 months after M&A) market performance of some M&A in 2014 could not be observed, the N of BHAR36 was reduced to 11,384. The long-term financial performance of M&A in 2014 three years after M&A was not observed, and the N of ΔROE t-3,t+3 was reduced to 10,218

0.043 −0.137

0.043

−0.256

OCF

0.520

0.524

Leverage

Panel A: Descriptive characteristics of long-term M&A performance

Table 8.3 (continued)

254 8 Trust Mechanism and M&A Performance: Trust Mechanism …

8.5 Empirical Results and Analysis

255

8.5.2 Multivariate Regression Analysis (1) The Impact of Social Trust on M&A Performance. This part presents the impact of social trust on M&A performance. The regression model is shown in models (1)–(3). The regression method uses OLS regression. The regression results of regional social trust on M&A short-term market performance, long-term market performance, and long-term financial performance are reported in Tables 8.4, 8.5 and 8.6. As shown in Table 8.4, the regression results between regional social trust and M&A performance show that the regression coefficients of trust were significantly positive in the regression of short-term market performance CAR of M&A at three window periods of [−1, 1], [−2, 2] and [−5, 5]. This shows that the higher the level of social trust (Trust) in the region where acquiring firms are located, the greater the value created by M&A. The possible reason is that the higher the degree of social trust, the less expected uncertainties, the more friendly negotiation between parties to M&A, the less negotiation time is required, the more recognition between parties, and the less transaction costs. Among control variables, the regression coefficient of firm size is significantly negative, which means that the larger the scale, the more difficult post merger integration, and the worse performance of M&A. The regression coefficient of leverage is positive, which shows that the higher the corporate debt ratio, the greater the potential for M&A. In addition, relative size and merger major are positively correlated with the short-term market performance of M&A. This indicates that investors prefer large-scale M&A, and expect that target firms’ business will merge with their own business. When the impact is greater, M&A is more likely to achieve optimized resource allocation. In merger pay, acquiring firms adopt cash payment to improve the short-term market performance of M&A, which may be related to information asymmetry. Cash payment conveys the low risk of M&A and leaders to better M&A performance. Table 8.5 reports the regression results of explained variables in long-term market performance one year after M&A BHAR12 , long-term market performance two years after M&A BHAR24 , and long-term market performance three years after M&A BHAR36 The results show that the regression coefficient of the social trust level (Trust) of the region where acquiring firms are located was significantly positive, which shows that the higher the social trust of the region where acquiring firms are located in the measurement of M&A performance based on long-term market performance, the better the long-term performance of M&A. Among control variables, the relationship between merger major and firm size and the long-term market performance of M&A was consistent with short-term market performance shown in Table 8.4. That is, major asset restructuring-based M&A can achieve better long-term market performance, and that firm size is negatively related to the long-term market performance of M&A. In addition, the regression coefficient of firm growth was significantly negative, indicating that M&A carried out by mature companies are more likely to achieve longterm performance, while growth companies have high risk appetite characteristics, which makes it difficult for them to improve M&A performance.

256 Table 8.4 Social trust and short-term market performance of M&A

8 Trust Mechanism and M&A Performance: Trust Mechanism … Variable

CAR[−1,1]

Intercept

0.091*

CAR[−2,2]

CAR[−5,5]

0.069

0.125

(1.70)

(1.03)

(1.25)

Trust

0.002**

0.003***

0.003*

(2.26)

(3.33)

(1.84)

Relative size

0.002***

0.002***

0.005***

(4.61)

(4.28)

(5.29)

Merger related

0.001

−0.001

0.003

(0.33)

(−0.12)

(0.84)

Merger pay

0.029***

0.030***

0.125***

(6.98)

(5.89)

(4.31)

Merger type

0.011

0.025

0.027

(0.73)

(1.29)

(0.96)

Underlying type

0.001

0.001

0.005

(0.30)

(0.20)

(1.42)

Merger major

0.029***

0.046***

0.065***

(5.74)

(7.26)

(6.87)

Firm size

−0.007***

−0.009***

−0.012***

(−9.58)

(−9.59)

(−8.37)

Leverage

0.017***

0.023***

0.033***

(4.93)

(5.22)

(5.73)

−0.020*

−0.019

−0.014

(−1.91)

(−1.48)

(−0.71)

Firm growth

0.002*

0.002*

0.005***

(1.90)

(1.74)

(2.06)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.055

0.056

0.052

F–statistic

13.93** *

14.14***

13.06***

N

11,656

11,656

11,656

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table are the regression coefficients of each explanatory variable, and data in bracelets are regression t value

Furthermore, in Table 8.6, difference in return on net assets one year after M&A ΔROE t-1,t+1 , difference in return on net assets two years after M&A ΔROE t-2,t+2 , and difference in return on net assets three years after M&AΔROE t-3,t+3 are explained variables of long-term financial performance. They examine whether the degree of social trust of acquiring firms help improve M&A performance. Table 8.6 reports

8.5 Empirical Results and Analysis Table 8.5 Social trust and long-term market performance of M&A

257

Variable

BHAR12

BHAR24

BHAR36

Intercept

0.827***

−0.492

−0.928**

(2.75)

(−1.40)

(−2.38)

Trust

0.043***

0.073***

0.093***

(11.10)

(17.32)

(20.60)

Relative size

0.010***

0.006**

−0.001

(3.58)

(2.00)

(−0.19)

Merger related

−0.007

0.010

0.001

(−0.77)

(1.04)

(0.10)

Merger pay

−0.004

−0.036

−0.063**

(−0.18)

(−1.54)

(−2.46)

Merger type

−0.172**

0.193**

0.136

(−2.16)

(2.23)

(1.55)

Underlying type

0.015

−0.022**

−0.034***

(1.61)

(−2.16)

(−3.21)

Merger major

0.178***

0.243***

0.226***

(6.76)

(8.46)

(7.18)

Firm size

−0.039***

−0.034***

−0.011**

(−9.84)

(−7.82)

(−2.44)

Leverage

0.021

0.055***

0.021

(1.13)

(2.63)

(0.92)

−0.071

−0.104*

0.052

(−1.34)

(−1.77)

(0.83)

Firm growth

−0.012**

−0.013**

−0.013**

(−1.97)

(−2.28)

(−2.11)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.047

0.054

0.052

F–statistic

22.90***

38.55***

47.98***

N

11,656

11,656

11,384

Note: ***, **, and * were significant at the levels of 1%, 5% and 10%, respectively. Data in the table are the regression coefficients of each explanatory variable, and date in bracelets is the regression t value. As some M&A in 2014 could not observe the longterm market performance of 36 months after the merger, the N of BHAR36 decreased to 11,384

258 Table 8.6 Social trust and long-term financial performance of M&A

8 Trust Mechanism and M&A Performance: Trust Mechanism … Variable

ΔROE t-1,t+1

Intercept

0.330**

0.201

0.130

(2.04)

(1.39)

(1.18)

Trust

0.006***

0.006***

0.006***

(3.07)

(3.23)

(3.71)

Relative size

0.003**

0.002**

0.002*

(2.09)

(2.01)

(1.93)

Merger related

0.005

0.010**

0.011***

(0.95)

(2.40)

(2.78)

Merger pay

0.012

0.022**

0.049***

(1.06)

(2.29)

(5.20)

Merger type

−0.110***

−0.073**

−0.025*

(−2.58)

(−2.07)

(−1.65)

Underlying type

0.006

0.007*

0.003

(1.12)

(1.65)

(0.76)

0.036**

0.036***

0.016

(2.57)

(3.04)

(1.24)

Firm size

0.004**

0.005***

−0.003**

(2.03)

(2.86)

(−2.02)

Leverage

0.009

−0.022***

0.033***

(0.89)

(−2.63)

(4.11)

OCF

0.166***

0.192***

0.222***

(5.85)

(7.97)

(9.43)

Firm growth

−0.023***

−0.017***

−0.016***

(−7.72)

(−7.00)

(−6.76)

Year Effect

Yes

Yes

Yes

Industry Effect

Yes

Yes

Yes

Merger major

Adjusted

R2

ΔROE t-2,t+2

ΔROE t-3,t+3

0.010

0.009

0.011

F–statistic

5.43***

6.99***

11.01***

N

11,656

11,656

10,218

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance three years after M&A could not be observed, and N of R O E t−3,t+3 decreased to 10,218

8.5 Empirical Results and Analysis

259

main regression results. It shows that in the regression equation of the long-term financial performance of M&A one to three years after M&A, the regression coefficients of the social trust agent variable were all significantly positive, and the significance level was above 1%. Among control variables, the regression coefficient of relative size on the long-term financial performance of M&A is significantly positive, which is consistent with the short-term market performance of M&A. The regression coefficient of firm growth on the long-term financial performance of M&A was significantly negative, being consistent with the long-term market performance of M&A. In addition, the regression coefficient of cash flow level (OCF) of acquiring firms on long-term financial performance was significantly positive, indicating that the cash flow level of acquiring firms is an important factor in promoting the improvement of financial performance after M&A. In merger type, compared to such restructuring as equity transfer, asset acquisitions can win better financial performance after M&A. Regression results in Tables 8.4, 8.5, and 8.6 show that higher social trust can help companies to facilitate M&A and increase merger income (Bottazi et al. 2016). In regions where the degree of social trust is high, the degree of information asymmetry between acquiring firms and target firms is low. Both parties of the transaction will carry out M&A and integration towards the goal of enhancing corporate value. Therefore, the higher the degree of social trust, the stronger the ability of M&A in value creation. The level of regional social trust can improve the contract’s self-fulfillment mechanism, increase companies’ external investors’ trust in the company, enhance investor confidence, limit companies’ opportunistic behavior, and further enhance integration efficiency after M&A. This verifies the research hypothesis H1 of this book. (2) Sub-sample Test of Social Trust and M&A Performance: The Substitution Effect of Informal Systems on Formal Systems. Through the above tests, this study finds that the social trust of the region where acquiring firms are located will significantly improve M&A performance. This study believes that an important mechanism for social trust to positively affect M&A performance is that social trust is a key element of social capital. Essentially, it constructs the basis of economic exchange and affects the signing and execution of contracts in M&A transactions. A natural inference based on this mechanism is that when the legal environment in the region where acquiring firms are located is good, parties to M&A can use the public information of companies’ external environment to gain trust and promote the creation of value in M&A. However, if the level of property rights protection provided by formal systems and legal systems cannot protect the rights and interests of investors, the social trust of the informal system can make up for the weakness of the formal system to a certain extent. In this part, this study analyzes research hypotheses, and divides total samples into good legal environment sub-group and poor legal environment sub-group based on the legal environment of the region where acquiring firms are located. In different formal institutional environments, testing how informal institutional social trust affects M&A performance, and verifying whether informal institutional social trust and formal institutional legal level can form a substitution effect in the process of corporate M&A and reorganization?

260

8 Trust Mechanism and M&A Performance: Trust Mechanism …

Specifically, according to the marketization index of China’s Marketization Index Report by Provinces (2016) (Wang et al. 2017), this study calculated the median level of the legal system in the region where sample companies are located, and on this basis distinguished the legal environment of sample companies. The regression of models (1) to (3) was repeated, whose results were reported in Tables 8.7, 8.8 and 8.9. In the regression results with Trust as the proxy variable of social trust, this study reveals that the regression coefficient of Trust is significantly positive in the group with lower legal level, but fails the significance test in the group with higher legal level. This shows that, in the value creation process of M&A transactions, there is a substitute relationship between the degree of social trust in the region where acquiring firms are located and the level of regional legal system. In areas where the local legal environment is poor, social trust in the informal system has a significant impact on value creation of after M&A. Parties to M&A usually seek solutions to contradictions outside of formal systems, and develop a mechanism that relies on trust to resolve disputes and punish violators. However, when the regional legal level is relatively high, the administrative legal punishment mechanism for dishonest breaches in M&A transactions is mainly used to reduce the occurrence of breaches in cooperation and reduce information asymmetry and M&A integration costs. This conclusion supports the research hypothesis H2a in this book. (3) Sub-sample Test of Social Trust and M&A Performance: Classified according to the Nature of Corporate Property Rights. In this part, based on the analysis of research hypotheses, this research divides the dominant companies according to the nature of property rights, and divides the total sample into two groups: SOEs and private enterprises. In different environments of the nature of corporate property rights, it tests social trust and M&A. The relationship between performance, the relevant regression results are reported in Tables 8.10, 8.11 and 8.12. Tables 8.10, 8.11 and 8.12 reveal that in private enterprise group, the regression coefficient of trust on short-term market performance, long-term market performance, and long-term financial performance of M&A is positive above the 1% significance level, but that of SOEs group failed the significance test. This result shows that in the M&A of private enterprises, the degree of social trust in the region where acquiring firms are located plays a positive role in value creation. Compared with SOEs, private enterprises have insufficient advantages in government support. Their profit-seeking nature make formal systems less binding. Their trust mechanism established by the informal system of social trust can reduce transaction frictions in M&A, which made up for the shortcomings of formal systems and improved the value creation ability of M&A. In M&A, SOEs mainly rely on formal systems to restrain dishonest performance and reduce transaction costs. As an informal system, social trust does not play a prominent role in the value creation process of M&A. This conclusion supports research hypothesis H2b in this book.

8.5 Empirical Results and Analysis

261

Table 8.7 Social trust and short-term market performance of M&A: grouped by legal environment Variable

CAR[−1,1]

CAR[−2,2]

CAR[−5,5]

Poor legal Good legal Poor legal Good legal Poor legal Good legal environment environment environment environment environment environment Intercept Trust

0.186**

0.065

0.132

0.067

0.218

(2.51)

(0.88)

(1.40)

(0.74)

(1.57)

(0.88)

0.008***

−0.001

0.008**

0.001

0.004**

0.001

0.117

(2.87)

(v0.36)

(2.46)

(−0.06)

(1.98)

(0.12)

Relative size

0.002**

0.002***

0.005***

0.002***

0.005***

0.003***

(2.31)

(3.99)

(3.72)

(3.15)

(5.39)

(3.44)

Merger related

−0.003

0.002

−0.007**

0.003

0.002

0.002

(−1.33)

(0.92)

(−2.12)

(0.90)

(0.61)

(0.42)

Merger pay

0.039***

0.018***

0.044***

0.018**

0.030***

0.029***

(6.88)

(3.03)

(6.01)

(2.42)

(3.33)

(2.64)

Merger type

−0.040*

0.051**

−0.015

0.063**

0.003

0.070*

(−1.79)

(2.35)

(−0.53)

(2.39)

(0.08)

(1.78)

0.001

0.002

0.001

0.008*

0.006

(0.29)

(0.63)

(0.48)

(1.94)

(1.35)

0.034***

0.032***

0.054***

0.070***

0.067***

Underlying 0.002 type (0.99) Merger major

0.023*** (3.32)

(4.44)

(3.65)

(5.85)

(6.57)

(4.90)

Firm size

−0.006***

−0.011***

−0.008***

−0.013***

−0.014***

−0.018***

Leverage OCF Firm growth

(−5.42)

(−10.12)

(−6.16)

(−9.86)

(−8.91)

(−8.74)

0.011**

0.019***

0.018***

0.022***

0.035***

0.039***

(2.13)

(3.96)

(2.67)

(3.82)

(4.49)

(4.56)

−0.046***

0.004

−0.056***

0.013

−0.036

0.019

(−3.22)

(0.25)

(−3.09)

(0.69)

(−1.59)

(0.68)

−0.001

0.005***

−0.001

0.005**

0.004

0.004

(−0.69)

(3.06)

(−0.31)

(2.55)

(1.59)

(1.47)

Year effect Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Adjusted R2

0.047

0.059

0.047

0.061

0.043

0.047

F–statistic

37.39***

47.90***

36.74***

49.45***

33.55***

37.47***

N

4662

6994

4662

6994

4662

6994

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value

262

8 Trust Mechanism and M&A Performance: Trust Mechanism …

Table 8.8 Social trust and long-term market performance of M&A: grouped by legal environment Variable

BHAR12

BHAR24

BHAR36

Poor legal Good legal Poor legal Good legal Poor legal Good legal environment environment environment environment environment environment Intercept Trust

1.739***

2.819***

−0.300

1.313

−0.024

−1.089***

(8.80)

(3.97)

(−1.11)

(1.34)

(−0.07)

(−2.83)

0.026***

0.024

0.033***

0.035

0.027***

0.022*

(5.88)

(1.30)

(5.36)

(1.38)

(3.49)

(1.79)

Relative size

0.001

0.006

0.003

0.041**

−0.003

0.009**

(0.80)

(0.49)

(1.39)

(2.28)

(−0.93)

(2.01)

Merger related

−0.016**

−0.003

−0.011

−0.055 *

−0.016

−0.017

(−2.31)

(−0.12)

(−1.14)

(−1.70)

(−1.39)

(−1.49)

Merger pay

0.025

0.006

0.011

−0.018

−0.033

−0.084***

(1.53)

(0.10)

(0.52)

(−0.22)

(−1.18)

(−3.09)

Merger type

−0.471***

−0.688

0.242***

−0.007

0.176**

0.074

(−9.07)

(−3.23)

(3.41)

(−0.02)

(1.96)

(0.69)

0.031

0.006

−0.010

0.019

−0.067***

(1.29)

(0.64)

(−0.29)

(1.62)

(−5.77)

−0.030

0.094***

0.031

0.129***

0.302***

Underlying 0.030*** type (4.32)

***

Merger major

0.073*** (3.62)

(−0.38)

(3.47)

(0.29)

(3.76)

(9.02)

Firm size

−0.041***

−0.056 ***

−0.056***

−0.091***

−0.064***

−0.001

Leverage OCF Firm growth

(−13.78)

(−5.02)

(−13.85)

(−5.95)

(−12.52)

(−0.21)

−0.022*

−0.019

−0.017

−0.139 **

−0.005

−0.050**

(−1.66)

(−0.41)

(−0.93)

(−2.16)

(−0.22)

(−1.99)

−0.176***

−0.204

−0.315***

−0.454 **

−0.335***

0.303***

(−4.32)

(−1.43)

(−5.63)

(−2.31)

(−4.72)

(4.6)

−0.002

0.030 **

−0.001

0.027

0.004

−0.018**

(−0.55)

(2.04)

(−0.06)

(1.30)

(0.63)

(−2.52)

Year effect Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Adjusted R2

0.039

0.041

0.047

0.036

0.043

0.024

F–statistic

30.72***

33.12***

37.21***

27.83***

33.56***

18.83***

N

4662

6994

4662

6994

4553

6831

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance 36 months after M&A could not be observed, and N of BHAR36 decreased to 11,384

8.5 Empirical Results and Analysis

263

Table 8.9 Social trust and long-term financial performance of M&A: grouped by legal environment Variable

ΔROE t-1,t+1

ΔROE t-2,t+2

ΔROE t-3,t+3

Poor legal Good legal Poor legal Good legal Poor legal Good legal environment environment environment environment environment environment Intercept Trust

0.251*

−0.056

−0.348

−0.050

−0.087

(1.87)

(−0.54)

(−0.65)

(−0.19)

(−0.20)

−0.208 (−0.74)

0.023***

0.005

0.036***

0.001

0.025**

0.002

(7.42)

(1.56)

(2.60)

(0.32)

(2.42)

(0.17)

Relative size

−0.001

0.001

0.031***

0.001

0.025***

−0.001

(−0.10)

(0.00)

(3.13)

(0.40)

(3.59)

(−0.60)

Merger related

0.005

0.001

0.008

0.004

0.017

−0.002

(1.03)

(0.30)

(0.47)

(0.60)

(1.06)

(−0.21)

Merger pay

0.055***

−0.012

0.074

0.004

0.026

0.004

(4.92)

(−1.59)

(1.62)

(0.21)

(0.66)

(0.18)

Merger type

−0.154***

−0.043

−0.070

0.034

−0.017

−0.006

(−4.31)

(−1.47)

(−0.43)

(0.52)

(−0.13)

(−0.07)

0.007**

0.006

0.015**

0.009

−0.002

(2.32)

(0.31)

(2.00)

(0.57)

(−0.25)

0.036

0.061***

0.019

0.064**

Underlying 0.007 type (1.38) Merger major

0.039***

0.051***

(2.79)

(5.73)

(0.60)

(2.99)

(0.36)

(2.06)

Firm size

0.002

0.005***

0.016*

0.004

−0.001

0.002

(0.86)

(4.16)

(1.95)

(1.26)

(−0.11)

(0.52)

0.008

−0.068***

−0.125***

−0.016

0.026

−0.024

Leverage OCF Firm growth

(0.86)

(−10.06)

(−3.54)

(−1.10)

(0.87)

(−1.27)

