Research on the Impact of Executive Shareholding Ratio on

Profitability of GEM Listed Companies

Xiaoqi Xin

Beijing Jiaotong University, China

Keywords: GEM Listed Companies, Shareholding Ratio of Senior Executives, Profitability.

Abstract: The GEM is an integral part of China's multi-level asset market, which is characterized by high growth,

high innovation, small scale, and high risk. In addition, senior executives may affect the company's

operation and management activities, and may seek private interests and damage the company's interests.

Therefore, shareholding by senior executives has become a common incentive method for companies, but

corporate governance issues such as principal-agent issues and senior executives' moral hazard have

followed. Therefore, at present, domestic and foreign scholars have taken executive stock ownership as a

core topic of company research. Based on the above background, analyze the impact of executive stock

ownership on profitability of GEM listed companies, and draw a conclusion.

https://orcid.org/0000-0001-8589-6720

1 INTRODUCTION

China's basic economic system is a socialist market

economic system with public ownership as the

mainstay, multiple ownership systems developing

together, distribution according to work as the

mainstay, and multiple distribution modes

coexisting. In this context, the company occupies an

important position in the market, and there are many

problems in the company, in the process of company

development, the need to continuously improve the

company's operating efficiency, the need to

maximize the value of the company's shareholders,

some scholars in the study of the company found the

problem of principality, executives as the company's

agents, in the company has an indispensable

position, is the company's operation and investment

decision executor, but they may seek private

interests and hinder the company's long-term

development of behavior. As a result, equity

incentives came into being and became a common

means to prevent such phenomena. Senior

management's shareholding and shareholders'

interests converge, and whether the company can

achieve rapid development has also become a

concern of executives.

Figure1: Number of GEM listed companies.

The number of listed companies in China's GEM

market has exceeded 1,000 so far, and it has tended

to mature. As of August 2022, the total market

capitalization reached 12 trillion yuan. GEM market

for entrepreneurial companies, small and

medium-sized companies and high-tech companies

that do not meet the listing conditions of the main

board to provide financing and development

channels, has an important complementary role to

the main board market, but also plays a key role in

the entire securities and even asset market, and

GEM listed companies have the characteristics of

general executive shareholding and relatively

concentrated equity, in this context, the company

pays more attention to whether the proportion of

executive shareholding has an impact on the

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Xin, X.

Research on the Impact of Executive Shareholding Ratio on Proﬁtability of GEM Listed Companies.

DOI: 10.5220/0012027600003620

In Proceedings of the 4th International Conference on Economic Management and Model Engineering (ICEMME 2022), pages 174-179

ISBN: 978-989-758-636-1

 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

company's profitability and how to affect it.

Therefore, this article takes GEM listed companies

as the background to explore the impact of executive

shareholding on the company's profitability.

As the GEM market becomes more and more

mature, how to effectively manage the company

according to its own characteristics, give full play to

its advantages as a supplement to the main board

market, let the investees who need to invest stand

firm, on the basis of the main board, increase the

company's financing methods, solve the capital

problems of small and medium-sized companies, and

increase investment opportunities, is a problem that

the market needs to pay attention to now, which is

conducive to the comprehensive development of

China's economic market. At present, few scholars

have studied the relationship between executive

shareholding ratio and profitability in detail, and few

have used GEM listed companies as a sample to

explore. It is of certain practical significance to

explore the relationship between corporate

profitability and executive shareholding ratio: first,

to clarify the impact of executive shareholding ratio

of GEM listed companies on profitability, and

second, the research conclusion provides certain

references for GEM listed companies that plan to

implement equity incentives.

2 RESEARCH HYPOTHESIS AND

DESIGN

2.1 Research Hypothesis

Based on the principal-agent theory, two-factor

theory and stakeholder theory, the company has

information asymmetry, different responsibilities of

owners and operators, resulting in agency conflicts,

according to the research results of many domestic

and foreign scholars on the issue of principal-agent,

giving executives a certain number of company

shares can effectively alleviate the agency conflict

problem of owners and operators, so that the

interests of executives and shareholders are unified

and converge, Xu Cheng (2020) research believes

that if the senior executives in the company hold

shares, Then to a certain extent, the interests of

shareholders can be safeguarded and the company's

governance can be improved, so executive

shareholding is conducive to improving the

company's profitability. Wu Gaobo and Du Yanping

(2021) studied Shanghai and Shenzhen A-share

companies from 2014 to 2018 and concluded that

executive shareholding is positively correlated with

the cost of equity capital, and certain equity

incentives can weaken the cost of capital effect of

accrued earnings management. Giving executives a

certain amount of company equity represents the

affirmation of their past work and operation, which

can allow them to maximize their self-worth,

maximize work efficiency, and promote the

development of the company. As an effective

incentive mechanism, executive shareholding meets

people's most basic needs and promotes the growth

of the company, thereby affecting the ability to

operate. Similarly, after holding shares in the

company, executives have a certain shareholder role,

give priority to themselves when making corporate

investment decisions, and prefer higher-income

business methods and strategies, and at this time, the

interests of executives and other stakeholders

converge, which will increase the return related to

investors' investment assets, increase the value of

the company, and enhance the company's

competitiveness and development ability.