0.097***

0.066***

−0.412***

0.131***

0.057

0.026

(3.47)

(3.73)

(−3.82)

(3.04)

(0.61)

(0.47)

−0.007**

−0.005***

0.005

−0.023***

−0.039***

−0.006

(−2.37)

(−2.77)

(0.44)

(−4.93)

(−4.13)

(−1.02)

Year effect Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Adjusted R2

0.008

0.008

0.009

0.008

0.006

0.018

F–statistic

6.96***

6.85***

7.35***

7.12***

5.04***

12.76***

N

4662

6994

4662

6994

4087

6131

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance in three years after M&A could not be observed, and N of ΔROE t-3,t+3 decreased to 10,218

264

8 Trust Mechanism and M&A Performance: Trust Mechanism …

Table 8.10 Social trust and short-term market performance of M&A: grouped by company nature Variable

Intercept Trust

CAR[−1,1]

CAR[−2,2]

CAR[−5,5]

Private enterprise

SOE

Private enterprise

SOE

Private enterprise

0.334***

−0.078**

0.336***

−0.097**

0.463***

−0.062

(9.10)

(−2.36)

(7.47)

(−2.28)

(6.53)

(−1.06)

0.003***

−0.001

0.005***

0.001

0.004***

0.001

(6.36)

(−0.75)

(8.69)

(0.86)

(4.28)

(0.11)

0.002***

0.003***

0.004***

0.005***

0.007*** (7.49)

Relative size 0.002***

SOE

(10.24)

(3.12)

(9.37)

(5.02)

(10.94)

Merger related

0.003***

0.001

0.003**

−0.001

0.009***

−0.001

(2.63)

(0.61)

(2.31)

(−0.97)

(4.25)

(−0.82)

Merger pay

0.027***

0.030***

0.027***

0.033***

0.032***

0.034***

(11.10)

(14.82)

(9.04)

(12.72)

(6.80)

(9.41)

Merger type

−0.040***

0.046***

−0.030***

0.059***

−0.039**

0.058***

(−4.40)

(6.82)

(−2.71)

(6.78)

(−2.19)

(4.84)

Underlying type

−0.001

−0.001

0.002

−0.004***

0.009***

−0.004***

(−0.39)

(−1.25)

(1.27)

(−3.95)

(4.00)

(−2.65)

Merger major

0.030***

0.020***

0.049***

0.028***

0.069***

0.038***

(9.94)

(7.69)

(13.53)

(8.51)

(12.00)

(8.46)

Firm size

−0.012***

−0.003***

−0.015***

−0.003***

−0.018***

−0.004***

(−24.53)

(−7.24)

(−24.15)

(−7.41)

(−19.03)

(−7.27)

Leverage

0.016***

0.014***

0.015***

0.027***

0.025***

0.033***

(8.13)

(7.22)

(5.91)

(11.23)

(6.46)

(9.73)

OCF

0.004

−0.030***

0.008

−0.026***

0.043***

−0.054***

(0.63)

(−5.95)

(1.07)

(−4.04)

(3.65)

(−6.07) −0.001

0.001*

0.001

0.001

0.001

0.003***

(1.73)

(1.38)

(1.33)

(1.03)

(3.09)

(−0.81)

Year effect

Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Firm growth

Adjusted R2 0.063

0.037

0.062

0.040

0.046

0.035

F–statistic

50.37***

28.94***

49.10***

31.43***

36.23***

27.16***

N

4662

6994

4662

6994

4662

6994

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value

8.5 Empirical Results and Analysis

265

Table 8.11 Social trust and long-term market performance of M&A: grouped by company nature Variable

Intercept Trust Relative size

BHAR12

BHAR24

BHAR36

Private enterprise

SOE

Private enterprise

SOE

Private enterprise

SOE

1.374***

−1.400

0.565

−2.704

−0.209

−3.813*

(5.19)

(−1.81)

(−0.91)

(1.60)

(−1.52)

(−0.49)

0.030***

0.037

0.054***

0.002

0.073***

−0.053

(8.64)

(1.21)

(11.76)

(0.06)

(13.24)

(−1.26)

0.007***

0.033

0.002

−0.009

−0.004

0.002 (0.02)

(4.26)

(0.40)

(0.98)

(−0.10)

(−1.41)

Merger related

−0.010

−0.106

0.021*

−0.119

0.009

−0.124

(−1.23)

(−1.56)

(1.92)

(−1.51)

(0.67)

(−1.35)

Merger pay

−0.026

−0.056

−0.058**

−0.184

−0.093***

−0.257

(−1.48)

(−0.44)

(−2.48)

(−1.26)

(−3.25)

(−1.49)

−0.294***

0.046

0.042

−0.046

0.021

−0.013 (−0.02)

Merger type

(−4.46)

(0.10)

(0.47)

(−0.08)

(0.20)

Underlying type

0.028***

−0.117

−0.015

−0.058

−0.047***

−0.016

(3.40)

(−1.54)

(−1.36)

(−0.67)

(−3.57)

(−0.16)

Merger major

0.286***

0.210

0.318***

0.374**

0.326***

0.388*

(13.32)

(1.30)

(11.08)

(2.00)

(9.40)

(1.76)

Firm size

−0.052***

0.025

−0.072***

0.081**

−0.038***

0.128***

(−14.26)

(0.74)

(−14.77)

(2.07)

(−6.43)

(2.79)

Leverage

−0.050***

0.151

0.095***

0.071

0.144***

−0.155

(−3.40)

(0.85)

(4.88)

(0.34)

(6.10)

(−0.64)

OCF

−0.029

1.932***

0.057

1.040*

0.108

2.497***

(−0.64)

(4.03)

(0.97)

(1.88)

(1.51)

(3.82)

−0.005

0.036

−0.007

0.036

−0.008

0.013

(−1.27)

(1.47)

(−1.23)

(1.25)

(−1.21)

(0.40)

Year effect

Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Adjusted R2

0.051

0.045

0.058

0.055

0.039

0.068

F−statistic

40.14***

35.04***

45.72***

43.26***

30.49***

54.18***

N

4662

6994

4662

6994

4553

6831

Firm growth

Note: ***, **, and * were significant at the levels of 1%, 5% and 10%, respectively. Data in the table are the regression coefficients of each explanatory variable, and date in bracelets is the regression t value. As some M&A in 2014 could not observe the long-term market performance of 36 months after the merger, the N of B H A R36 decreased to 11,384

266

8 Trust Mechanism and M&A Performance: Trust Mechanism …

Table 8.12 Social trust and long-term financial performance of M&A: grouped by company nature Variable

ΔROE t-1,t+1

ΔROE t-2,t+2

ΔROE t-3,t+3

Private enterprise

SOE

Private enterprise

SOE

Private enterprise

0.139

0.416***

−0.468***

0.022

−0.283*

0.231

(1.33)

(2.91)

(−3.17)

(0.14)

(−1.66)

(1.27)

0.006***

0.003

0.006***

0.002

0.010***

−0.003

(4.54)

(1.10)

(3.12)

(1.25)

(4.23)

(−1.51)

Relative size

0.001

−0.008*

0.002**

−0.004*

0.002

−0.006*

(0.64)

(−1.89)

(2.21)

(−1.69)

(1.49)

(−1.77)

Merger related

0.007**

−0.015***

0.021***

−0.006

0.015***

−0.005

(2.28)

(−2.72)

(4.57)

(−1.63)

(2.67)

(−1.14)

Merger pay 0.015*

0.055***

0.042***

0.012

0.088***

−0.019*

(4.20)

(4.30)

(1.33)

(6.40)

(−1.67)

−0.245***

0.108***

−0.137***

0.123***

−0.272*** (−7.07)

Intercept Trust

(1.94) Merger type −0.069***

SOE

(−2.61)

(−5.52)

(2.95)

(−4.42)

(2.90)

Underlying type

0.007**

0.001

0.030***

−0.003

0.010*

−0.007

(2.12)

(0.02)

(6.63)

(−0.86)

(1.88)

(−1.55)

Merger major

0.053***

0.009

0.034***

0.083***

0.040**

0.065***

(5.69)

(0.57)

(2.86)

(7.12)

(2.26)

(4.36)

Firm size

0.002

0.015***

0.002

0.005***

−0.002

−0.002

(1.30)

(6.49)

(1.04)

(3.17)

(−0.74)

(−0.99)

Leverage

−0.013**

−0.100***

−0.011

−0.047***

0.029***

−0.023**

(−2.14)

(−7.23)

(−1.41)

(−5.39)

(2.97)

(−2.20)

OCF

0.074***

0.121***

0.063**

0.088***

0.106***

0.076***

(4.05)

(3.31)

(2.56)

(3.82)

(3.55)

(2.74)

Firm growth

−0.009***

0.016***

−0.010***

0.004*

−0.010***

0.002

(−4.76)

(3.93)

(−4.20)

(1.66)

(−3.64)

(0.58)

Year effect

Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Adjusted R2

0.006

0.008

0.010

0.008

0.020

0.006

F–statistic

5.19***

6.88***

8.60***

6.90***

14.02***

5.25***

N

4662

6994

4662

6994

4087

6131

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance three years after M&A could not be observed, and N of R O E t−3,t+3 decreased to 10,218

8.5 Empirical Results and Analysis

267

8.5.3 Further Analysis In the process of corporate M&A, intermediaries play a role in alleviating information asymmetry between parties to it or provide professional advice. They can reduce transaction costs, information asymmetry and agency costs. The underlying mechanism of above research conclusion is that the higher the degree of social trust in the region where acquiring firms are located, the higher the level of social trust between companies, the lower the transaction costs and the lower the degree of information asymmetry. Based on this theoretical analysis logic, in the region where acquiring firms are located, the higher the level of social trust, the lower information transaction cost between parties to M&A. Will this reduce the probability of hiring a transaction intermediary? To answer this question, this research further examines the mechanism of interaction between regional social trust and M&A value creation from the perspective of intermediary agency selection. This research first establishes model (4) as follows and uses Logistic regression to investigate the influence of trust on the selection of intermediaries for M&A. Agent = ρ0 + ρ1 T r ust_3 + ρi Contr ol + ρ j Y ear + ρk  I ndustr y + ω (8.4) The explained variable agent indicates whether an intermediary agency is selected for M&A, which is a dummy variable. When acquiring firms select an intermediary agency for M&A, it takes 1; otherwise, it takes 0. Agency2 includes whether acquiring firms hire asset appraisal agency Agent1 and financial consultant Agent2 for M&A. Data of employing intermediary agencies is taken from CSMAR M&A database. Due to the lack of data in the database, the research team manually checked the temporary M&A announcements of listed companies. Trust_3 is explanatory variable social trust, which contains three proxy variables Trust, Trust_social and Blood. Trust follows regional trust index in models (1) to (3) at the China Comprehensive Social Survey (CGSS). Trust_social provides regional trust data for Zhang and Ke (2002). Zhang and Ke (2002) commissioned the “Chinese Entrepreneur Survey System” to conduct a trustworthiness survey of 15,000 companies in China’s mainland in 2000, and ranked the trustworthiness of 31 provinces, municipalities and autonomous regions. This study takes this as the second indicator to measure regional 2

The intermediary agencies selected in enterprise mergers and acquisitions mainly include asset appraisal agencies, financial consultants, accounting firms and law firms. In the due diligence of mergers and acquisitions, based on the authenticity of the transaction, the compliance of the process and the interests of small and medium-sized investors, lawyers need to issue legal opinions and certified public accountants need to issue audit reports; when the acquisition target is an asset, an asset evaluation needs to be issued According to the report, when the target of the acquisition is equity, the enterprise can decide on its own whether to hire an asset appraisal agency; the enterprise can decide on its own whether to hire a financial consultant. Therefore, the research of this subject selects asset appraisal agencies and financial consultants that enterprises can independently hire as proxy variables for hiring intermediary agencies. For relevant regulations, see the “Securities Law”, “Administrative Measures on the Acquisition of Listed Companies”, “Administrative Measures on Law Firms Engaged in Securities Legal Business”, etc.

268

8 Trust Mechanism and M&A Performance: Trust Mechanism …

social trust. Blood is the rate of voluntary blood donation. This study uses collects voluntary blood donation rate (Blood) of all provinces and regions from the Chinese Blood Transfusion Association, the Red Cross and the Huatong Economic Statistics Database (ACMR) as a measure of the third important indicator of trust. This study believes that for companies that have established a social trust mechanism, information asymmetry in M&A can be reduced. Parties to M&A may choose not to hire an intermediary based on trust, instead conduct M&A transactions directly, so the regression coefficient is expected to be negative. The vector Control represents all control variables, which are the same as control variables in models (1) to (3). Table 8.13 indicates the results of logistic regression on social trust and the selection of M&A intermediaries. The logistic regression coefficient of Trust for the selection of asset evaluation agency Agent1 was −0.108, which was significant at the 1% significance level. The logistic regression coefficient of trust for the selection of M&A consultant Agent2 was −0.116, significant at the 1% significance level. Similarly, regression results of Trust_Social and Blood as proxy variables of social trust also show the negative relationship between social trust and the employment of intermediary agencies. This shows that when the region where acquiring firms are located has a high degree of social trust, the degree of trust between parties to M&A will increase and there will be less information asymmetry, which will reduce the engagement of intermediary agencies by both parties, thereby reducing transaction costs.

8.5.4 Robustness Test In the research on the relationship between social trust and the employment of intermediary agencies, this study selected three proxy variables of social trust and brought them into models for regression, having reached the conclusion that models are robust. In the main model of this book, this study only uses the regional trust index Trust provided by the China Comprehensive Social Survey (CGSS) data to examine the relationship between social trust and M&A performance. This part checks the robustness of main conclusions of the book with other two proxy variables of social trust. First of all, data about regional trust (trust_social) provided by Zhang and Ke (2002) were used as an indicator to measure the level of regional social trust, and to conduct regression on short-term market performance, long-term market performance and long-term financial performance of M&A. The regression results are listed in Tables 8.14, 8.15 and 8.16. The main regression results have not changed. The regression results of the sub-samples grouped according to legal environment and the nature of corporate property rights remained unchanged. Due to space considerations, this study did not report the results of sub-sample grouping regressions. Next, voluntary blood donation rate (Blood) of all provinces and regions across China were used as another important indicator to measure social trust. Regression of the short-term market performance, long-term market performance and long-term

8.5 Empirical Results and Analysis

269

Table 8.13 Logistic regression of social trust and the selection of M&A intermediaries Variable

Trust

Trust_Social

Blood

Agent1

Agent2

Agent1

Agent2

Agent1

Agent2

Intercept

−5.286***

−6.547***

−5.657***

−6.901***

−5.116***

−6.385***

(14.32)

(20.71)

(16.20)

(22.82)

(13.34)

(19.51)

Trust_3

−0.108***

−0.116***

−0.157***

−0.160***

−0.128***

−0.147***

(22.54)

(19.69)

(34.36)

(26.30)

(24.24)

(23.56)

Relative size

0.026

−0.240***

0.023

0.026*

0.023

0.027*

(0.22)

(13.52)

(2.07)

(2.78)

(2.15)

(2.95)

Merger related

0.634***

0.405***

0.640***

0.410***

0.650***

0.420***

(140.76)

(41.85)

(143.19)

(42.84)

(147.04)

(44.91)

Merger pay

1.740***

2.129***

1.749***

2.138***

1.735***

2.123***

(265.94)

(361.52)

(267.58)

(363.16)

(264.27)

(358.61)

1.275***

1.073**

1.305***

1.050**

1.287***

(5.62)

(8.41)

(5.94)

(8.77)

(5.70)

(8.46)

Underlying type

0.627***

1.810***

0.630***

1.812***

0.621***

1.803***

(109.75)

(374.04)

(110.94)

(374.92)

(108.13)

(372.34)

Merger major

1.731***

1.758***

1.738***

1.759***

1.720***

1.750***

(132.31)

(130.86)

(132.64)

(130.67)

(130.66)

(129.74)

Firm size

0.033

0.004

0.035

0.005

0.022

−0.006

(2.16)

(0.02)

(2.49)

(0.03)

(0.99)

(0.05)

Leverage

−0.676***

−0.624***

−0.686***

−0.632***

−0.620***

−0.556***

(35.03)

(22.28)

(35.97)

(22.75)

(30.32)

(18.13)

OCF

−0.309

−0.394

−0.302

−0.387

−0.236

−0.322 (0.75)

Merger type 1.039**

(0.93)

(1.12)

(0.89)

(1.08)

(0.55)

Firm growth

0.051

0.020

0.047

0.016

0.054

0.023

(1.96)

(0.26)

(1.66)

(0.16)

(2.24)

(0.35)

Year effect

Yes

Yes

Yes

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Yes

Yes

Yes

Pseudo R2

0.14

0.19

0.14

0.19

0.14

0.19

Forecast accuracy percentage (%)

0.72

0.79

0.72

0.79

0.72

0.79

Likelihoods ratio

1526.45***

2121.68***

1539.51***

2129.33***

1528.46***

2125.91***

N

11,656

11,656

11,656

11,656

11,656

11,656

Note: ***, **, * were significant at levels of 1%, 5% and 10%, respectively. Data in the table are the regression coefficient of each explanatory variable, and data in bracelets is the Wald chi-square value of regression

270 Table 8.14 Social trust and short-term market performance of M&A

8 Trust Mechanism and M&A Performance: Trust Mechanism … Variable

CAR[−1, 1]

CAR[−2, 2]

CAR[−5, 5]

Intercept

0.080

0.056

0.126

(1.48)

(0.83)

(1.26)

0.008***

0.009***

−0.002

(2.93)

(2.61)

(−0.43)

Relative size

0.002***

0.003***

0.005***

(4.67)

(4.36)

(5.34)

Merger related

0.001

−0.001

0.003

(0.32)

(−0.15)

(0.81)

Merger pay

0.029***

0.031***

0.033***

(7.03)

(5.94)

(4.30)

Merger type

0.010

0.024

0.029

(0.67)

(1.26)

(1.00)

Underlying type

0.001

0.001

0.005

(0.36)

(0.30)

(1.50)

Merger major

0.029***

0.046***

0.065***

(5.70)

(7.24)

(6.90)

Firm size

−0.007***

−0.009***

−0.012***

(−9.53)

(−9.36)

(−8.14)

Leverage

0.017***

0.022***

0.035***

(4.91)

(5.02)

(5.45)

Trust_Social

−0.021**

−0.020

−0.014

(−2.00)

(−1.58)

(−0.74)

Firm growth

0.002*

0.002*

0.004**

(1.87)

(1.68)

(2.01)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.056

0.056

0.052

F–statistic

14.01***

14.04***

12.98***

N

11,656

11,656

11,656

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value

financial performance of M&A was carried out. The regression results have not changed, as shown in Tables 8.17, 8.18 and 8.19. The regression results of the subsamples grouped according to legal environment and the nature of corporate property rights remained unchanged. Due to space considerations, results of the sub-sample grouping regressions were not elaborated.

8.5 Empirical Results and Analysis Table 8.15 Social trust and long-term market performance of M&A

271

Variable

BHAR12

BHAR24

BHAR36

Intercept

0.763**

−0.587*

−1.104***

(2.52)

(−1.66)

(−2.81)

Trust_Social

0.029**

0.041***

0.073***

(2.07)

(2.72)

(4.52)

Relative size

0.010***

0.007**

0.001

(3.78)

(2.31)

(0.21)

Merger related

−0.008

0.008

−0.001

(−0.92)

(0.80)

(−0.12)

Merger Pay

−0.004

−0.037

−0.067***

(−0.16)

(−1.57)

(−2.58)

Merger type

−0.163**

0.209**

0.165*

(−2.05)

(2.41)

(1.86)

Underlying type

0.018**

−0.015

−0.027**

(2.00)

(−1.51)

(−2.48)

Merger major

0.181***

0.247***

0.231***

(6.85)

(8.56)

(7.29)

Firm size

−0.033***

−0.024***

0.001

(−8.46)

(−5.63)

(0.04)

Leverage

−0.004

0.011

−0.030

(−0.21)

(0.53)

(−1.35)

−0.078

−0.114*

0.039

(−1.48)

(−1.93)

(0.60)

Firm growth

−0.011**

−0.014**

−0.014**

(−2.01)

(−2.31)

(−2.24)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.041

0.045

0.042

F–statistic

20.20***

32.03***

39.00***

N

11,656

11,656

11,384

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. As some M&A in 2014 could not observe the long-term market performance of 36 months after the merger, the N of B H A R36 decreased to 11,384

272 Table 8.16 Social trust and long-term financial performance of M&A

8 Trust Mechanism and M&A Performance: Trust Mechanism … Variable

ΔROE t-1,t+1

Intercept

0.269*

0.132

0.054

(1.67)

(0.91)

(0.49)

Trust_Social

0.043***

0.050***

0.047***

(5.79)

(8.12)

(7.94)

Relative size

0.003**

0.002**

0.002*

(2.18)

(2.09)

(1.91)

Merger related

0.005

0.010**

0.011***

(0.97)

(2.45)

(2.81)

Merger pay

0.013

0.023**

0.051***

(1.16)

(2.44)

(5.37)

Merger type

−0.115***

−0.080**

−0.027*

(−2.71)

(−2.27)

(−1.82)

Underlying type

0.006

0.007*

0.003

(1.18)

(1.69)

(0.82)

0.035**

0.034***

0.014

(2.47)

(2.90)

(1.13)

Firm size

0.004**

0.005***

−0.004**

(2.10)

(2.77)

(−2.12)

Leverage

0.010

−0.019**

0.036***

(1.01)

(−2.29)

(4.49)

OCF

0.160***

0.185***

0.215***

(5.64)

(7.67)

(9.14)

Firm growth

−0.023***

−0.017***

−0.016***

(−7.75)

(−7.03)

(−6.73)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Adjusted R2

0.011

0.011

0.012

F–statistic

5.96***

8.18***

12.09***

N

11,656

11,656

10,218

Merger major

ΔROE t-2,t+2

ΔROE t-3,t+3

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance three years after M&A could not be observed, and N of R O E t−3,t+3 decreased to 10,218

8.6 Conclusion Table 8.17 Social trust and short-term market performance of M&A

273 Variable

CAR[−1, 1]

Intercept

0.096*

CAR[−2, 2]

CAR[−5, 5]

0.076

0.137

(1.79)

(1.14)

(1.37)

Blood

0.002***

0.004***

0.006***

(2.91)

(3.52)

(3.54)

Relative size

0.002***

0.002***

0.005***

(4.59)

(4.27)

(5.25)

Merger related

0.001

−0.001

0.003

(0.29)

(−0.18)

(0.81)

Merger pay

0.029***

0.030***

0.033***

(6.96)

(5.87)

(4.30)

Merger type

0.011

0.024

0.026

(0.70)

(1.27)

(0.91)

Underlying type

0.001

0.001

0.004

(0.27)

(0.18)

(1.35)

Merger major

0.029***

0.046***

0.065***

(5.72)

(7.24)

(6.83)

Firm size

−0.007***

−0.009***

−0.012***

(−9.67)

(−9.61)

(−8.61)

Leverage

0.017***

0.022***

0.038***

(4.98)

(5.20)

(5.93)

−0.020*

−0.019

−0.013

(−1.89)

(−1.47)

(−0.67)

Firm growth

0.002*

0.002*

0.004**

(1.93)

(1.76)

(2.12)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.056

0.056

0.053

F–statistic

14.00***

14.17***

13.27***

N

11,656

11,656

11,656

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value

8.6 Conclusion This book takes M&A transactions of China’s A-share listed companies listed from 1998 to 2014 as research objects. It analyzes whether the degree of social trust in the

274 Table 8.18 Social trust and long-term market performance of M&A

8 Trust Mechanism and M&A Performance: Trust Mechanism … Variable

BHAR12

BHAR24

BHAR36

Intercept

0.879***

−0.382

−0.811**

(2.91)

(−1.08)

(−2.07)

Blood

0.032***

0.062***

0.076***

(7.38)

(12.93)

(14.74)

Relative size

0.010***

0.006**

−0.001

(3.63)

(2.07)

(−0.06)

Merger related

−0.009

0.008

−0.002

(−0.96)

(0.74)

(−0.21)

Merger pay

−0.005

−0.039*

−0.068***

(−0.24)

(−1.66)

(−2.66)

Merger type

−0.171**

0.191**

0.142

(−2.15)

(2.21)

(1.60)

Underlying type

0.016*

−0.020**

−0.032***

(1.73)

(−2.00)

(−2.99)

Merger major

0.179***

0.243***

0.227***

(6.78)

(8.45)

(7.19)

Firm size

−0.037***

−0.031***

−0.008

(−9.28)

(−7.19)

(−1.64)

Leverage

0.009

0.039*

−0.001

(0.50)

(1.85)

(−0.01)

−0.070

−0.102*

0.057

(−1.32)

(−1.72)

(0.90)

Firm growth

−0.010*

−0.013**

−0.013**

(−1.89)

(−2.15)

(−2.05)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

OCF

Adjusted

R2

0.044

0.050

0.047

F–statistic

21.34***

35.60***

43.38***

N

11,656

11,656

11,384

Note: ***, **, and * were significant at the levels of 1%, 5% and 10%, respectively. Data in the table are the regression coefficients of each explanatory variable, and date in bracelets is the regression t value. As some M&A in 2014 could not observe the longterm market performance of 36 months after the merger, the N of B H A R36 decreased to 11,384

8.6 Conclusion Table 8.19 Social trust and long-term financial performance of M&A

275 Variable

ΔROE t-1,t+1

Intercept

0.340**

0.212

0.034

(2.10)

(1.47)

(0.51)

Blood

0.006**

0.006***

0.008***

(2.42)

(3.05)

(3.70)

Relative size

0.003**

0.002**

0.001**

(2.09)

(2.01)

(2.47)

Merger related

0.004

0.010**

0.010**

(0.89)

(2.35)

(2.24)

Merger pay

0.012

0.022**

0.051***

(1.04)

(2.27)

(4.84)

Merger type

−0.110***

−0.074**

−0.021

(−2.59)

(−2.09)

(−1.26)

Underlying type

0.006

0.007*

0.003

(1.14)

(1.65)

(0.74)

0.036**

0.036***

0.018

(2.57)

(3.03)

(1.26)

Firm size

0.005**

0.005***

−0.003

(2.13)

(2.88)

(−1.36)

Leverage

0.007

−0.023***

0.026***

(0.76)

(−2.71)

(2.94)

OCF

0.167***

0.192***

0.210***

(5.86)

(7.98)

(8.08)

Firm growth

0.340***

−0.017***

−0.018***

(2.10)

(−6.97)

(−6.63)

Year effect

Yes

Yes

Yes

Industry effect

Yes

Yes

Yes

Merger major

Adjusted

R2

ΔROE t-2,t+2

ΔROE t-3,t+3

0.010

0.009

0.010

F–statistic

5.35***

6.96***

10.26***

N

11,656

11,656

10,218

Note: ***, **, and * were significant at levels of 1%, 5% and 10%, respectively. Data in the table were regression coefficients of each explanatory variable, and data in bracelets were the regression t value. In M&A transactions in 2014, long-term financial performance three years after M&A could not be observed, and N of R O E t−3,t+3 decreased to 10,218

276

8 Trust Mechanism and M&A Performance: Trust Mechanism …

location of acquiring firms affect transaction behavior in M&A from the perspective of informal systems, and examines the mechanism of trust on corporate M&A performance from the perspective of agency selection and employment. The book finds that the higher the degree of social trust in the region where acquiring firms are located, the more likely it is to reduce opportunism and free-riding between transaction subjects through trust and reciprocity, urge both parties to be honest and trustworthy with each other, reduce uncertainty, and ultimately facilitate cooperation and improve value creation ability. Such impact is more pronounced in areas where private companies dominate M&A and local legal system is at a low level. This study further examines the mechanism by which informal institutions influence the ability of value creation between parties to M&A from the perspective of employment of intermediaries. Above research results show that in China’s capital market with emerging transition characteristics, social trust in the informal system can promote M&A performance. When the corporate environment is imperfect, the informal system can make up for the lack of formal systems and help M&A. Enterprises win trust and promote the protection of investors’ rights and interests, and enhance their ability to create value in mergers and acquisitions. In a nutshell, this book reveals the feasibility and importance of informal systems to help master merged companies reduce information asymmetry and transaction costs through regional trust levels, and create value for mergers and acquisitions. The research conclusions are not only useful for understanding mergers and acquisitions in my country’s capital market during the transitional economy. Provides a new perspective and enriches the research field of informal institutions. Findings of this book also have a certain reference value for actual M&A and restructuring of Chinese enterprises and the evaluation of corporate M&A by stakeholders. Although the short-term benefit effects of M&A are recognized by companies, in the long run, companies gain trust and create corporate value mainly by cultivating formal systems and conducting formal and informal systems. This is of great significance to the sustainable development of corporate M&A.

8.7 Rethinking SOEs’ Mixed Ownership-Oriented M&A Based on Social Trust Since the reform and opening up, China’s market-oriented reforms have been conducted for nearly 40 years. However, the issue of how SOEs become independent market participants has not been effectively resolved (Qi et al. 2017). Undoubtedly, the mixed-ownership economy, as a product that satisfies the requirements of various ownership economies to pursue complementary advantages, is a breakthrough in the reform of SOEs at current stage. For a long time, SOEs have been in an absolute monopoly position in important industries related to the national economy, people’s

8.7 Rethinking SOEs’ Mixed Ownership-Oriented M&A …

277

livelihood and the lifeline of the national economy. Their profits are often considered to mainly derive from “monopoly” advantages, but monopoly has restricted their innovative vitality, business model and management system. By conducting mixed ownership-oriented reform, SOEs can draw on the resource advantages of non-state capital in technology, business model, and operating mechanism to achieve mutual benefit, while non-state-owned capital can enter monopoly industries to increase their market competitiveness, market share, and enjoy the property rights advantages of SOEs in terms of technology, reputation, and political connections. SOEs’ primary motivation to carry out mixed reform is to improve the efficiency of allocation of different ownership, and secondary motivation is to improve corporate governance by introducing non-state shareholders and changing state-owned shareholders’ “dominant share”. As an effective way to optimize the allocation of existing resources and stimulate the vitality of enterprises, M&A is an important way for SOEs to promote mixed reform. For SOEs, reforms in the form of merging private enterprises will not only improve their competitiveness through strategic adjustments, but also allow them to adapt to market-oriented competition. For the development of the entire state-owned economy, mixed-ownership M&A of SOEs will further release the dividends of factor marketization, accelerate the capitalization of state-owned assets, and enhance the effectiveness of reforms of SOEs. SOEs implement mixed ownership-oriented reform through M&A, which theoretically has a positive impact on their future development. However, not a conclusion has been reached regarding whether mixed ownership-oriented M&A can truly create value for enterprises. The reason is that in addition to formal systems, the role of informal systems cannot be ignored. Compared with western developed countries, China’s formal institutional arrangements in terms of law and finance are relatively weak, but it has achieved rapid economic growth in the past few decades, which is inseparable from the important role of informal institutions (Allen et al. 2005). Therefore, in the process of mixed ownership-oriented M&A of SOEs, in addition to the incentives of formal systems, informal systems are also very important. Trust, as a basic informal system of the economy and society, is especially worthy of attention in this research. The book finds that trust mechanism affects M&A pricing and M&A performance. The higher social trust in the region where acquiring firms are located, the more M&A can create value for companies, which has important practical significance for SOEs’ mixed ownership-oriented M&A. Information asymmetry between parties to M&A reduces market operation efficiency and increase transaction costs. In mixed ownership-oriented M&A of SOEs, there is obviously information asymmetry in each link. When the information asymmetry is serious (for example, the target firm deliberately concealed some undisclosed potential debts that are difficult to investigate and verify before M&A), which may cause the M&A to fail. The effective transmission of M&A information can help parties to it gain trust. If SOEs and private enterprises do not trust each other in the process of M&A, transactions will require more protection and higher costs. Trust as a link in post merger integration can reduce the conflict between companies and promote mutual integration. Therefore, it can be expected that the higher the level of social trust in the location of SOEs,

278

8 Trust Mechanism and M&A Performance: Trust Mechanism …

the easier it is to carry out M&A transactions between SOEs and private enterprises. Both parties bear reduced cost of transactions through trust and reciprocity, improve the efficiency of other capital such as financial capital, reduce the uncertainty of transactions, promote the generation and completion of cooperation, and ultimately improve companies’ ability to create value after M&A. Mixed ownership is an effective way for both state-owned and private enterprises to achieve mutual benefits and win–win results. This book shows that social trust in informal systems plays an important role in the efficiency of M&A in China’s capital market during the transitional economy. This means while promoting strategic M&A of SOEs, if we blindly focus on formal systems and ignore informal systems, economic benefits that could have been achieved may be lost. Only by fully integrating informal systems with formal systems can mixed ownership -oriented M&A continue to inject new impetus into the reform of SOEs.

Chapter 9

A Case Study of Mixed Ownership-Oriented M&A and Innovation-Driven Development of Chinese SOEs

This chapter proposes a theoretical analysis framework based on the evolution path of open innovation to independent innovation capabilities brought about by M&A, the relationship between innovation capabilities and enterprise development, and the mechanism of mixed ownership systems for innovation-driven development. It studies the three M&A transactions of local SOE Grandblue Environment in Guangdong Province to explore the internal mechanism of mixed ownershiporiented M&A in promoting innovation-driven development. The result shows that the acquirer’s original innovation capabilities, the complementary knowledge of the acquirer and the target firm, and innovation environment are the prerequisites for companies to achieve innovation-driven development through M&A. Focusing on mixed ownership-oriented M&A based on the integration of existing resources, companies integrate capital and production factors, carry out post merger integration centering on innovation capabilities, thus effectively achieve value rediscovery and realization. In the context of China’s economic transformation and upgrading, SOEs use mixed ownership and innovation capabilities as “dual” motives for implementing M&A, thereby realizing innovation-driven development.

9.1 Research on Problems Embedded in the Background of China’s Economic Transformation and Upgrading In 2015, China’s GDP totaled CNY 67 trillion, a year-on-year increase of 6.9%, which was the lowest level since 1990. Under the “new normal” of economic development, SOEs are actively exploring the reform of existing resource reorganization and the path for realizing mixed ownership development. At the Third Plenary Session of the 18th CPC Central Committee, it was proposed to actively develop a mixed-ownership economy. At the Fifth Plenary Session of the 18th CPC Central Committee, it was emphasized that public ownership should be the mainstay and multiple ownership © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_9

279

280

9 A Case Study of Mixed Ownership-Oriented …

economies should co-exist for common development. Parties concerned should take the diversification of property rights as an opportunity to create corporate value and enhance the vitality, control, influence and risk resistance of the state-owned economy. However, judging from the practice of mixed ownership reform of SOEs, the black box of “it it difficult to create corporate value through M&A” has not been solved in mixed ownership-oriented M&A. How to achieve optimal ownership arrangements and release institutional dividends through post merger integration has become the focus of enterprise property rights reform (Sudarsanam et al. 1996; Kong et al. 2014). In recent years, technological M&A motivated by obtaining innovation capabilities have become an important means for companies to achieve leapfrog development. However, empirical evidence shows that in the integration of technological M&A, it is difficult for the acquirer and the target company to transfer core technologies to each other, or for companies to obtain and maintain sustained competitive advantages (Kallunki et al. 2009; Zhou et al. 2012). In the economic environment of optimizing economic structure and implementing “Made in China 2025”, SOEs deepen reforms through mixed ownership-oriented M&A to achieve innovation-driven development, and urgently need to achieve rediscovery and realization of corporate value (Li 2015). Embedded in the social scenario of China’s economic transformation and upgrading, with mixed ownership and innovation capabilities as the “dual” motivations for M&A, it is of great significance to explore the path and mechanism of creating corporate value via M&A (Hoskisson et al. 2002; Wu and Han 2011; Lu and Dang 2014). In general, research on mixed ownership-oriented M&A and independent innovation capabilities is still undergoing deepening of theoretical construction. First, existing literature does not distinguish between the introduction of non-state-owned strategic investors by SOEs for capital mixing, M&A of private enterprises with SOEs, and pricing in M&A through share-based payment, the introduction of strategic investors and non-state shareholders, and the realization of a mix of capital and production factors, which hinder research on the relationship between the independent innovation capability of enterprises and the mixed ownership system. From the perspective of China’s mixed ownership system, there are four forms to realize mixed ownership of enterprises, including property rights transfer, capital increase and share expansion, new enterprises and M&A. However, few documents clearly define and distinguish the connotations of these four types of mixed ownership enterprises. Most studies take corporate governance and property rights structure as main dimensions to examine the economic consequences of mixed ownership systems (Carvalho 2014; Cambini and Spiegel 2015; Tu and Liu 2010; Yang 2013). Secondly, there are relatively few studies on the evolution path of independent innovation capabilities of enterprises in the context of mixed-ownership M&A in existing literature (Chen et al. 2014). Research on M&A focuses on the relationship between motivation for technological merger and innovation performance (Bauer and Matzler 2014). There is little research on the development path of independent innovation capabilities of enterprises in the context of mixed ownership-oriented M&A (Chesbrough 2003; Chen et al. 2014) from the perspective of internal capability basis, and the characteristics of “mixed but not integrated” is not taken into consideration. China’s

9.1 Research on Problems Embedded in the Background …

281

SOEs carry out M&A and independent innovation in the context of economic transition, but there are few documents that discuss the role of the characteristics of mixed ownership system in the integration of M&A in the innovation-driven development from the perspective of external contingency, which limits their guiding role on the development of mixed ownership economy (Jiang et al. 2011). Therefore, discussing the development and cultivation mechanism of the independent innovation capability of Chinese SOEs in mixed ownership-oriented M&A will help design the release path of the mixed ownership system dividends in the micro-mechanism, and provide a new perspective for realizing innovation-driven development through mixed ownership-oriented M&A. Based on the above issues, this study intends to adopt a longitudinal case study method. It selects Grandblue Environment, a local SOE that has obtained independent innovation capabilities through mixed ownership-oriented M&A, as the research object, analyzes and summarizes the evolution path of its independent innovation capabilities in M&A transactions since its listing, and the promotion of the mixed ownership system to the creation of corporate value by M&A, which provides reference for Chinese SOEs to achieve innovation-driven development through mixed ownership-oriented M&A.

9.2 Literature Review 9.2.1 Corporate M&A and the Development of Independent Innovation Capabilities Joseph Schumpeter (1934) put forward the theory of innovation. Chinese scholar Fu (1998) defined the connotation of independent innovation from the perspective of enterprises. Enterprises achieve technological breakthroughs through their own exploration, and complete technological commercialization and achieve expected goals with their own efforts. Chesbrough (2003) found that innovation capabilities do not come entirely from within an enterprise. Ideas obtained through external channels can create value outside of existing businesses for the enterprise and form open innovation capabilities. Haspeslagh and Jemison (1991) first examined core competence theory in the context of corporate M&A. They believed that the primary motivation for M&A is to quickly acquire new technologies needed for corporate innovation, and that transfer of core competence was the main driving force for successful M&A (Szulanski 1996; Meyer et al. 2009; Acemoglu and Cao 2015). Yu and Wang (2008) found that based on the complementary knowledge of parties to M&A and the accumulation of knowledge of the target company, when the acquirer has the ability to integrate ideas from the target company, open innovation is transformed into independent innovation capability (Li et al. 2011; Luo et al. 2014). Existing literature divides enterprise independent innovation into secondary innovation, integrated innovation, and original innovation (Wu 2009). With the expansion of

282

9 A Case Study of Mixed Ownership-Oriented …

corporate organizational boundaries brought about by M&A, it is very important to take the path and process of transforming open innovation to independent innovation capability as a breakthrough and analyze the formation process of original innovation, integrated innovation and secondary innovation capability and the mechanism of innovation capability for M&A value creation in integration.

9.2.2 SOEs’ Reform and Mixed Ownership-Orientde M&A Shleifer and Vishny (1994), representatives of the property rights school, believe that the diversification of property rights structures is an important path for the reform of SOEs (Carvalho 2014). Early research suggests that SOEs transfer their equity to private enterprises and realize corporate privatization through transferring corporate control rights, thus increase corporate value (Boardman and Vining 1989). In the past ten years, research on mixed ownership has been carried out focusing on not changing the controlling position of state-owned shareholders (Wintoki et al. 2012; Chen et al. 2014). In research on the relationship between mixed ownership and corporate value, Tu and Liu (2010) believe the strength of the degree of equity checks and balances will cause significant differences in corporate value, that the effects of checks and balances of different types of shareholders are different, and that the relationship between ownership structure and corporate value is not linear (Yang 2013; Zhang et al. 2015). In theoretical research on property rights reform of existing resource reorganization, M&A and other ways to realize mixed ownership are distinguished. Focusing on the motivations of mixed ownership-oriented M&A, revealing the benefits of M&A following the research line of “M&A motivationintegration- economic consequences” help solve the problem of corporate value creation in mixed ownership reform (Masulis et al. 2007; Kong et al. 2014; Li 2014).

9.2.3 Mixed Ownership-Oriented M&A and Independent Innovation Capabilities of Enterprises Early institutional theories studied the change of the independent innovation capabilities of enterprises from the perspective of external contingency. According to this theoretical logic, changes in mixed ownership system are exogenous. If enterprises want to survive, they must adapt to institutional environment (Ambos and Schlegelmilch 2007). However, this theory has certain limitations in the research of corporate M&A. For companies with heterogeneous independent innovation capabilities carrying out mixed ownership-oriented M&A (Hoskisson et al. 2002; Zahra and George 2002; Keupp et al. 2012), is their motivation to achieve mixed ownership or innovation-driven development? Is most essential driving force for the evolution of independent innovation capabilities in corporate M&A companies’ active choice

9.2 Literature Review

283

or passive adaptation? This is not only a controversy over the focus of “choiceadaptation” in the field of strategic management (Hannan and Freeman 1984), but also a blind spot in the field of mixed ownership research (Pache and Santos 2013). Secondly, Van Den Bosch et al. (1999) believe that in the process of transferring external ideas to internal ideas, companies’ previous relevant knowledge does not affect their absorptive capacity. However, the difficulty in integration after conducting mixed ownership-oriented M&A is how to achieve balance in the interests of the stakeholders. When the generation and realization of expected benefits are based on the creation of corporate value through innovation, the focus of post merger integration will be more successful (Wu 2014; Li 2015). Therefore, in mixed ownershiporiented M&A, the evolution of independent innovation capabilities of enterprises is not individuals adapting to the environment randomly (Wu 2012; Xu et al. 2013). The original innovation capabilities and knowledge relevance of the acquirer and the target company directly affect the conversion effect of open innovation to independent innovation capability and is a key factor for the success of mixed ownershiporiented M&A. By embedding the motivation of innovation-capable M&A in the research of mixed ownership-oriented M&A and using sample companies to conduct objective observations, we can provide a more comprehensive and in-depth analysis of the mechanism of the mixed ownership system in promoting innovation-driven development.

9.2.4 Research Review and Gaps Although existing literature is helpful to understand the mechanism of evolution of enterprises’ independent innovation capabilities in mixed ownership-oriented M&A, there are still some research gaps. First of all, the path of transformation from open innovation to independent innovation capability in M&A needs to be refined. By examining the evolution of open innovation to original innovation, integrated innovation, and secondary innovation capability, the development path of independent innovation capability of enterprises in M&A is analyzed. Secondly, Chinese SOEs carry out mixed ownership-oriented M&A in the context of economic structural transformation and upgrading. The functioning mechanism and conditions of mixed-ownership system in the evolution of independent innovation capabilities of enterprises are unique. It is of important practical significance to combine external contingency with internal capabilities and carry out research on the interactive mechanism of “value creation via M&A” and “innovation-driven development” with mixed ownership and innovation capabilities as the double motivations for M&A. In summary, this research hopes to answer the following questions: (1) Can SOEs improve their independent innovation capabilities and innovation-driven development through M&A? (2) What is the mechanism of action of mixed ownership system for innovation-driven development in M&A activities?

284

9 A Case Study of Mixed Ownership-Oriented …

9.3 Research Design and Approach 9.3.1 Research Approach As an important research method in management science, case study helps obtain a comprehensive and overall view of issues through in-depth description and analysis, and answer “how” and “why” questions (Yin 1994; Xu et al. 2013; Xing et al. 2015). This study uses this method to explore the path of SOEs in developing independent innovation capabilities in M&A and the role of mixed ownership system in promoting innovation-driven development. Single case study is more suitable for studying typical cases than multiple cases study. In particular, longitudinal study of the same case based on a long-term process-oriented perspective is conducive to capturing new phenomena in management practice, and can often lead to new research conclusions based on old theoretical system (Eisenhardt 1989; Eisenhardt and Graebner 2007; Luo et al. 2014). This research mainly examines how open innovation in M&A evolves into independent innovation capabilities. It is a vertical case that focuses on the process and is a single case study.

9.3.2 Selection of Case Enterprise This book selects a local SOE in Guangdong Province, which have developed from a pure public welfare SOE in the water industry to a high-tech enterprise in the environmental protection industry, as the research base of this study. Since the reform and opening up, accelerated urbanization has provided a broad space for the rapid development of the urban water industry. However, due to the constraints of resource endowments, water companies need to launch transformation and upgrading. Stateowned water enterprises rely on the government to inject resources to improve their value creation capabilities, but at the same time enhance their independent innovation capabilities by developing a circular economy. In other words, due to the constraints of resource endowments, the water industry has always been practicing innovationdriven development, which provides a good research background for this study. With reference to the research of Mao and Li (2010), this book selects case company based on the following criteria. First, the company has carried out transformation and upgrading and independent innovation practices for a long time, has transformed from a pure public welfare enterprise to a high-tech enterprise, and pays income tax at a rate 15%, showing great decreases from previous 25%. Second, the company has experienced two kinds of corporate growth strategies: endogenous development and M&A. During endogenous development, it established original innovation capabilities. During M&A, it experienced the three stages: M&A did not improve independent innovation capabilities, innovation capabilities brought about by M&A failed to drive its sustainable development, it achieved innovation-driven development through M&A. Such a company is representative and typical in the

9.3 Research Design and Approach

285

transition economy. Following the spirit of the Third and Fifth Plenary Sessions of the 18th CPC Central Committee, this study conducted mixed ownership-oriented M&A in which the status of state-owned controlling shareholders remain unchanged, embedded elements of mixed ownership system in the vertical development of innovation capabilities, took mixed ownership and independent innovation capabilities as dual motivations for M&A, and examined the mechanism of mixed ownership in the integration of innovation capabilities. In longitudinal case studies, the book compared the similarities and differences between market mechanism-oriented and government behavior-oriented M&A strategies, and revealed the mechanism of mixed ownership system in innovation-driven development of SOEs. This book employs long-term longitudinal case study. The richer the previous related research and the more detailed the information, the more smoothly the research can proceed. Based on above criteria, Grandblue Environment was selected as the case enterprise. Grandblue Environment has developed from a purely public welfare local SOE to a market-competitive mixedownership enterprise, and from a water affairs enterprise to an environmental hightech enterprise. In exploring independent innovation capabilities, it transformed from relying on local government to inject resources carrying out mixed ownership M&A dominated by market mechanisms. The innovative resources and project expansion capabilities of its target firm complement its brand advantages and operational capabilities, forming a complete industry chain of solid waste treatment from source to end. Its financial performance improved, M&A was recognized by the capital market, and market performance increased by more than 200%. It is fair to say that Grandblue Environment as an excellent sample for this research. The author has twelve years of work experience in companies and capital market as a senior manager, and used to be the financial manager of the parent company of Grandblue Environment, having participated in many M&A transactions of Grandblue Environment and obtained a lot of first-hand information. Hedata. In 2014, the author resigned from the position of head of corporate finance and entered Guangdong University of Finance and Economics to engage in full-time teaching and research. Such adjustment ensures the standardized, in-depth and detailed development of this study.

9.3.3 Constructive Measurement 9.3.3.1

Measurement of Enterprise’s Independent Innovation Ability

Based on the nature of capability, independent innovation capability can be expressed as “high-level knowledge embedded in the process of independent innovation”, which runs through this longitudinal case study. In an environment of endogenous growth, independent innovation capability is divided into original innovation capability, integrated innovation capability and secondary innovation capability (Wu et al. 2009; Xu et al. 2013). Original innovation capability is characterized by internal R&D and independent design to form technological invention. Integrated innovation capability

286

9 A Case Study of Mixed Ownership-Oriented …

features connecting existing technological resources through organizational boundaries, integrating innovative elements and improving innovation efficiency. The core technology of secondary innovation comes from organizational boundaries. Enterprises develop imitative innovations and create new products on the basis of technology introduction through purchases and other methods. M&A brings about the expansion of corporate organizational boundaries. Based on the source of innovation, Rigby and Zook (2002) divided innovation capabilities into open innovation and independent innovation. When innovation results originate from the internalization of external creativity, it is an open innovation capability. When they originate from the continuous accumulation of internal original innovation activities, it is an independent innovation. M&A breaks the standard for classify traditional enterprise innovation capabilities. The acquirer and target company coexist within the new organizational boundary. Innovation activities within the organization have both external and internal characteristics. Both original innovation and integrated innovation activities may occur within the organization. This study combines the organizational boundary of endogenously growing companies and the organizational characteristics of M&A. In M&A, the impact of original innovation activities and open innovation activities on the independent innovation ability of enterprises are respectively measured. It aims to examine whether the continuous accumulation of original innovation activities has improved enterprises’ independent innovation capabilities, the path of evolution from open innovation activities to integrated innovation and secondary innovation activities, whether integrated innovation capabilities or secondary innovation capabilities are formed, and whether M&A improves enterprises’ independent innovation capabilities.

9.3.3.2

Measurement of Mixed Ownership-oriented M&A

Based on the perspective of existing resource reorganization-based property rights reform, mixed-ownership M&A is defined as integration of “capital + production factors”. Specifically, state-owned listed companies are the acquirers, non-SOEs are the target companies, and share-based payment is the main payment method for M&A transaction. Original shareholders of non-SOEs become new shareholders of SOEs as strategic investors. SOEs consolidate the control of state-owned shareholders by directive private placement, and build a mixed-ownership enterprise that has stateowned capital holdings, cross-holding of state-owned and non-state-owned capital, and integrates production factors of SOEs and non-SOEs.

9.3.3.3

Measurement of Enterprise Development

The core of corporate development capability is the growth rate of corporate value. Since this book mainly focuses on the impact of mixed ownership system and corporate independent innovation capabilities on value creation in M&A, according to the idea of Zhang (2003), measuring corporate development capabilities by corporate

9.3 Research Design and Approach

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value, the market value and book value of enterprises are combined to measure the development of enterprises. Market value is with event research method and shortterm market performance and long-term market performance brought about by M&A (Healy et al. 1992; Zhai et al. 2010). Book value is measured based on the thinking of the accounting research. Li et al. (2004) measured financial performance by the difference between operating income and return on net assets before and after M&A, and measured companies’ development ability and level from multiple dimensions by combining non-financial performance and financial performance.

9.3.4 Data Sources Using triangulation method proposed by Miles and Huberman (1994), the author conducted case study with data from different sources to supplement information and cross validate data (Mao and Zhang, 2008). First-hand information in this book mainly came from semi-structured interviews, informal interviews, and on-site observations, including: (1) 8 interviews with corporate executives; (2) 10 on-site inspections of solid waste treatment processes and exchanges with technical personnel; (3) 8 exchanges with state-owned controlling shareholders, non-state-owned strategic investors and enterprises’ ultimate controllers. Second-hand materials are mainly literature materials and archive records, including: (1) direct corporate materials like leaders’ speeches, internal management systems and manuals; (2) announcements and media evaluation about strategic activities such as corporate M&A obtained from companies and Wind database; (3) related articles on academic journals.

9.3.5 Data Analysis This research analyzes above data and makes repeated effective inferences on them. Through rethinking and discussing the evolution of independent innovation capabilities in M&A presented in original data and second-hand data, the influence of mixed ownership systems on innovation-driven development, and the relationship between existing M&A and innovation capabilities and the theory of mixed ownership systems, generalizable research conclusions were drawn following iterative nonlinear paths (Eisenhardt and Graebner 2007). First of all, as this research examines the evolution path of SOEs’ independent innovation capabilities in M&A, the relationship between innovation and enterprise development, and the influence of mixed ownership systems on innovation-driven development, longitudinal timing perspective was employed. The development of Grandblue Environment since listing was divided into three stages by iconic M&A events, “formation and accumulation of original innovation capabilities” from 2001

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to 2011, “evolution from open innovation capabilities to secondary innovation capabilities” from 2012 to 2013, and “evolution from open innovation capabilities and integrated innovation capabilities + mixed ownership reform” from 2013 to 2015. Secondly, based on analysis of the theoretical framework, evolution path of independent innovation capabilities in the first two M&A events and the relationship between innovation and enterprise development, the influence of mixed ownership system in the last M&A event on the evolution path of independent innovation capabilities and the relationship between enterprise development and innovation was analyze, with a focus on the relative changes of comparison constructs in different M&A events. Therefore, based on the measurement of constructs, this study describes changes in constructs and analyzes the theoretical connotation of the constructs. Finally, this study integrates previous results, analyzes, summarizes, and explores the key factors and internal mechanisms of innovation-driven development along the time axis of the three M&A events. It examines the characteristics of corporate innovation activities in different M&A events and changes in the evolution path of innovation capabilities when mixed ownership is embedded, and checks how these changes promote further corporate development. Data and theory are converted back and forth, and finally tend to converge (Xing et al. 2015).

9.4 Case Analysis 9.4.1 Formation of Original Innovation Capabilities and Accumulation of Independent Innovation Capabilities in M&A Grandblue Environment was established in December 1992 by targeted fund raising. In November 1999, Water Supply Group Co., Ltd. under the jurisdiction of Public Assets Management Committee of Nanhai District, Foshan City acquired 76.09 million legal person shares by assuming debts and became the controlling shareholder of Grandblue Environment. Grandblue Environment’s business is production and supply of tap water. In December 2000, the company publicly issued CNY 65 million common stocks to the public at an issue price of CNY 6.68, and was listed on Shanghai Stock Exchange. As a public welfare water supply company, Grandblue Environment has been exploring and practicing transformation and upgrading since its listing, and has achieved innovation-driven development. In April 2006, it jointly established Foshan Nanhai Green Renewable Energy Co., Ltd. (hereinafter referred to as “Green Renewable Energy”) with Lianda under Public Assets Management Committee of Nanhai District. Green Renewable Energy mainly operates solid waste treatment business focusing on power generation by waste incineration in Nanhai District. 70% of its shares are held by Grandblue Environment, which is mainly responsible for the implementation of its independently developed technologies. In 2010, the

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company had a daily processing capacity of 1,500 tons of domestic waste, 4,000 tons of daily transfer of domestic waste, and 300 tons of sludge treatment. It has passed ISO9001\ISO14001\OHSAS18001\SA8000 international quality, environment, occupational health and safety and social responsibility system certification, and became national “AAA-level harmless incineration plant”, “Municipal Public Utility Technology Demonstration Project” of the Ministry of Housing and Urban–Rural Development, and Guangdong environmental education base. In 2010, Grandblue Environment was recognized as a high-tech enterprise in Guangdong Province because of its improved independent innovation abilities. However, it only achieved CNY 23.15 million of operating income from solid waste treatment business that year. As the proportion of high-tech service income mainly based on solid waste treatment did not reach 60% of its total income of the year, it could not enjoy the 15% preferential income tax rate that year. To further develop solid waste treatment business, expand the scale to increase profits, and strengthen the control of controlling shareholders, the company issued an asset acquisition and related transaction announcement on September 9, 2011, and purchased the 30% stake of Lianda in Green Renewable Energy at CNY 240 million, achieving a M&A premium rate of 87.64%. In the two window periods before and after the first day of announcing M&A, the M&A failed to achieve good market performance. During [−1, 1] window period, the cumulative value of excess return on stocks with the same risk was −0.6512%. The CAR of [−15, 10], a longer window period, was −4.2212%. As of December 31, 2012, Grandblue Environment’s stock price was only CNY 6.52 per share, which was lower than its listing price. In terms of innovation performance, the company increased investment in R&D after the merger, and obtained 9 national patents one year after that. As for financial performance, improved innovation capabilities brought better financial performance due to Green Renewable Energy’s business income. At the year of the merger, Grandblue Environment enjoyed a 15% income tax rate. One year after the merger, Green Power Company achieved CNY 106 million of revenue from solid waste treatment, with 53.53% of gross profit margin. Two years after the merger, its business income increased to CNY 302 million. One year after the merger, its ROE reached 10.64%. After paying CNY 240 million of M&A transaction, its ROE increased by 1.10 percentage points year-on-year. In the course of establishing Green Renewable Energy, Grandblue Environment formed original innovation capabilities. After the merger, Green Renewable Energy became a wholly-owned subsidiary of Grandblue Environment. With the change of the role of shareholders, Grandblue Environment has transformed from guiding Green Renewable Energy to conduct independent R&D on solid waste treatment to carrying out corporate governance and resource integration for the wholly-owned subsidiary. Focusing on the strategic positioning of “a nationally influential systematic environmental investor and operator”, the company increased its investment in innovation and improved its independent innovation capabilities. Post-merger R&D expenditures were mainly used for waste treatment, waste operation, sludge treatment, development and promotion of food waste treatment and waste infiltration treatment, technological transformation and innovation, operation management

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information and automation. One year after the merger, Grandblue Environment developed China’s first garbage recycling industrial park that integrates waste incineration and treatment, sludge treatment, and kitchen waste treatment. It launched intensive information-based management featuring unified planning, unified configuration, unified scheduling, and unified treatment, having promotes its intensive growth. One year after the merger, Green Renewable Energy won 9 national patents, was named “2012 China’s Most Socially Responsible Enterprise in the Solid Waste Industry”, and was awarded “Award for Greatest Potential for Growth” at the 5th World Economic and Environmental Conference”, “Best Operation Award” for top 30 environmental sanitation enterprises in South Guangdong. In the same year, it passed QMS, EMS and OHSAS international certification. Its waste incineration power plant was rated as the top AAA grade harmless waste incineration plant in Guangdong. Under the background of corporate transformation and upgrading, Grandblue Environment sought promotion of innovation capabilities and merged Green Renewable Energy as its wholly-owned subsidiary. In post merger integration, it supported the development of the target firm through resource sharing and other methods, produce synergies in innovation activities, and witnessed improved innovation performance. At the same time, both parties to M&A improved their original innovation capabilities, and produced synergistic effects in corporate resources, knowledge and capabilities. Synergies M&A have effectively resolved negative effects of 87.64% merger premium on corporate financial performance. The financial performance of enterprises improved after M&A. However, M&A did not bring good market performance. Analyzing from its nature, related M&A, intra-regional M&A, and the use of cash as payment method may affect the confidence of investors in the secondary stock market and become main factors that impair the performance of M&A market. Therefore, enterprises’ motivation of M&A is improving independent innovation capabilities. However, M&A between local SOEs led by local governments cannot fully realize innovation-driven development of enterprises, and SOEs’ independent innovation capabilities fail to promote the increase of corporate market value.

9.4.2 Evolution from Government-Led M&A and Open Innovation to Secondary Innovation Capabilities Grandblue Environment is the only A-share listed local SOE under the jurisdiction of Nanhai District. In addition to exploring independent innovation, it actively guides the M&A of high-quality state-owned resources, and intends to enhance its sustainable development capabilities by extension. Following this strategic idea, it acquired another company Foshan Nanhai Gas Development Co., Ltd. (referred to as “Gas Development”), a high-quality SOE in Nanhai District. Gas Development, established in February 1995, is the only gas company engaged in urban pipeline gas supply in Nanhai District, Foshan. It is a Sino-foreign joint

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venture, 75% of its equity was held by SOE Foshan Gas Co., Ltd. (hereinafter referred to as “Foshan Gas”) and 25% by GOOD TRADE LIMITED in British Virgin Islands. Its business involves the supply of pipeline liquefied petroleum gas, pipeline natural gas and liquefied petroleum gas and related supporting businesses, technical consultation and information services on gas engineering. As of June 30, 2011, Gas Development had CNY 308.18 million book value of net assets. From 2008 to 2010, the company developed rapidly and had strong profitability. Its sales revenue rose from CNY 646 million in 2008 to CNY 774 million in 2010, and annual net profit rose from CNY 41.03 million to approximately CNY 95.9 million. According to forecast in 2010, in the next three years from 2010, its average annual total revenue is expected to exceed CNY 1 billion, and annual net profit exceed CNY 100 million. In accordance with the strategic goal of innovation-driven development, Grandblue Environment acquired Gas Development, whose good profitability and cash flow provide financial support for Grandblue Environment and enhance its financing capacity, and enhance corporate independence through secondary innovations such as technology introduction. Therefore, under the leadership of the local government, Grandblue Environment obtained control of Gas Development through one merger and one capital increase. On January 11, 2012, Grandblue Environment issued an announcement to accept 25% of the equity of Gas Development transferred by GOOD TRADE LIMITED. The M&A transaction was priced at CNY 270 million. Grandblue Environment payed it in cash and witnessed a M&A premium of 246.81%. On March 15, 2012, approved by Public Assets Management Committee of Nanhai District, 1/2 of the 75% equity of Gas Development held by Foshan Gas was transferred to Foshan Nanhai Urban Construction Investment Co., Ltd. (hereinafter referred to as “Nanhai Urban Construction Investment”) for free. At the third shareholder meeting of Gas Development held on June 6, 2013, it was resolved that Grandblue Environment invest CNY 220 million in currency to unilaterally increase capital and shares in Gas Development. After that, the equity structure of Gas Development is: 40% held by Grandblue Environment, 30% by Foshan Gas, and 30% by Nanhai Urban Construction Investment. Grandblue Environment became the largest shareholder of Gas Development and achieved relative holding. According to the Strategic Development Agreement signed by Grandblue Environment and Public Assets Management Committee of Nanhai District, Grandblue Environment has obtained the control of Gas Development through M&A and capital increase. Both companies are under the control of Public Assets Management Committee of Nanhai District. Grandblue Environment’s merging Gas Development reflected the local government’s intention to integrate high-quality assets. After the merger, Gas Development brought huge profits and cash flow to Grandblue Environment, and achieved good financial synergy. In 2014, Grandblue Environment incorporated the assets, liabilities and profits and losses of Gas Development, and retrospectively adjusted consolidated financial data for 2013 and 2012. It achieved CNY 2.435 billion of operating income, an increase of 143.18% year-on-year. The main reason is that its main business covered gas supply, which achieved CNY

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1.26 billion of operating income, accounting for more than half of its total operating income. Grandblue Environment embraced CNY 467 million of total profit, an increase of 69.02% year-on-year. The net profit attributable to the parent company was CNY 351 million, a year-on-year rise of 49.73%. However, in the two window periods before and after the first day of announcing the merger, M&A failed to produce good market performance, where CAR at [−1, 1] and [−15, 10] were − 1.7451% and −5.6669%, respectively. In terms of innovation performance, Grandblue Environment did not form core competitiveness in independent innovation capabilities by merging Gas Development. In the year of the merger, the company failed to pass high-tech enterprise review, and no longer possessed the qualifications as a high-tech enterprise, which brought great negative impact on its implementation of “innovation-driven development” strategy. In the process of acquiring Gas Development, Grandblue Environment obtained high-quality assets through local government support, and witnessed improved financial performance thanks to the profitability and cash flow of Gas Development. However, this merger has brought a negative impact on the continuous improvement of its independent innovation capabilities. Although synergistic effects have been formed in financial resources, the price of M&A transactions was high. Grandblue Environment achieved relative holding of Gas Development by payment in cash and cash capital increase, whose cash expenditures totaled CNY 490 million. It received GOOD TRADE LIMITED’s 25% equity of Gas Development and witnessed 246.81% of M&A premium. This led Grandblue Environment’s insufficient investment in the innovation of Green Renewable Energy, and hindered the company’s continuous accumulation of original innovation capabilities. Grandblue Environment merged Gas Development under the motivation of enhancing its independent innovation capability, but excessive transaction costs made it difficult for open innovation formed by M&A to transform into secondary innovation capabilities, and insufficient financial resources lead to insufficient investment in innovation. R&D expenditures accounted for 2.21% of its operating income in the year of merger, which fell to only 1.69% one year later, being lower than the standard of certificating high-tech enterprise, i.e., 3%. This became the main reason for Grandblue Environment’s failure to pass high-tech enterprise review. At the same time, Green Renewable Energy conducted original innovation, but had limited contribution of innovation capabilities. In 2011 and 2012, its business revenue accounted for 26.02 and 31.16% of Grandblue Environment’s total business revenue, and it was incorporated into Grandblue with the development of gas. As Gas Development was incorporated into Grandblue Environment’s financial statements, the proportion was lower. Therefore, the M&A did not bring good market performance. From the perspective of the nature of parties to it, the acquirer and target company belong to different industries, making it difficult for M&A to achieve technological synergy, and for open innovation to evolve to secondary innovation capabilities. Besides, related M&A in the same region is not recognized by the capital market. Enterprise value is composed of market value and book value. Non-related M&A between local SOEs led by local governments have not improved enterprises’ independent innovation ability. Although it increases

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their book value, it cannot increase their market value and enable them to achieve innovation-driven development.

9.4.3 The Evolution of Mixed Ownership-Oriented M&A and Open Innovation to Integrated Innovation Capabilities Although Grandblue Environment had greater scale and profitability after merging Gas Development, it did not embrace stronger independent innovation capabilities. M&A and reorganization of high-quality state-owned resources lead by local governments hardly enable enterprises to achieve innovation-driven development. Therefore, it began to explore M&A and reorganization strategies designed to improve independent innovation capabilities and rationally allocate resources through market mechanisms. Following this strategic idea, it acquired C&G Environmental Protection (China) Co. Ltd. (hereinafter referred to as “C&G China”), and realized mixed ownership reform. C&G China, founded in 2004, is a wholly-owned subsidiary of C&G Environmental Protection (Hong Kong) Co. Ltd. (hereinafter referred to as “C&G Hong Kong”, registered in Hong Kong, China). Headquartered in Xiamen, China, it now mainly invests in the construction and operation of solid waste comprehensive treatment projects including domestic waste, kitchen waste, and sludge through BOT, BOO, BT, etc. Currently, it has 11 waste-to-energy environmental protection projects in Fujian, Hubei, Hebei, Liaoning and other provinces of China. Its total scale of garbage disposal exceeds 10,000 tons. According to the “2012 Ranking of Waste Treatment Enterprise” compiled by the Environmental Chamber of Commerce of the All-China Federation of Industry and Commerce, it ranked among the top ten. For a long time, C&G China has invested in technology research and development. It owns independently developed core technologies in the key links of waste treatment and sludge treatment. Its waste incineration waste heat boiler, waste incineration heat recovery device, and flue gas purification process have been authorized as China’s proprietary technology. Its waste incineration heat boiler has also been selected into national key environmental protection practical technology list. As of 2012, its total assets stood at CNY 3.545 billion and net assets at CNY 1.161 billion. On October 17, 2013, Grandblue Environment issued an announcement on major asset reorganization for the first time. In December 2013, it issued a transaction plan for issuing shares and paying cash to purchase assets. The estimated value of 100% equity of C&G China was CNY 1.85 billion, and the estimated value appreciation was CNY 560 million, showing an appreciation rate of 43.40%. Grandblue Environment issued 135.97 million shares to C&G Hong Kong at a consideration of CNY 8.34 per share, and completed a mixed-ownership merger of C&G China. The M&A transaction was paid with “shares + cash”. C&G Hong Kong became the second

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largest shareholder of Grandblue Environment as a strategic investor, and realized a hybrid of “capital + production factors”. In terms of market performance, during the two window periods before and after the first day of announcing the merger, CAR at [−1, 1] and [−15, 10] were 1.7551% and 31.7101%, respectively. By the end of 2015, the stock price of Grandblue Environment exceeded CNY 16.05 per share. In terms of financial performance, Grandblue Environment incorporated C&G China’s assets, liabilities, profits and losses in 2015, and achieved an operating income of CNY 3.357 billion, a year-on-year increase of 37.85%, of which income from solid waste business was CNY 1.02 billion, a year-on-year increase of 165.32%. It realized a profit of CNY 403 million, a year-on-year increase of 30.51%, of which net profit from solid waste treatment was CNY 223 million, a rise of 55.65%. The proportion of net profit increased from 19.36% to 55.41%. As for innovation performance, after acquiring C&A China, Grandblue Environment continued to increase investment in R&D. One year after that, it spent CNY 26.6 million in R&D expenditures, an increase of 57.14% yearon-year. Two years after that, its R&D expenditures reached CNY 38.6 million, a rise of 45.09%. R&D expenditures were mainly used to enhance the independent innovation capability of Green Renewable Energy. One year after the merger, Green Renewable Energy passed high-tech enterprise review and enjoyed corresponding preferential policies for three years. With the successful acquisition of C&G China, Grandblue Environment expanded solid waste treatment business to many provinces and cities nationwide. Its capacity of waste incineration power generation increased from 3,000 tons/day to 14,350 tons/day, and business scale increased by nearly four times. One year after the merger, it was listed in the Recommended Enterprises for Domestic Waste Incineration Projects in Guangdong Province (the First Batch) and ranked first in the list. After the merger, Grandblue Environment was rated as one of the top ten influential companies in China’s solid waste treatment industry for two consecutive years. While acquiring C&G China, Grandblue Environment achieved innovation-driven development based on its independent innovation capabilities, “dual M&A motivations”, and rational allocation of resources through market mechanism. It created C&G China to improve its independent innovation capabilities, and transformed its open innovation capabilities into integrated innovation capabilities. However, the improvement of innovation capabilities after integration did not happen overnight. Mixed ownership institutional arrangements had a positive impact on the formation of innovation mechanism and the improvement of innovation performance. Based on mixed ownership institutional arrangements, target company C&G China faced a M&A premium of 43.40%, which was lower than average level in the industry and has reduced the negative impact of transaction costs on value creation. In post merger integration, state-owned controlling shareholders and corporate management dominated by non-state-owned strategic investors determined the strategic positioning of Grandblue Environment as a “leader of integrated environmental services”. Grandblue Environment strengthened the philosophy of “responsibility, integrity, cooperation, and innovation” in corporate governance, integrated the resources of itself (SOE)

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and target firm (non-SOE), focused financial resources on the cultivation of independent innovation capabilities. It increased investment in R&D expenditures on the one hand, and changed its strategic positioning on the other hand. In the high-tech enterprise review in 2014, it applied to be identified as a high-tech enterprise in the name of C&G China instead of Grandblue Environment. Taking Green Renewable Energy and C&G China as engines for innovation-driven development, it drove the evolution of open innovation capabilities brought about by M&A to integrated innovation capabilities and improved innovation performance. Under the new strategic positioning, it spent CNY 2 billion in 2016 for independent innovation capability building. Facing financing constraints, the strong financial resources of Gas Development, another subsidiary of Grandblue Environment, improved Grandblue Environment’s financing capabilities and supported its innovation and development. Under mixed ownership institutional arrangement, Grandblue Environment acquired Gas Development under the leadership of the local government in 2012, having realized the evolution from open innovation capabilities to secondary innovation capabilities, which was the essential motivation for M&A. At the same time, in response to common problems in mixed-ownership M&A such as “mixed but not integrated” and lack of trust, corporate governance and management carried out M&A oriented towards improvement its independent innovation capabilities. In the evolution from open innovation to independent innovation, SOEs established a trust mechanism. State-owned controlling shareholders and non-state-owned strategic investors achieved a balance of interests based on improved corporate innovation capabilities. One year after the merger, the market value and book asset value of Grandblue Environment both exceeded CNY 10 billion. This merger brought about good market performance and financial performance. In terms of the nature of parties to M&A, the acquiring firm and the target firm belong to the same industry. They realized the evolution of open innovation to integrated innovation capabilities, improved their independent innovation capabilities via technological M&A, realized cross-regional expansion through nonrelated M&A in different places. Mixed ownership institutional arrangement reduced transaction and integration costs in M&A, guided capital and production factors to focus on independent innovation, and drove the increase of corporate book value and market value, thus achieving the strategic goal of innovation-driven development.

9.5 Case Analysis and Discussion 9.5.1 Prerequisites for Realizing Innovation-Driven Development Through M&A In M&A, there are three evolutionary paths for independent innovation capabilities of enterprises: form and accumulate original innovation capabilities solely by themselves; carry out secondary innovation through the purchase and introduction of technologies based on financial synergy brought by M&A, thereby improve independent

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innovation capabilities; improve independent innovation capabilities through integrated innovation with the core capabilities of parties to M&A, the latter two of which are the paths for transforming open innovation capabilities to independent innovation capabilities. In the first time, Grandblue Environment acquired Green Renewable Energy with its original innovation capabilities. As a local SOE, it had limited original innovation capabilities. Although innovation capability is an important factor in business and profit growth, innovation output accounted for a low proportion of its overall business income and profit. The capital market was not very responsive to M&A featuring related M&A, mergers in the same region, and cash payment that took accumulation of original innovation capabilities as motivation. Grandblue Environment did not achieve breakthrough growth from improvement of innovation capabilities, and hardly realized innovation-driven development. In the second time, it merged Gas Development and achieved financial synergy. The acquisition brought financial and capital resources for it. Grandblue Environment used its capital advantages to introduce technologies, transform equipment, and introduce new technology production lines to improve independent innovation abilities through secondary innovation. However, the essence of ability is a kind of advanced knowledge (Xu et al. 2013). Technologies introduced with funds are mechanical. Grandblue Environment does not have the ability to transform core knowledge on a large scale. Besides, obtaining control of the target company with high M&A premium and cash payment restricted its ability to invest in innovation. Open innovation is difficult to evolve into a secondary innovation ability. M&A improved its financial performance, but failed to improve its independent innovation ability and innovation performance. The main driving factor for the improvement of corporate financial performance is not the ability of independent innovation. Non-related M&A between local SOEs led by local governments was not responded to by the capital market, and enterprises have failed to achieve innovation-driven development. In the third time, Grandblue Environment merged C&G China. It had original innovation capabilities in the beginning. Its wholly-owned subsidiary Green Renewable Energy mainly operates solid waste treatment business based on waste incineration power generation in Nanhai District. On this basis, Grandblue Environment enhanced its independent innovation capabilities by carrying out technological M&A. The target firm C&G China’s original innovation capabilities were greater than that of the acquirer Grandblue Environment. It has an average daily waste treatment capacity of 11,350 tons/day, holds more than ten waste-to-energy environmental protection projects across China, has a number of patents in the key links of sludge treatment, and has obtained the “Class A Operation Qualification of Domestic Waste Treatment Facilities” issued by China’s Ministry of Ecology and Environment, being technology-leading urban solid waste operator. Through integrated innovation, Grandblue Environment “owned” instead of “could only use” technological resources. With innovation as the engine of development, it organically integrates short-term and long-term goals and continuously invested in innovation. This also promoted the transformation of the open innovation formed by the second M&A to secondary innovation capabilities. The second M&A produced financial synergy under the conditions of successful integration in the third M&A. Open innovation evolved into the independent innovation capability

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of the enterprise through integrated innovation, and the improvement of independent innovation capability promotes the evolution of open innovation into the independent innovation capability of the enterprise through secondary innovation, and the independent innovation capability continues to improve. Grandblue Environment applied for recognition as a high-tech enterprise in the name of the group company in 2010, but did not pass review in 2012. Then it applied for review in the name of subsidiary Green Renewable Energy in 2014, which was recognized as a high-tech enterprise recognition. This reflected how Grandblue Environment achieved the strategic goal of “innovation-driven development” through three M&A transactions. By acquiring C&G China, Grandblue Environment not only improved its independent innovation capabilities and innovation performance, but also realized significant growth in business, operating income and net profit in remote locations, and improved financial performance. Besides, this remotely unrelated correlation technological M&A was responded to by the capital market, produced good long- and short-term market performance, increased Grandblue Environment’s market value, and helped it achieve innovation-driven development. In the practice of innovation-driven development, in addition to improving independent technological innovation capabilities, Grandblue Environment was driven by operation management, capital market signal release and corporate culture construction. In November 2013, its name was changed from Nanhai Development Co., Ltd. to Grandblue Environment Co., Ltd., which not only represented its fundamental shift in strategic positioning from a traditional water enterprise to a “leader in comprehensive environmental services”, but also delivered a positive signal of innovation-driven development to the capital market. The company established and cultivated the core culture of “good urban housekeeper, good industry model, and good neighbor”. It was awarded the Top Ten Influential Enterprises in China’s Solid Waste Industry in 2014 and 2015, which fully reflected industry and stakeholders’ comprehensive recognition of the company’s market capabilities, investment and financing capabilities, social responsibility, brand capabilities, entrepreneurs and teams, and management capabilities. Its general manager Ms. Jin Duo has planned the transformation from single water supply to the environmental protection in 2005, personally led the company to cultivate original innovation capabilities, established Green Renewable Energy, and developed it into one of China’ five AAA-level harmless wastes incineration power plants. She designed and led the acquisition of C&G China in 2013, and converted open innovation in M&A into independent innovation capabilities through integrated innovation. In June 2014, Grandblue Environment revised its articles of association, and changed its legal representative from its chairman to its general manager. The language, behavior and thought of the innovative new legal representative led the company to establish and strengthen innovative values (Wang, 2014; Wang and Kan, 2014). At the end of 2015, Grandblue Environment signed a strategic cooperation agreement with Germany’s largest and world-leading environmental service company Remondis Industrial Services International Co., Ltd. The two companies jointly developed hazardous waste resource regeneration and terminal treatment business in Foshan and other regions with their respective advantages. In 2016, their investment in innovation amounted to CNY 2 billion. This shows that

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Grandblue Environment has completed the merger and integration of C&G China. On the basis of completing the transformation of open innovation to integrated innovation capabilities brought about by M&A, open innovation will transform to secondary innovation capabilities, and enterprise innovation-driven development will embrace a new starting point. Based on the case of Grandblue Environment which merged C&A China and realized innovation-driven development, this research can draw a more general proposition, that is, open innovation based on M&A may have a positive impact on improving enterprises’ independent innovation capabilities, and that independent innovation capabilities may promote the improvement of corporate development capabilities, the conditions for which are: (1) The acquirer has formed original innovation capabilities before the merger and has the basic conditions for absorbing open innovation capabilities. (2) The acquirer and the target company’s knowledge complement each other. The original innovation capability and knowledge accumulation of the target company are greater than that of the acquirer. The acquirers’ motivation for M&A is to improve independent innovation. Through integrated innovation, open innovation can be transformed into independent innovation. (3) After acquirers complete the evolution from open innovation to integrated innovation capabilities, the open innovation brought about by M&A will evolve to secondary innovation capabilities, and companies’ independent innovation capabilities will continue to improve. (4) Acquirers’ organizational environment and core culture enable them to integrate the original innovation capabilities of target firms. Their original innovation ability, the complementary knowledge of the acquirer and the target company, and the innovation environment are the prerequisites for urging enterprises to achieve innovation-driven development through M&A.

9.5.2 Positive Impacts of Mixed Ownership-Oriented M&A on Realizing Innovation-Driven Development Grandblue Environment has been exploring and practicing how to cultivate and enhance independent innovation capabilities and realize innovation-driven development since its listing in 2001. However, it has been conservative in capital operations such as equity financing and equity structure reform. During the ten years of listing from 2001 to 2011, the company’s total share capital remained at 270 million shares. The total share capital in the A-share main board market was relatively small, and its controlling shareholder was Water Supply Group under Public Assets Management Committee of Nanhai District, which only held 28.24% of its equity. Its stock issuance price is CNY 6.68 per share, which has basically maintained unchanged during the ten years. Even after it acquired Green Renewable Energy and Gas Development from 2011 to 2012, its stock price did not exceed CNY 7 per share. The development of an enterprise comes from its ability to create value. The market value of Grandblue Environment was relatively small. By only relying on self-cultivation of

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original innovation capabilities and local government-led state-owned high-quality asset M&A to carry out secondary innovation, it is difficult to make independent innovation capabilities its core competitiveness, achieve innovation-driven development, or cannot improve its valuation by the capital market. Grandblue Environment acquired C&G China, with share-based payment as the main payment method. It introduced non-state-owned strategic investors to carry out mixed-ownership reform. At capital level, it gave full play to the policies and resource advantages of state-owned controlling shareholders of Guangdong Nanhai Holdings Investment Co., Ltd. (“Nanhai Holdings”) and the entrepreneurial and innovative spirit of non-state strategic investor C&G Hong Kong, strengthened innovation and honest management in corporate governance, built an equity check-andbalance mechanism designed to enhance independent innovation capabilities, and strove to achieve innovation-driven development. At the level of production factors, Green Renewable Energy, a wholly-owned subsidiary of Grandblue Environment, established “Nanhai Solid Waste Treatment and Environmental Protection Industrial Park”, and runs it with intensive treatment model in the entire solid waste treatment industry chain and leading technology and operational management. The industrial park become a benchmark and model for China’s solid waste treatment industry, and has formed the “Nanhai Model” in solve the problem of urban garbage siege. However, as Green Renewable Energy is a wholly-owned subsidiary of a local SOE, it faced problems that restrict its development such as a small capacity of garbage disposal, limited business scope in Nanhai District, and lack of advanced technology in key links of waste and sludge treatment. Target firm, non-SOE C&G China, had a total waste treatment capacity of over 10,000 tons/day, owned a number of patents in key links of waste and sludge treatment, obtained BOT franchise of municipal solid waste incineration power generation projects, cooperated with the local government of where projects are located, and invested, constructed, operated and delivered municipal solid waste incineration power generation projects. However, since C&G China is a non-SOE, whose operating mode is to establish a project company and cooperate with local government, it only obtained BOT franchise right to carry out solid waste treatment, did not form an intensive treatment model for the entire industry chain, and had low profitability or cash flow. In post merger integration, the acquirer and the target company integrated their existing resources, mutually transferred core competitiveness through integrated innovation, achieved complementation of advantages, and enhance their independent innovation capabilities. Currently, Grandblue Environment has a total garbage processing scale of 14,300 tons per day. Having broken through regional restrictions, it copies the “Nanhai Model” of Green Renewable Energy in different places, realizes integrated and intensive treatment of solid waste, and embrace improved corporate financial performance. In the capital market, investors expect that reform can improve corporate governance efficiency. By integrating the existing resources of SOEs and non-SOEs, they improved resource allocation, and concentrated capital and production factors in developing independent innovation capabilities. This mixed ownership-oriented M&A created synergies in corporate innovation. After the signal of mixed-ownership M&A was released, the stock price of Grandblue Environment exceeded CNY 13 per share,

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and its market value doubled. In post merger integration, based on sound mixed ownership institutional arrangements, parties to M&A realized mutual transfer of core capabilities. Their open innovation was transformed into independent innovation capabilities through integrated innovation. Post merger integration achieved good results. In the operating revenue ranking of listed environmental protection companies announced in 2015, Grandblue Environment was the only Guangdong state-owned holding company among the top 20. As of the end of 2015, its total share capital reached 766 million, stock price surpasses CNY 16 per share, and total market value exceeded CNY 12 billion. Its mixed ownership-oriented M&A helped it achieve the fundamental strategic goal of innovation-driven development. More importantly, in the process of mixed ownership reform, Grandblue Environment tried to avoid common problems such as the tendency to privatize and restrain the speculation of strategic investors, and gradually increased its vitality, control, influence and anti-risk abilities. Firstly, it consolidated the control of stateowned shareholders. Beginning in 2012, the company designed strategy of mixed ownership-oriented M&A, carried out private placement to many SOEs under Public Assets Management Committee of Nanhai District and implemented share payments, and enhanced the controlling position of state-owned shareholders. On April 16, 2012, Grandblue Environment released an announcement to issue 91.31 million shares to Nanhai Holdings, the parent company of its controlling shareholder Water Supply Group, at a price of CNY 6.57 per share. The proportion of shares held by Nanhai Holdings was 15.77%, that of ultimate controller Public Assets Management Committee of Nanhai District rose to 39.56%. In January 2014, Grandblue Environment issued 45.97 million shares to Nanhai Urban Construction Investment under the jurisdiction of Public Assets Management Committee of Nanhai District at a price of CNY 8.34 per share, and purchased 30% of its holdings in Gas Development. Before acquiring C&G China, it embraced a total net asset of CNY 2.443 billion, while C&G China’s net assets were assessed at CNY 1.85 billion. This major asset reorganization was likely to cause the change of actual controller. It is precisely because Grandblue Environment has continuously strengthened the control of state-owned controlling shareholders before the merger, and after completing the transaction pricing and payment to acquire C&G China, the total shareholding ratio of ultimate controller Public Assets Management Committee of Nanhai District was 35.97%, that of strategic investor C&G Hong Kong was 11.88%. Grandblue Environment’s acquisition of C&G China has not changed the controlling position of state-owned shareholders. In November 2015, before launching another capital increase, share expansion and equity financing, Grandblue Environment issued shares to Foshan Gas at a price of CNY 11.95 per share to acquire 30% of the shares of Gas Development held by Foshan Gas, making Gas Development a wholly-owned subsidiary of Grandblue Environment. After capital increase and equity financing, Public Assets Management Committee of Nanhai District holds 34.93% of the total shares of Gas Development through Nanhai Holdings, Water Supply Group, Foshan Gas, and Nanhai Urban Construction Investment, and remains the actual controller of the company. Secondly, it curbed the speculative opportunities of strategic investors. In order to prevent the transfer of control rights of state-owned shareholders during

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the acquisition of C&G China, Grandblue Environment paid CNY 1.1 billion in cash in addition to share payments. To prevent the risk of excessively high M&A premium, in addition to obeying external formal regulations such as the Measures for the Management of Strategic Investment in Listed Companies by Foreign Investors, C&G Hong Kong was required to lock up shares held for 36 months. It also signed a gambling agreement with Grandblue Environment, promising that the net profit of C&G China in 2014, 2015 and 2016 would not be lower than the estimated net profit of each year determined in the asset appraisal report. If the actual net profit is lower than the promised net profit, it will compensate the listed company in the form of cash for the difference in between. Mixed ownership-oriented M&A may exert positive impacts on innovation-driven development. (1) It can effectively rediscover corporate value and promote value realization by integrating existing resources in capital + production factors. (2) SOEs continue to consolidate the control of state-owned shareholders in M&A, and introduce non-state-owned strategic investors through share-based payment for M&A transactions to enhance their vitality, control, influence and risk resistance. (3) They focus on innovation capabilities to carry out post merger integration, which can resolve the problem of “mixed but not integrated”.

9.6 Conclusions and Prospects 9.6.1 Research Conclusions Based on longitudinal case study of Grandblue Environment for its innovationdriven development, this book sorts out the process of evolution from independent innovation capabilities and innovation-driven development since its listing in 2001, and concludes that mixed ownership-oriented M&A can facilitate the realization of innovation-driven development of enterprises. In order to have a clearer understanding of the evolution path and innovation-driven development mechanism of independent innovation capabilities of enterprises in mixed-ownership M&A, this book proposes a complete mechanism model, as shown in Fig. 9.1. First, the independent innovation of Grandblue Environment was a process of dynamic accumulation, which started from the formation of original innovation capabilities, transited to the integration of open innovation activities brought about by M&A, evolved to the integration of innovation activities, and finally resulted in enhanced independent innovation capabilities. This process was a strategic choice made by Grandblue Environment who has experienced “bottleneck” in accumulating original innovation capabilities and difficulties in forming core capabilities through technology introduction for secondary innovation. The three M&A transactions seem to be random events, but in fact are the process of non-linear accumulation of independent innovation capabilities. Grandblue Environment started from original innovation, gradually accumulated technical knowledge through the first M&A, tried to

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Fig. 9.1 Model of mechanism of promoting innovation-driven development with mixed ownershiporiented M&A

achieve financial synergy through the second M&A, and conducted secondary innovation through technology introduction. Finally, it carried out technology M&A in the same industry on the basis of original innovation, and transformed open innovation into independent innovation capabilities through integrated innovation. Compared with previous studies, this finding provides a more rigorous verification of the conversion path from M&A-based open innovation to independent innovation capabilities. This book compares the path and economic consequences of the evolution from open innovation to three independent innovation capabilities formed by M&A, and reveals that in the context of economic transition, independent innovation capabilities evolved following the path of “original innovation capabilities → technological M&A → integrated innovation → independent innovation capabilities, which is the transition of innovation capabilities from quantitative changes to qualitative changes, and a process of capability duplication and reconstruction. Companies’ independent innovation capabilities continue to improve with environment transformation. Second, Grandblue Environment’s mixed ownership-oriented M&A have simultaneously increased its market value and book value. With improved independent innovation capabilities, mixed-ownership system is the main driving force for its innovation-driven development. Mixed-ownership enterprises achieve complementary development with resources of different ownership, but are prone to encounter problems brought by “mixed but not integrated”. Grandblue Environment carries out technological M&A on the basis of its original innovation capabilities. In addition to integration at capital level, it realized mutual transfer of production factors and core competence, which is conducive to building a trust mechanism. Investors in the capital market have good expectations for the integration of enterprise innovation capabilities under the guidance of market mechanisms. State-owned shareholders and non-stateowned shareholders conduct corporate governance based on enhancing innovation

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capabilities. C&G China stimulated Grandblue Environment’s integrated innovation capabilities with its innate innovation mechanism, and enhanced the latter’s market development capabilities and operating efficiency. Grandblue Environment helped C&G China solve low profitability and lack of funds with its profit model and financial advantages, and helped the latter eliminate hidden barriers, expand market space and enhance market competitiveness with its credit advantages as a SOE. M&A motivated by independent innovation ability and mixed ownership system can promote the creation of corporate value and facilitate enterprises to realize innovation-driven development. From the perspective of system theory, the author studied the mechanism of enhancing enterprises’ independent innovation abilities in M&S, and thus discovered the important mechanism that mixed ownership system promote enterprises’ innovation-driven development.

9.6.2 Theoretical Contributions Based on foregoing analysis and discussion, we see that there are two theoretical contributions in this study. First, it opens the black box of the path of evolution from “open innovation based on M&A” to independent innovation capabilities. From the perspective of core technology knowledge sources, this book distinguishes and defines secondary innovation, integrated innovation and original innovation in independent innovation capabilities, and analyzes the path of conversion from open innovation based on M&A to above three innovation capabilities, and examines the extent to which companies’ independent innovation capabilities are improved. It proposes that integrated innovation is an effective evolution path from open innovation to independent innovation capability. This research dimension also breaks static perspective in previous research (Kochhar and David 1996; Ambos and Schlegelmilch 2007). From the angle of post merger integration, it analyzes the dynamic regularity of the evolution of independent innovation capabilities. This point helps understand the mechanism of open innovation based on M&A for enterprises to enhance their independent innovation capabilities, and provides a new research perspective for innovation research on M&A. Second, this book focuses on external contingency and capability-based view (Xu et al. 2013; Luo et al. 2014). Inspired by M&A theories, it reveals an important driving factor for companies to achieve innovation-driven development through M&A: internal absorptive capacity and external institutional changes. This shows that innovation-driven development is a result of enterprises’ actively choosing and passively adapting to the environment, which a new dimension for the co-exertion mechanism of enterprises. In addition, in the context of economic transition, this book introduces variables such as M&A through longitudinal case studies to explain factors that influence M&A in promote innovation-driven development.

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9.6.3 Practical Implications Grandblue Environment started solid waste treatment business from original innovation, which makes its successful experience a universal reference for the development of local SOEs in economic transition. If companies motivated by obtaining innovative capabilities want to achieve innovation-driven development, they can consider actively promoting integrated innovation to realize transformation from open innovation to independent innovation capabilities. By launching mixed-ownership M&A aiming at improving independent innovation capabilities, transforming the motivation of M&A into the driving force of value creation, organically integrating M&A and restructuring with corporate market value, corporate governance and post merger integration with corporate book value, and realizing innovation-driven development by continuously improving corporate value, it is a demonstrative example for strategic M&A and reorganizations oriented by innovative capabilities and mixed ownership.

Chapter 10

Research Conclusions and Policy Recommendations for Mixed Ownership-Oriented M&A of Chinese SOEs

Based on theoretical framework in Chap. 4, game theory in Chap. 5, empirical research from Chapts. 6−8 and case study in Chap. 9, this part first summarizes conclusions on mixed ownership-oriented M&A of Chinese SOEs. This study finds that the macro, meso, and micro mechanism of “innovation—mixed ownershiporiented M&A—trust” can promote the creation of value for SOEs. Macro system construction, meso industrial layout optimization and structural adjustment, and micro mixed ownership reform enable SOEs to demonstrate the advantages of the basic economic system of “taking public ownership as the mainstay and the common development of multiple forms of ownership” in mixed ownership-oriented M&A, and join hands with other economic entities such as private enterprises to adjust the stock economy and optimize the layout of the incremental economy. This theoretical framework has been proved by game deduction, empirical research and case analysis. Then this study puts forward seven policy recommendations. The first is to improve factor market allocation with mixed ownership-oriented M&A. Post merger integration is the process of integrating the advantages of SOEs and private enterprises. It guides the agglomeration of advanced productive forces, and has important practical significance for establishing a sound, unified and open factor market. The second is to reduce government administrative intervention and establish a trust mechanism to cultivate innovative growth. Before and during M&A, it is necessary to clarify the government’s position, reduce administrative intervention, and improve factorized market configuration through government regulation and supervision after M&A. The third is to clarify property rights, improve the efficiency of SOEs’ mixed ownership-oriented M&A, fully establish a modern property rights system based on capital composition and liability forms according to the characteristics of the mixed-ownership economy, improve the legal protection system for property rights flow and protection, and develop property rights transaction market. In addition, this research proposes policy recommendations on reducing irrational behaviors in the game of mixed ownership-oriented M&A, constructing trust mechanisms in developing innovation capabilities, cultivating mature capital markets, and improving laws © Science Press 2021 Y. Wang, Exploring the Trust and Innovation Mechanisms in M&A of China’s State Owned Enterprises with Mixed Ownership, https://doi.org/10.1007/978-981-16-4404-7_10

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and regulations on M&A and reorganization. Last but not least, in view of limitations of this book, it prospects future research directions of mixed ownership-oriented M&A of SOEs.

10.1 Research Conclusions on China’s Mixed Ownership-Oriented M&A 10.1.1 Research Conclusions on the Theoretical Framework of China’s Mixed Ownership-Oriented M&A This book reviews the history of mixed ownership-oriented M&A of SOEs, summarizes existing problems in it, proposes a three-dimensional mechanism of “innovation—mixed ownership—oriented M&A—trust” on this basis, and analyzes macro system, meso industry development mechanism and micro enterprise development mechanism in M&A. On the macro level, the “mixed ownership economy” proposed in Decision of the Central Committee of the CPC on Some Major Issues Concerning Comprehensively Deepening the Reform in 2013 is no longer a simple “mixed equity participation”. For the state-owned economy, it has the function of “amplifying” stateowned capital and achieving “value preservation and appreciation”. For the private economy, it is an important opportunity for private enterprises to seize strategic opportunities and develop together with the state-owned economy. As an important institutional arrangement for the capital market to serve the real economy, M&A is an important business strategy and inevitable choice for SOEs to carry out mixed ownership reform. The Opinions of the State Council on Several Policies and Measures for Vigorously Promoting Mass Entrepreneurship and Innovation issued by the State Council on June 11, 2015 proposed innovative mechanisms to facilitate entrepreneurship. This book divides innovation into three levels: innovation input, innovation implementation, and innovation output, and analyzes what mechanism to build at these levels to continuously stimulate the vitality of mixed ownership-oriented M&A and release the dividends of the mixed ownership system. Regarding innovation mechanism, at the level of innovation input, it is important to identify innovation capital in traditional factor capital, rationally allocate traditional factors, knowledge, and human capital, form integrated capital for innovation, and fully mobilize the distribution of innovation input. At the level of innovation implementation, parties concerned should continue to carry out technological innovation and business model innovation, make full use of data-enabled innovation in the era of big data on the basis of innovation capital investment, emphasize trust in this process, reduce the time chain and cost chain of innovation by using “block + chain” data structure, optimize the efficiency of capital allocation, and protect innovation input. At the level of innovation output, they should maximize the value of innovation output, commercialize innovation results, recycle utilization, and protect

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intellectual property rights. As for trust mechanism, they should combine trust as an informal system with formal systems, embed the theoretical foundation of capital allocation theory and contingency theory on the basis of three-dimensional basic economic system, integrate them into trust mechanism, build an institutional system that provides a three-dimensional basic economic system, and carry out institutional theoretical innovation. On the meso level, General Secretary Xi Jinping affirmed the importance of industrial development in his important exposition on industrial development in May 2015.1 In mixed ownership reforms at the industrial level, innovation is the engine. That is, in terms of innovation mechanism, it is important to through industrygovernment-university-research collaborative innovation, promote the integration of the real economy and the virtual economy, the integration of state-owned capital and private capital in mixed ownership-oriented M&A, the development of mixed industrial clusters in the regional economy, the rational allocation of production factors in the supply-side structural reform, and optimization in the global value chain. In mixed ownership reform at the industrial level, innovation alone is not enough, and trust is the guarantee. In terms of trust, parties concerned should integrate trust mechanism to promote the integration of the real economy and virtual economy, promote the integration of China’s state-owned capital and private capital in mixed ownership-oriented M&A, promote the development of mixed industrial clusters in regional economy, facilitate the rational allocation of production factors in the supplyside structural reform, integrate trust mechanism in the implementation of industrial policies, and optimize mixed ownership industries in the global value chain structure while implementing industrial policies. In mixed ownership-oriented M&A, it is difficult to achieve the evolution from open innovation to independent innovation capabilities on one’s own, and the construction and embedding of trust mechanism play an indispensable role in optimizing and adjusting industrial structure. At the micro level, promoting the mixed ownership reform of SOEs in the form of mixed ownership-oriented M&A is the best way for SOEs and private enterprises to break existing constraints, get out of development bottlenecks, and move towards high-quality development. In terms of innovation mechanism, SOEs promote the protection of property rights and the free flow of market factors through independent innovation, improve production efficiency and quality through independent innovation to form a new power for product supply, improve the incentive flow mechanism for talents through independent innovation, and build a fair and orderly corporate competition mechanism oriented by consumer demand through independent innovation. In terms of trust mechanism, SOEs promote mixed ownership-oriented M&A through modern enterprise system, integrate formal systems in corporate governance with integrity and innovation culture through “pro” and “clear” corporate governance, 1

General Secretary Xi Jinping pointed out: “Optimizing and upgrading the industrial structure is a key measure to improving the comprehensive competitiveness of China’s economy. It is necessary to accelerate the transformation and upgrading of traditional industries, deepen the integration of informatization and industrialization, focus on cultivating strategic emerging industries, vigorously develop the service industry, especially the modern service industry, actively cultivate new business formats and new business models, and build a new system for modern industrial development.”.

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and integrate formal systems in corporate governance and integrity and innovation culture through independent innovation.

10.1.2 Conclusions of Empirical Test for China’s Mixed Ownership-Oriented M&A First of all, this book uses theories on contract economics and information economics to study incomplete information game on parties to M&A from the perspective of acquiring firms (SOEs), constructs a model of the relationship between transaction pricing and expected excess returns of the market through mixed ownership-oriented M&A with the target of maximizing the expected return of acquirers, and conducts an empirical test with data of China’s A-share state-owned listed companies that conducted mixed ownership-oriented M&A from 1998 to 2015. It takes premium of mixed ownership-oriented M&A as explanatory variable, transaction pricing as proxy variable, and capital coast as control variable to perform OLS regression on M&A premium (explanatory variable) and the short-term market performance of M&A (explained variable) to explore the mechanism of realizing buyers’ expected market excess returns. The game model shows that transaction pricing is the focus of the mixed ownership-oriented M&A game of SOEs. As far as acquirers (SOE) are concerned, transaction pricing is a strategy based on their expectation of excess returns in the stock market. Due to the scarcity of corporate resources, capital coast needs to be considered in pricing strategy. Expected market excess return is a function of transaction pricing and capital cost. On the basis of constructing a mathematical model, the author used empirical data of mixed ownership-oriented M&A of China’s A-share listed SOEs from 1998 to 2015 to test the game model, and explored whether the expected market benefits of pricing strategy in the M&A are realized. The results show that: the higher the premium rate of mixed ownership-oriented M&A, the better its short-term market performance. No matter the window period is [−10, 10] or [−30, 30], the conclusion remains unchanged. Whether it is a univariate regression, or added with corporate control variable, or added with enterprise and macro control variable, the research conclusion does not change. The empirical results support the mixed-ownership M&A game model of SOEs constructed in this book. In the case of information asymmetry and participants’ bounded rationality, acquirers conduct M&A game with the rational goal of maximizing total returns, and reaches the equilibrium of the game at the intersection of expectations on short-term market excess returns and transaction pricing. In the process of realizing expected market excess returns, the higher the premium for mixed ownership-oriented M&A, the greater short-term market excess returns. An important mechanism for the positive impact of SOEs’ premium for mixed ownership-oriented M&A on short-term market performance is that among stakeholders of such M&A, shareholders of target firms are often the biggest beneficiaries. In the long run, shareholders of acquiring firms can hardly

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benefit from the long-term performance of M&A. However, in the game of mixedownership M&A transactions, if the income of shareholders of both acquirers and target firms are taken into consideration, the synergistic benefits of the M&A can be predicted. This will not only promote the successful completion of the M&A transaction, but also convey good news that long-term book performance can be expected based on good short-term market performance. In this way, the M&A will be more efficient and there will be less conflicts during integration, which will help improve the long-term performance of M&A and ultimately stimulate companies to M&A create value. Therefore, this book believes that the level of the premium of mixed ownership-oriented M&A of SOEs is an important factor that can explain the fact that such M&A can create income for acquirers (SOEs). Secondly, this book uses a total of 186 Chinese SOEs as samples that conducted major asset restructuring from 1998 to 2011, and analyzes the ways and paths that trust mechanism and innovation capabilities influence corporate value, aiming to explain the increasingly stronger wave of mixed ownership-oriented M&A by Chinese SOEs since the end of the last century. Empirical test shows that the trust mechanism and innovation capabilities of SOEs affect value creation through M&A. Improved innovation capabilities of SOEs after M&A plays an important role in the creation of corporate value, which is closely related to trust mechanism. The more honest SOEs to M&A, the stronger the role of innovation in promoting value creation. With 2SLS model, we conducted a two-stage regression and found that SOEs’ internal trust mechanism centering on integrity culture improves their innovation capabilities by promoting continuous internal and external use of knowledge. The more honest SOEs are, the stronger the role of innovation in promoting value creation. In robustness test, this book uses structural equations to verify the mediating effect of innovation abilities in the process of honesty culture influencing the value of SOEs after M&A, whose result was consistent with the previous one. Therefore, this study believes that trust mechanism with “integrity” as core corporate culture can promote value creation of SOEs in mixed ownership-oriented M&A by influencing their innovation capabilities. Existing studies believe that transfer of core competence is the most important factor in the success of M&A, that is, the creation of corporate value. Although the innovation brought about by M&A is not independent innovation, innovation capabilities of both parties form their internal factors and bring new production functions to technological and R&D input and output. This has the same meaning as the philosophy that innovation ability brought by M&A is the driving force to promote SOEs create corporate value via mixed ownership-oriented M&A. This book provides micro-support for “enterprise innovation and M&A value appreciation theory”. In addition, trust mechanism is indispensable in the process of acquiring, transferring, and merging innovation capabilities. The impact of corporate integrity culture, an informal system, on corporate innovation and M&A value appreciation is more significant that of trust of stakeholders as a formal system. This book analyzes the phenomenon of dissimilation of innovation capabilities and economic consequences of SOEs’ mixed ownership-oriented M&A from the perspective of informal systems, and explains the continuous growth of SOEs’ M&A activities since the end

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of the last century. The results show that although China’s institutional environment is generally not perfect, under the background that the Chinese government vigorously promotes mixed ownership reforms, SOEs can create value in M&A through establishing integrity culture and improving innovation capabilities, and thus better implement mixed ownership reforms. Finally, taking M&S transactions of China’s A-share listed companies from 1998 to 2014 as research objects, this study examined the influence of social trust on value creation in M&A from the perspective of transaction costs. My empirical research shows that the higher the degree of social trust in the region where acquiring firms are located, the more helpful it is for parties to M&A to improve value creation ability through trust mechanism. This kind of influence is more pronounced in areas where private enterprises dominate M&A and where the level of local legal governance is low. Legal systems and social trust have a substitute relationship in their influence on M&A performance. Furthermore, from the employment perspective of intermediary agencies, this study tested the impact of social trust on value creation in M&A, and found that regional social trust would reduce the incidence of employing market intermediaries by acquiring firms and thus reduce transaction costs. Regarding trust mechanism in mixed ownership reform of SOEs, a discussion on specificity was launched. This book shows that social trust as in informal system plays an important role in the efficiency of M&A in China’s capital market during economic transition. This means that in the process of promoting strategic M&A of SOEs, if we blindly focus on formal systems and ignore informal systems, economic benefits that could have been achieved may also be lost. Only by fully integrating informal systems with formal systems can mixed ownership-oriented M&A continue to inject new impetus into the reform of SOEs.

10.1.3 Conclusions from Case Study Based on the path of evolution from open innovation to independent innovation capabilities brought about by M&A, the relationship between innovation capability and enterprise development, and the mechanism of mixed ownership system on innovation-driven development, the author proposed a theoretical analysis framework, and concluded through longitudinal case study of Grandblue Environment’s three M&A transactions that mixed ownership-oriented M&A can promote the realization of innovation-driven development. Original innovation abilities of acquirers, complementary knowledge of acquirers and target firms, and innovative environment are the prerequisites for enterprises to achieve innovation-driven development through M&A. Mixed ownership-oriented M&A can effectively facilitate corporate value rediscovery and realization by integrating capital and production factors, and focusing on innovation capabilities in post merger integration. SOEs implement M&A under the motivation of mixed ownership and innovation capabilities, which promotes M&A to create corporate value and realize innovation-driven corporate development.

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The basic point of this case is that in the economic environment of optimizing economic growth structure and implementing “Made in China 2025” strategy, independent innovation capabilities evolve along the path of “original innovation capabilities → technological M&A → integrated innovation → independent innovation capabilities”, which is a process of replicating and reconstructing innovative capabilities. M&A motivated by mixed ownership system and innovation capabilities promotes the creation of corporate value. One of its main innovations is that it has opened the black box of the evolution from “open innovation based on M&A” to independent innovation capabilities. This book analyzes the path of transformation from open innovation based on M&A to secondary innovation, integrated innovation and original innovation capabilities, and examines the extent to which companies’ independent innovation capabilities will ultimately be improved. It proposes that integrated innovation is an effective path of evolution from open innovation to independent innovation capabilities, which breaks previous research on independent innovation capability from a static perspective, and analyzes the dynamic regularity of evolution of independent innovation capabilities from the perspective of post merger integration. This perspective is helpful to understand the mechanism of M&A-based open innovation for enterprises to enhance their independent innovation capabilities, thereby providing a new research lens for innovation research on M&A. The second innovation is that based on external contingency view and capability-based view, inspired by theories on M&A, this book reveals the important driving factors for enterprises to achieve innovation-driven development through M&A, namely internal absorptive capacity and external institutional changes. This shows that innovationdriven development is a result of enterprises actively choosing and passively adapting to the environment, which provides a new dimension for the co-exertion mechanism of enterprises. In addition, in the context of economic transition, this book introduces research variables such as M&A through longitudinal case study to explain factors that influence the promotion of innovation-driven development in M&A.

10.2 Policy Recommendations for China’s Mixed Ownership-Oriented M&A China encourages SOEs to carry out mixed ownership reforms, which can not only break barriers between public and non-public ownership, but also provide new opportunities for the development of state-owned and private enterprises. Through M&A, SOEs can draw on the resources of private capital in terms of unique technologies, business models or operating mechanisms to improve their operational efficiency, complement each other, and achieve win–win results. However, in SOEs’ actual mixed ownership-oriented M&A transactions, there are still many outstanding problems to be solved urgently. Comprehensive measures are needed to speed up M&A, promote the reform of mixed ownership of SOEs, and remove institutional and mechanism barriers.

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On May 18, 2020, the Opinions of the CPC Central Committee and the State Council on Accelerating the Improvement of the Socialist Market Economic System for a New Era (hereinafter referred to as the Opinions) was released, which offers a comprehensive design and deployment of the socialist market economic system in the near future.2 On May 22, 2020, the third meeting of the Thirteenth National People’s Congress was held, where “grasping actions and achieving results” in government work report become the key words of reform in 2020. The report reveals that the three main points of the reform of state-owned assets and SOEs are to implement the three-year action of SOE reform, improve the effectiveness of state-owned assets and SOE reforms, improve core competitiveness, while the five tasks are to improve regulatory system for state-owned assets, conduct mixed ownership reform, strip the social functions of SOEs’ facilities, focus on main responsibilities, implement a market-oriented management mechanism, and one core is to stimulate the vitality of market players. Enhancing the vitality of micro-subjects is the subject of the reform of state-owned assets and SOEs, which requires removing institutional and mechanism barriers and stimulating endogenous development momentum. Currently, the international situation is grim and complex. China’s economy is climbing up and passing hurdles. The state-owned economy has been greatly impacted by the COVIC19 epidemic. SOEs must play the role of pillars and ballasts in “six guarantees”, and accelerate the pace of reform to an even more urgent state. With the launch of the Three-year Action Plan for Reforms of SOEs, there will be a clearer plan for reforms of SOEs. In response to problems in SOEs’ mixed ownership-oriented M&A, based on research conclusions of this book and new deployment and arrangements for the reform of state-owned assets and SOEs during the two sessions„ the author proposes policy recommendations on speeding up SOEs’ mixed ownership-oriented M&A and promoting mixed ownership reform as follows from perspectives of market-oriented allocation of production factors, government regulation, clarification of property rights, M&A game, innovation capacity building, trust mechanism construction, 2

As the first document of the CPC Central Government on market-oriented allocation of production factors, the Opinions have established a mechanism for the flow of production factors from low-quality and low-efficiency areas to high-quality and high-efficiency areas, which is of great significance to improving the quality and allocation efficiency of production factors, guiding all kinds of production factors to gather together toward advanced productive forces, and accelerating the improvement of the socialist market economy system. As an action plan for accelerating the improvement of the socialist market economic system at present and for a period of time in the future, the Opinions puts forward reform measures in seven key areas: (1) adhere to public ownership as the mainstay and the common development of multiple ownership economies to enhance the vitality of micro subjects; (2) consolidate the basic system of the market economy and ensure fair competition in the market; (3) build a more complete market-based allocation system mechanism for production factors to further stimulate the creativity and market vitality of the whole society; (4) innovate government management and service methods, and improve the macroeconomic governance system; (5) uphold and improve the people’s livelihood security system to promote social fairness and justice; (6) build a new higher-level open economic system to promote reform and development through openness; (7) improve the socialist market economy legal system and strengthen the guarantee of the rule of law.

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cultivation of mature capital markets, and perfection of laws and regulations on M&A and restructuring:

10.2.1 Improve Market-Oriented Allocation of Production Factors Starting from Mixed Ownership-Oriented M&A of SOEs After more than 40 years of reform and opening up, China has made important progress in reform of production factor market, with significantly enhanced ability for the market to allocate factor resources. However, in general, the market system is not yet sound, the production factor market is not fully developed, and problems like insufficient market incentives, unsmooth factor flow, inefficient resource allocation, and weak microeconomic vitality still exist. In order to stimulate the vitality of SOEs, departments concerned must invigorate internal operation and steadily promote reform of natural monopoly industries must, including enabling entities of various ownership to use resource factors equally in accordance with law. Integration after mixed ownership -oriented M&A is the process of integrating the advantageous production factors of SOEs and private enterprises, which can guide production factors to gather toward advanced productivity, and has important practical significance for establishing a sound, unified and open factor market. The Opinions clarifies the direction and key reform tasks of production factor market system, and arranges the scope of production factor market allocation, the independent and orderly flow of production factors, and reforms of production factor price market.3 3

The Opinions puts forward to establish and improve a unified and open production factor market, build more complete systems and mechanisms for market-oriented allocation of production factors, promote the market-oriented reform of production factor prices, deepen the reform of interest rate marketization, improve benchmark interest rate and market-based interest rate system, better play the benchmark role of price in treasury bond yield curve, enhance the independent pricing capabilities of financial institutions, improve market-oriented formation mechanism of the RMB exchange rate, enhance its flexibility of two-way floating; speed up the construction of national technology trading platforms, actively develop asset evaluation services such as scientific and technological achievements, patents, promote the orderly flow of technological factors and the formation of reasonable prices; innovate market-oriented allocation of production factors, improve the quality and efficiency of the commodity and service market, deepen the reform of the circulation system, strengthen the construction of the whole chain standard system, develop “Internet + circulation”, and reduce logistics cost of the whole society. Improving market-oriented allocation of production factors is an inherent requirement for building a unified, open, and orderly competitive market system, and an important part of accelerating the improvement of the socialist market economic system for a new era. As the first document of the central government on market-oriented allocation of production factors, the Opinions is of great significance to forming a mechanism for the flow of production factors from low-quality and low-efficiency areas to high-quality and high-efficiency areas, improving the quality and allocation efficiency of production factors, guiding all kinds of production factors to gather toward advanced productivity, promoting the quality efficiency, and power of economic development, and accelerating the improvement of socialist market economic system.

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Based on research conclusions of this book, the author makes the following suggestions. (1) SOEs should start from mixed ownership-oriented M&A to achieve market-oriented allocation of production factors in post merger integration. The most important feature in SOEs’ implementing mixed ownership reform through M&A is that such M&A can deeply integrate capital and production factors of stateowned and private enterprises, which is not just simple combination of capital at the surface, but a deeper “integrated mechanism”. By organically combining the advantageous resources of state-owned and private enterprises and realizing the free flow of resource factors in post merger integration, various resource factors can flow from low-quality and low-efficiency areas to high-quality and high-efficiency areas, accelerate the formation of a mechanism for the market to determine the allocation of factors, release mismatched resources, promote the clearing of “zombie enterprises”, eliminate ineffective supply, enhance high-quality supply, stimulate the vitality of enterprises, improve the efficiency of macro-allocation of production factors, and ultimately enhance the effectiveness of the reform of state-owned assets and enterprises. (2) In promoting market-oriented allocation of production factors in mixed ownership-oriented M&A, SOEs should focus on the cultivation of innovative capabilities, which requires the embedding of trust mechanism to stimulate the vitality of production factors and injects new impetus into economic development. Due to the large differences between different factor markets, problems faced by enterprises are not the same. While promoting market-oriented allocation of production factors through innovation and trust mechanisms, enterprises must have both individual awareness and an overall view. Individual consciousness means to take different measures for development according to the attributes of different production factors and actual situation, while an overall view refers to consider how to expand the scope of the entire factor market on the basis of fully developing each factor market. The Opinions puts forward the reform direction for classification of factor fields with specific measures. The following part will explain how to promote the market-oriented allocation of factor fields through mixed ownership-oriented M&A. In terms of land factor, the Opinions proposes to enhance the flexibility of land management, use industrial land flexibly, and manage land plan index. Land is the most important means of production. Market-oriented reform of land is a fundamental institutional change that affects the all-round flow of other production factors. Promoting the efficient use of stock land is one of the important reasons for SOEs to carry out mixed-ownership reform. PPP model is an important way to conduct mixed-ownership reform. Through PPP joint development, SOEs efficiently use land, flexibly configure allocated land and transfer land, and innovate ways of land use to make land development and utilization not only conform to market rules, but also adjust industrial structure according to local conditions to optimize industrial layout, lead industrial transformation and upgrade, and continuously release land factor dividend. As for labor factor, the Opinions puts forward to guide the rational and orderly flow of labor, and offer channels for household registration and job title evaluation. First, the capital advantages and innovation of state-owned and private enterprises

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should be given to full play to optimize urban planning and gradient industrial layout. Nowadays, the leading role of central cities has become increasingly prominent, but “big city diseases” are emerging one after another, which bring burdens to urban management and harms balanced economic development. Large central cities should rationally dissolve non-core functions, categorize and guide urban spatial structure and industrial layout to extend outward, and promote the diffusion of industries and population to their one-hour high-speed rail traffic circle. Large central cities under construction or yet to be formed should rationally plan and arrange urban spatial structure and industrial layout to reduce population density and avoid the emergence of large central cities. Second, units concerned should deepen mixed-ownership reform in new infrastructure, and build large, medium and small cities and small towns based on transportation hubs, manufacturing industry chain support, labor supply and factor costs based on the capital advantages and the distribution of innovation entities of state-owned and private enterprises, thus avoid vanity projects and “new infrastructure” core central cities under vanity cities. Third, private enterprises should be guided to participate in the implementation of major national strategies, major construction and research projects. By combining the resource endowment of SOEs with the ability of private unicorn companies, actively guiding private enterprises to integrate into the construction of national strategic projects, and giving full play to the power of smart facilities, enterprises create new fulcrums for innovation. Regarding capital factors, the Opinions proposes to improve the system for multilevel capital market, the stock market and unified standards for the bond market. Post merger integration and restructuring are closely linked to the development of the capital market, which covers both state-owned capital and private capital, being one of the platforms for implementing mixed ownership reforms. M&S integrates various capitals to promote “mechanism reform” with “integrated capital” and promote the free flow of market factors. To improve basic systems for the capital market, one key is to implement registration system reform centered on information disclosure, minimize unnecessary administrative interventions, truly give the market the right to choose, and the second key is to improve the rule of law, increase the cost of violations, and enhance supervision on law enforcement. Enterprises should drive the reform of the entire capital market with innovation board, cultivate more technologically innovative enterprises, and facilitate economic transformation and upgrading. In terms of technical factors, the Opinions suggests to stimulate the vitality of technology supply, promote the transformation of scientific and technological achievements, and activate the vitality of property rights incentives and intermediary services. Innovation-driven growth mode not only improves efficiency, but more importantly, boost the application and diffusion of scientific and technological achievements in production and commerce (Hong Yinxing 2013). Transforming innovation into achievements has always been an inevitable issue. It is necessary to activate property rights incentives, strengthen policy guidance for transferring and transforming innovation achievements, clarify the ownership of intellectual property rights, and give research personnel ownership and long-term right to use achievements; activate the vitality of intermediary services, promote the establishment of a unified and open intellectual property and technology project trading market, closely

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link domestic and foreign innovation resources, and improve corresponding evaluation system, so that the vitality of innovation factors such as technology, capital, and talent can be activated to the maximum extent. In addition, the Opinion regards data as a new type of production factor, and proposes to make big data a new driving force for high-quality economic development by accelerating the cultivation of data market and giving full play to the multiplier effect of data on the efficiency of other factors. Trust is the key to ensuring the smooth implementation of innovation activities, while big data undoubtedly facilitates the establishment of trust mechanism. With big data technologies, transaction information about enterprises are recorded in the form of data to form a complete data chain. The “ins and outs” of enterprises’ entire innovation process are clear at a glance, which can reduce the time chain and cost chain of innovation, reduce input frictions in inputting production factors, and optimize the efficiency of capital allocation.

10.2.2 Reduce Administrative Intervention from the Government, Establish a Trust Mechanism and Cultivate Innovation Growth Points As the investor and regulator of SOEs, the government is obligated to supervise SOEs, but its degree, method, and scope of regulation and supervision are often criticized. In the allocation of resource factors, the CPC Central Committee has always emphasized that the market plays a decisive role and that the government plays a better role. In the case of mixed ownership-oriented M&A of SOEs, the government must reduce administrative intervention and establish a trust mechanism through formal systems. First of all, before and during M&A, it is necessary to clarify the government’s position in SOEs’ mixed ownership-oriented merger and reorganization and reduce administrative intervention. Although the government has always emphasized the need for the capital market to play a major role in M&A, and strengthened the pricing and transaction functions of property rights, in actual mixed ownership-oriented M&A transactions, it uses review system, which makes M&A time-consuming and inefficient and requires the government to reduce administrative intervention in this process. On the one hand, it should relax substantive review, gradually cancel administrative licenses in matters where the market can make independent decisions and adopt in-process and ex-post supervision; reduce transaction barrier and reduce M&A cost; avoid negotiated pricing, designated pricing, and approved pricing, prevent rentseeking behavior of those in power, and prevent the loss of state-owned assets. On the other hand, it should reduce the intervention of local protectionism, so that stateowned capital can better flow among different regions, industries, and ownership systems.

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Secondly, after M&A, the government should establish a trust mechanism through formal systems, improve the allocation of factorized markets, and form new innovative growth points. There are many factors for sustained and rapid economic growth, but without governance mechanism as a guarantee, it will be difficult for factor endowments, economic structural conditions and external development environment to be transformed into real development advantages (Zhang 2019). In mixed ownership-oriented M&A of SOEs, various forms of capital combinations do not improve the efficiency of governance mechanisms. Scientific and reasonable governance systems are the fundamental guarantee for enterprises’ sustainable development. Trust, as an important governance mechanism, can guarantee the rational flow and operation of various capital elements, and promote enterprises to form new innovative growth points. The government should reduce the direct allocation of resource factors, clarify the regulation and supervision of each resource factor, establish a formal trust mechanism by formulating and improving relevant systems, promote market-oriented reform of factor allocation, improve factor trading rules and services, regulate and guide the pricing of the factor market, and guide factors to continue to gather toward advanced productivity, thus forming new innovative growth points.

10.2.3 Clarify Property Relations and Improve the Efficiency of Mixed Ownership-Oriented M&A of SOEs Property right system is the basis for developing the mixed-ownership economy. A clear property relationship is the prerequisite for realizing M&A and restructuring between capitals of different ownership, and the basis for parties to M&A to establish a trust mechanism. However, from the practice of mixed ownership reform, there are often problems such as unclear property rights, difficulty in determining transaction targets, and difficulty in determining whether corporate internal decisionmaking is effective. In mixed ownership-oriented M&A of SOEs, it is necessary to innovate property rights system with clear property rights as the core to ensure that powers and responsibilities are clearly separated. The cultivation of SOEs’ innovation capabilities also requires sound property rights protection as a “backing”. On the one hand, it is important to fully establish a modern property right system based on capital composition, liability forms and the characteristics of the mixedownership economy, improve legal guarantee system for the flow and protection of property rights, and develop property rights trading market. (1) Units concerned should formulate special laws on transaction of state-owned property rights regarding subject qualifications, transaction procedures, transaction administrative management, and legal responsibilities of participants of state-owned property rights transactions, and formulate relevant detailed rules to improve the effectiveness of relevant regulations, and lay the foundation for the establishment of a trust mechanism for parties to M&A. (2) They should improve multi-level property rights transaction

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market system, including improving the mechanism and functions of the property rights transaction market, establishing a reasonable pricing mechanism, innovating property market transaction methods such as online bidding, innovating property rights transaction varieties and service content, and strengthening the construction of regional property rights transaction markets. (3) The Anti-Monopoly Law should be adopted to control the property rights transactions of SOEs that restrict competition. For a long time, SOEs have been in an absolute monopoly position in important industries. Although this has brought good economic benefits to enterprises, it has also restricted their development. The purpose of mixed ownership-oriented M&A is to break the “monopoly” of SOEs. However, the monopoly position of certain SOEs may be strengthened through M&A, which will undoubtedly dampen the enthusiasm of private enterprises to participate in such M & A. The Anti-Monopoly Law and supporting implementation rules can regulate SOEs’ property rights transactions that restrict competition, strengthen the allocation function of the market, and smoothly promote mixed ownership reform. Fourth, the role of lawyers in property rights transactions should be strengthened. As an external trust mechanism, lawyers issue written legal opinions on the legality and compliance of transactionrelated matters, and submit them to the state-owned assets regulatory authority for approval, which serve as a guarantee for the legality and compliance of property rights transactions, especially property rights transaction of state-owned assets. On the other hand, to cultivate their innovation capabilities, SOEs need to link internal and external elements, create a dynamic innovation system and mechanism, and firmly strengthen intellectual property protection on the basis of building a diversified innovation input system and strengthening the support of innovative talents. (1) Departments concerned should reduce the cost of intellectual property rights protection, encourage cooperation between SOEs and law enforcement agencies to form a scientific and reasonable intellectual property mechanism, make full use of digital means, and broaden fast and low-cost rights protection channels through source traceability, real-time monitoring, online identification, etc. (2) They should improve the effectiveness of intellectual property protection, build a network platform for intellectual property protection, release information on intellectual property and related competition in a real-time manner, and implement punitive compensation system for infringement so that offenders pay a heavy price. (3) They must innovate coordinated protection of intellectual property rights, coordinate with intellectual property administrative law enforcement agencies under the “dual-track” protection model of intellectual property rights, actively guide innovation, strengthen legal knowledge training for employees, and encourage SOEs to form a unique set of intellectual property strategy to improve its core competitiveness.

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10.2.4 Reduce Irrational Behaviors in the Game of SOEs in Mixed Ownership-Oriented M&A Under the circumstance of information asymmetry and limited rationality of participants, acquiring firms (SOEs) conduct M&A game with the rational goal of maximizing total income, and reach the equilibrium state at the intersection of short-term excess return expectations of the market and transaction pricing. Research results in this book show that pricing is an important factor that explains why mixed ownershiporiented M&A can create short-term benefits for acquiring firms (SOEs), which provides a new analysis angle and empirical evidence for research on the factors affecting the value creation of SOEs in such M&A. The study in this book also brings an enlightenment that high price in M&A transactions will cause a series of risks. Fu et al. (2013) find that under market timing, if the stock price of a company is too high, the acquirer will accept transactions with a high M&A premium. This will breed the first type of agency problem for the acquirer in management. The acquirer’s management is very likely to collude with the target firm to acquire the latter at a high premium to realize their own private interests. After the completion of the M&A transaction, it is difficult for the M&A to achieve long-term performance improvement and create value. Excessive M&A premiums will also result in overestimation of goodwill (Yang et al. 2018; Liu et al. 2019). The large-scale impairment of goodwill in China’s capital market in 2018 also indicate the importance and robustness of rational M&A. In the future, similar research should focus in risk issues under this type of M&A premium, and provide more decision support for the sustainable development of such M&A. To minimize irrational behaviors in mixed ownership-oriented M&A, SOEs should do the following during transactions: First, they should conduct trust governance while seeking innovation and optimize decision-making procedures. To enhance the efficiency of mixed ownershiporiented M&A, SOEs must formulate strict M&A decision-making procedures or optimize original decision-making procedures, introduce equity incentives, option incentives, professional manager systems, independent directors or other mechanisms through establishing and improving modern corporate governance structure, conduct management with a trust mechanism, let the management to operate independently, check and balance each other, better solve agency problem, and prevent M&S decision risks from the source. Especially for professional managers, it is necessary to promote professional manager system in an orderly manner, improve market-oriented operation mechanism, and stimulate the vitality of enterprises. Second, SOEs make full use of the power of intermediary agencies to strengthen the transmission of external trust. Information asymmetry between parties to M&A is one of the important reasons for failure in M&A. To avoid risks caused by information concealment by target firms, they should not only conduct comprehensive and in-depth investigations before M&A, but also actively use the power of intermediary agencies, such as accountants, appraisers, lawyers, etc., to fully obtain information about target companies. Effective transmission of information obtained through

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external intermediaries helps SOEs and private enterprises establish a trust mechanism and reduce the degree of information asymmetry between them. Such trust mechanism also lays the foundation for post merger integration. It helps reduce conflicts between parties, promote mutual integration, and continuously stimulate the innovation ability of SOEs. Third, SOEs should adopt appropriate valuation methods to reasonably evaluate the value of M&A. One of the core issues in M&A is to assess the value of target firms. Under underdeveloped property rights trading market and imperfect value measurement system, SOEs that intend to carry out M&A must choose appropriate methods based on various factors such as motivation and key elements to conduct a comprehensive and systematic valuation on target firms, prevent falsely raising prices, and avoid the loss of state-owned assets, which involves the valuation of not only corporate assets and liabilities, but also corporate innovation capabilities and other non-physical assets. To dispel the doubts of private enterprises in mixed ownership reform, they may establish a trust mechanism with those private enterprises by setting performance commitment clauses in agreement, insuring directors, supervisors, and high liability insurance, and establishing employee follow-up investment mechanisms, which lay the foundation for effective integration of factor resources. Fourth, SOEs should rationally raise funds for M&A and control financing risks. Flexible payment and financing method and reasonable allocation methods help effectively reduce financing risks. In terms of payment methods, SOEs may reasonably allocate the proportion of cash and stocks, appropriately reduce the proportion of cash payment, introduce strategic investors through share-based payments, and tie the interests of shareholders of themselves and private enterprises to benefit future development. As for financing methods, they are advised to use external financing methods, such as equity financing and issuance of M&A bonds, to reduce the use of internal funds and retain cash for subsequent integration and sustainable development. Regarding goodwill problem that may exist in M&A, to prevent hidden risks in goodwill, SOEs can implement a step-by-step merger and reorganization by first acquiring part of target firms’ shares to achieve actual control, then acquiring their remaining assets. In response to impairment of goodwill after M&A, they may improve the effectiveness of impairment testing, such as focusing on key links in goodwill impairment test, enhancing the interaction among accounting, auditing and evaluation in the test, and improving the quality of information disclosure; or simplify the process of goodwill impairment test to reduce corporate costs. For example, they can perform goodwill impairment test for target firms with obvious signs of impairment, and amortize goodwill for target firms without obvious signs of impairment.

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10.2.5 Emphasize the Establishment of Trust Mechanism in Integrating Innovation Abilities of SOEs Haspeslagh and Jemison (1991) believes that the transfer of core competence is the most important reason for the success of M&A, that is, the creation of corporate value. Eisfeldt and Papanikolaou (2013) propose that although innovation brought about by M&A is not independent innovation, the innovation capabilities of parties to M&A form their internal elements and bring new production functions to their technological and R&D input and output. This is the same as the suggestion in this book that innovation capability is a driving factor that promotes mixed ownership-oriented M&A to create value for SOEs, and provides micro-support for “enterprise innovation and M&A value appreciation theory”. In addition, trust mechanism is indispensable in the process of acquiring, transferring, and merging innovative capabilities. As an informal system, corporate integrity culture has a greater impact on corporate innovation and the value appreciation of M&A than the trust of stakeholders as a formal system. This provides a new perspective for explaining how SOEs achieve innovation and value appreciation under current imperfect institutional environment. The most difficult and critical issue in M&A is not the process, but whether the advantageous resources of both parties can be effectively integrated after that, so that both parties can continue to operate in a healthy manner. After M&A, SOEs and private enterprises will inevitably undergo a certain degree of integration in management, operation, and culture. They need to carry out powerful reforms in accordance with actual situation. Integrating the resources of both parties after M&A is not only a key part of mixed ownership reform, but also the key to the success of the M&A. Trust, as a basic informal system, plays an important role in the merger and integration of state-owned and private enterprises, while innovation is the source of vitality of enterprises. If SOEs want to improve the effectiveness of mixed ownership reform through M&A, they must emphasize the construction of innovation capabilities in post merger integration, for which trust mechanism is the guarantee. In statecontrolled mixed-ownership enterprises, state-owned capital must be integrated with private capital to achieve the goal of improving corporate capital structure. As SOEs and private enterprises have many differences in management, operation, culture, etc., regarding their differences and disagreements in M&A, analyzing the reasons and adopting targeted methods to ensure the success of post merger integration is a strong guarantee for the success of SOEs’ mixed ownership-oriented M&A. Corresponding to theoretical framework in Chap. 4, for management and integration issues in mixed ownership-oriented M&A: First, mixed ownership reform must be compatible with corporate equity. SOEs should make adjustments in light of the equity holdings of all parties, overall interests, and convenience for management. If state-owned capital has absolute controlling rights, the management mechanism of the absolute controlling party must be adjusted to eliminate shortcomings in original mechanism, introduce another party’s excellent management mechanism and achieve integrated management. If both parties to M&A do not have absolute controlling rights, the management system should adapt to their

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actual situation and industry characteristics, and be adjusted based on the demands of both parties. A consensus should be reached to reduce disputes on management system, and improve the effectiveness of mixed ownership-oriented M&A. Second, SOEs should integrate the management objectives of both parties after M&A. They, as the backbone of the national economy, must consider not only the preservation and appreciation of state-owned assets, but also the balance of the interests of all parties in the society, while private enterprises aim at maximizing corporate value, which result in disagreements between them in management objective. However, mixed-ownership enterprises controlled by state-owned capital or private capital are ultimately profit seeking based on business activities. SOEs should focus on main responsibilities and businesses. However, this does not mean directly throwing away social responsibilities, but to adjust company structure and aim at both maximizing corporate value and serving social security functions. Third, in the entire process of post merger integration, the integration of management systems is relatively difficult and controversial. In this process, mixed ownership enterprises should formulate and adhere to strict regulations and principles, unified and standardized management system. The management system of mixedownership enterprises must comply with the “three important and one major” decision-making principle. Mixed-ownership enterprises have state-owned capital and are subject to the supervision of the State-owned Assets Supervision and Administration Commission and other administrative agencies. When formulating management systems, they should reflect the policy spirit of the CPC Central Committee and the State Council. At the same time, it is necessary to ensure the authority of management system. In practice, state-owned and non-state-owned shareholders often examine and approve all matters in order to achieve management and control of the enterprise, which greatly weakens the authority of management system. It is necessary to establish a set of standardized and effective management system and conduct management from top to bottom. In addition, in post merger integration and management, in addition to systems, personnel should also be integrated, which is another difficult problem faced by SOEs in M&A. After M&A, SOEs can implement strategic human resource management, establish a good employment mechanism, balance employee interests, and retain outstanding talents. They may also establish an internal performance appraisal system, appraise and evaluate employees, and set evaluation standards in connection with management system to improve their overall efficiency. Corresponding to theoretical framework in Chap. 4, regarding management adjustment in mixed ownership-oriented M&A: First, SOEs should scientifically handle asset integration. They must fully consider the assets and liabilities of both parties, and adopt various measures to integrate their assets and liabilities, such as sales, repurchase, debt-to-equity swaps, control the scale of assets and liabilities within a certain range, continuously optimize capital structure, rationally allocate corporate operating resources, and enhance the effect of M&A. Second, on the basis of fully considering external factors such as market prospects and macro policies, SOEs should accurately position themselves based on the resource advantages of both parties, industrial development plans and other internal factors,

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gradually adjust their business strategies, develop a diversified business strategy while focusing on main business, and synergize superior industries and diversified projects. Third, they should establish a sound management system. SOEs and private enterprises have differences in business operations. After M&A, in order to ensure that the interests of both parties are not harmed, they can adjust operating system by taking into consideration the business characteristics of private enterprises and traditional business models, and strengthen integration. For example, they can appoint financial directors to private enterprises to supervise the latter’s financial activities, and use financial director rotation system to ensure the transparency of the supervision and improve the efficiency of financial integration; set up a reward and punishment mechanism (such as setting performance commitments) in M&A contract to avoid uncertain risks in post-merger business operations to reasonably protect the interests of both parties. Corresponding to theoretical framework in Chap. 4, regarding cultural conflicts in mixed ownership-oriented M&A: In post merger integration, in addition to management integration and business adjustment, it is also necessary to focus on cultural integration and effectively resolve cultural conflicts between the two parties. Due to differences in corporate culture and values, SOEs may easily face inefficiency and even failure of M&A after acquiring private enterprises. Therefore, in the process of post merger integration, in order to avoid cultural conflicts that bring risks to both parties, SOEs should strengthen communication and coordination with private enterprises, integrate cultures of both parties on the basis of establishing a trust mechanism, seek common ground while reserving differences, and actively guide the effective integration of resources of both parties, so as to maximize the synergies of M&A. Besides, mixed-ownership enterprises after M&A need to actively improve corporate governance, adjust corporate governance structure, and make full use of innovation mechanism and trust mechanism to ensure that rights, responsibilities, and benefits are mutually matched.

10.2.6 Cultivate a Mature Capital Market and Accelerate SOEs’ Mixed Ownership Reform Through M&A Due to its advantages in marketization, diversified M&A, openness and transparency of transactions, the capital market is gradually becoming one of the important channels for the cash out, reorganization and integration of state-owned assets, and the entry of non-public capital. As an important channel for the optimal allocation of production factors, corporate M&A, and listing, it has also become an important platform for the generation and development of mixed ownership. A mature capital market provides a good development space for mixed ownership reforms and releases

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reform dividends of SOEs. As for the development of the capital market, the Opinions proposes to promote the reform of registration system, improve compulsory delisting and active delisting systems, and greatly broaden the service industry.4 There are now huge opportunities for M&A in domestic and foreign multi-level capital markets. Through M&A, companies can be listed as a whole, the role of SOEs’ as integration platform can be played, a huge industrial chain can be released to non-public capital, and the vitality of enterprises can be continuously enhanced by introducing non-public capital. Developing a mature capital market and giving full play to its role in the merger and reorganization of public and non-public capital, and the role of the market mechanism are conducive to not only establishing a property right system, diversifying investment entities, forming an effective supervision mechanism, bu also improving corporate governance structure, establishing effective self-discipline and incentive mechanisms, and continuously promoting the development of mixed ownership economy. To strengthen the active role of the capital market in promoting mixed ownership-oriented M&A of SOEs, it is recommended to further clean up and simplify administrative licensing, improve market-based mechanism for M&A and reorganization, enrich payment tools for M&A, broaden financing channels, improve supervision on M&A, and leverage the power of capital markets at all levels, including main board market, small and medium-sized board market, second-board market, new third board market, and bond market, to promote mixed ownership reforms.

10.2.7 Improve Laws and Regulations on M&A and Provide Effective Operating Platforms for SOEs to Conduct Mix Ownership-Oriented M&A M&A is an important way for SOEs to carry out mixed reforms. Realizing equal protection of various property rights and safeguarding public interests under legal framework is an important part of promoting the success of mixed ownership reforms. A sound legal system and perfect institutional arrangements provide an effective operating platform for mixed-ownership reforms and allow the smooth circulation of property rights and the healthy development of the mixed-ownership economy. In terms of improving legal and regulatory systems on economy, the Opinions proposes a series of measures to improve the legal system for property rights, improve

4

The Opinions proposes to accelerate the establishment of a standardized, transparent, open, dynamic and resilient capital market, strengthen the construction of basic systems for the capital market, promote the reform of registration system for stock issuance centered on information disclosure, improve mandatory and voluntary delisting systems, improve the quality of listed companies, strengthen protection of investors, explore the implementation of a registration management system for the issuance of corporate credit bonds, and build a multi-level, wide coverage, and differentiated banking system that is compatible with the structure of the real economy and financing needs.

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bankruptcy system, and amend anti-monopoly law.5 These measures are important for improving laws and regulations on M&A and restructuring, and escorting SOEs’ mixed ownership-oriented M&A. Acting in accordance with the law is a principle that SOEs must adhere to after mixed ownership reforms or other reforms. In December 2015, the State-owned Assets Supervision and Administration Commission of the State Council issued the Opinions on Comprehensively Promoting the Construction of the Rule of Law in Central Enterprises, which clearly requires to further promote rule of law in central enterprises, and “strictly control legal risks” in mixed ownership reforms. In November 2016, the Opinions on Improving the Property Rights Protection System and Protecting Property Rights in accordance with the Law reiterates to “effectively protect the property rights of economic organizations of various ownership and citizens in accordance with the law” and “improve property rights protection system based on the core principle of fairness”. If the main problem faced by mixed ownership reforms is “how to integrate”, then the main legal issue in it is the protection of property rights during and after reforms. Property rights protection has an important incentive effect on the production, accumulation and distribution of wealth. Protecting the rights of minority shareholders, especially the legitimate rights and interests of non-state-owned shareholders, concerns the enthusiasm of non-stateowned capital in participating in mixed ownership reforms. If their rights and interests cannot be protected by law, or are treated unfairly, their enthusiasm for further participation will be greatly reduced. How to equally protect all kinds of property rights should be an important content of legal system for M&A and reorganization. At practical level, companies should fully protect various property rights in their articles of association, governance system and operating mechanism, and standardize board procedures, professional committees, voting rules, etc., to protect the rights and interests of minority shareholders. Government departments should further improve review and approval system, regulatory provisions, industrial policies, etc. to avoid infringement of non-public property rights. In addition, current central and local policies on mixed ownership reforms are just “notices” and “opinions”. Legislation on property rights protection and employee shareholding of different types of ownership should be launched as soon as possible. Especially in the face of legal application issues involved in M&A from private enterprises, SOEs should make judgments and respond in advance, and consult experts and higher-level departments for instructions. In terms of possible tax risks, they should specify the responsibilities of both parties 5

The Opinions put forwards that property rights related legal systems such as property rights, creditor rights, and equity should be improved, and private property and public property should be given equal status and equal protection in legislation. It is necessary to improve bankruptcy system, reform and improve the legal system for corporate bankruptcy, promote bankruptcy legislation for individuals, establish and improve regulations on market-oriented exit of financial institutions, realize the orderly exit of market entities; revise the anti-monopoly law, promote the establishment of social credit laws, maintain a fair competitive market environment; formulate and improve laws and regulations on development plans, land and space plans, natural resources and assets, ecological environment, agriculture, finance and taxation, finance, and foreign trade and economic relations; promote legislation in new economy in accordance with the principle of tolerance and prudence.

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in M&A contract, consult and file with tax authorities in advance. Regarding contract performance, they should arrange performance conditions, liabilities for compensation, and seller’s commitments, etc. in advance. Before officially launching mixed ownership-oriented M&A activities, SOEs are advised to conduct a detailed investigation of target firms and ensure that target firms do not face violations of laws and regulations, and negotiates and signs a written agreement after clarifying the responsibilities and obligations of both parties to clearly stipulate the rights and obligations of both parties and avoid legal risks.

10.3 Prospects of Research on China’s Mixed Ownership-Oriented M&A First, innovation abilities are crucial to enhancing the vitality of SOEs and improving the core competitiveness of enterprises. This book explores trust and innovation mechanisms in mixed ownership-oriented M&A, but does not analyze the path and role of innovation mechanism in it. Future research may take innovation as an intermediary variable to explore how trust mechanism or other informal systems can create M&A value for enterprises by enhancing their innovation capabilities, improve the vitality of SOEs, and raise the effectiveness of reforms of state-owned assets and enterprises. Second, in empirical research, this book constructs a game model of M&A covering transaction pricing and expected excess returns of the market, and tests the relationship among trust mechanism, innovation capability, and merger performance with a series of empirical studies. However, SOEs’ ultimate goal in mixed ownership-oriented reform is not to improve M&A performance, but to stimulate their vitality and enhance their core competitiveness. More detailed empirical studies or case studies are needed to verify the impact of mixed ownership-oriented M&A on SOEs’ vitality and core competitiveness. Third, this book only discusses the impact of trust mechanism, an informal system, on SOEs’ mixed ownership-oriented M&A. With the release of the Three-year Action Plan for Reforms of SOEs, the goal and direction of reform of state-owned assets and enterprises will be further clarified. Future research may explore the impact of other informal systems on SOEs’ mixed ownership-oriented M&A and vitality to provide more decision support for the sustainable development of such M&A, enhance the vitality of SOEs, and improve the core competitiveness of the state-owned economy.

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