As the decision-makers of the company's

investment and operation, executives will work more

actively for the company's profits in order to increase

the market value of the shares held, use all the

company's existing resources for profit, and work

harder to improve the ability of investors to generate

income from the funds invested in the company. Tian

Guoshuang and Qi Yingnan (2018) analyzed 245

companies from 2012 to 2016, and believe that the

increase in the proportion of executive shareholding

will increase the company's economic efficiency. Wei

Wenjun and Shi Huaqian (2017) analyzed A-share

companies and believe that executive shareholding

positively affects financial performance. Wang

Xiaoning and Zhou Meiling (2016) study empirical

data in the real estate industry to demonstrate the

positive correlation between executive shareholding

and company performance. Li ed al. (2007) studies

that from 1992 to 2000, listed companies proposed

that executive shareholding helped to improve

corporate performance, and that companies with a

high proportion of shares had about 2% higher

operating capacity and profitability than companies

with a low proportion of shares. Wang Xiufen and

Xu Xiaopeng (2017) analyzed A-share enterprises

from 2011 to 2015 and demonstrated that executive

shareholding can improve operational profitability.

Most scholars believe that executive shareholding

can effectively make executives pay more attention

to the company's performance, effectively improve

the company's performance, and the company's

executives holding a certain number of company

Research on the Impact of Executive Shareholding Ratio on Proﬁtability of GEM Listed Companies

175

shares can protect the interests of shareholders to a

certain extent, suppress the problem of principality,

and improve corporate governance. As the operator

of the company, the executive has a good

understanding of the company's asset information,

and the company gives a part of the shares to the

executive, which will allow the executive to make

better use of the existing information to make

decisions to maximize the value of the company,

maximize the efficiency of asset operation, and

improve the overall profitability of the company

using all assets. Similarly, senior executives'

shareholding can enable them to obtain the rights of

shareholders, participate in major decisions of the

company, have a strong sense of belonging to the

company, pay more attention to the interests of the

company, make various business decisions that will

be closer to the requirements of the company's

interests, make behaviors that use power for personal

gain to harm the interests of the company, and the

risk appetite of company executives for investment,

projects, etc. will converge with the company's

shareholders, and the use of the company's assets will

be more effective. Therefore, the hypothesis is

proposed:

H1: There is a positive correlation between

executive shareholding and profitability.

2.2 Research Design

2.2.1 Sample Selection

The data in this paper comes from the Guotai An

database, which is sorted out by Excel and tested by

Stata to test the model. Taking the five-year data of

GEM listed companies from 2017 to 2021 as the

research sample, in order to draw a more accurate

conclusion, ST, *ST listed companies and financial

industry companies are excluded from the sample

selection, and the company should continue to

operate in the five years from 2017 to 2021 and have

been listed in 2017, and the data is complete and

complete to ensure the consistency of the sample. In

the end, a total of 2810 sample data from 562

sample companies were obtained after screening.

2.2.2 Variable Selection

 Interpreted variable: profitability

Referring to the research of Liang Yuanni (2020),

Chen Yaomeng (2021) and others, the return on

equity reflects the company's net profit income,

which can enable managers and investors to decide

whether to expand the scale of operation or

investment, and capital profitability is the ability of

the company owner to benefit from investing capital

management; Return on total assets can reflect the

company's ability to use and manage total assets,

and asset profitability is the company's ability to

return on operating assets; Operating profit margin

reflects the company's operating efficiency,

operating profitability is the company's financial

operation ability, so the return on net assets, return

on total assets, operating profit margin as the

indicator to measure profitability.

 Explanatory variable: Shareholding ratio

of senior executives

The shareholding ratio of senior executives is an

important indicator to measure the degree of senior

management's shareholding. The shares held by the

executives in this article are the company's current

shares, and if one person wears multiple positions,

the number of shares is not double-counted.

The relevant variables and definitions involved

in this article are shown in Table 1.

Table 1: Variable definitions and descriptions.

Var Symbol definition

Interpreted

variable

Return on

equit

ROE Net profit/net assets*100%

Return on

total assets

RTA

(Total profit+interest expense)/Total

average assets*100%

Operating

profit margin

OPM Operating profit/revenue*100%

Explanatory

variable

Shareholding

ratio of senior

executives

ESR

Total shares held by senior executives/total

shares of the company*100%

ICEMME 2022 - The International Conference on Economic Management and Model Engineering

176

control variable

company size SIZE

Natural logarithm of total assets at the end

of the year

Shareholding

ratio of the

largest

shareholder

FIRST

Number of shares held by the largest

shareholder/total number of shares*100%

leverage LEV

Total liabilities at the end of the year/total

assets at the end of the year *100%

2.2.3 Model

To verify that the hypothesis is correct, the following

multiple linear regression model is established:

𝑅𝑂𝐸\𝑅𝑇𝐴\𝑂𝑃𝑀  𝛼  𝛽𝐸𝑆𝑅  𝛾



𝑆𝐼𝑍𝐸

𝛾



𝐹𝐼𝑅𝑆𝑇  𝛾



𝐿𝐸𝑉  𝜀

Among them, the meaning of each variable is

shown in Table 1, 𝛼 is the constant term, 𝛽, 𝛾

𝛾

, 𝛾

are the model regression coefficients, 𝜀 are

the model random error terms.

3 EMPIRICAL RESULTS AND

ANALYSIS

3.1 Descriptive Statistical Analysis

In order to obtain a preliminary understanding of the

executive shareholding ratio, profitability and

control variables of the sample companies,

descriptive statistics were used for analysis. The

specific results are shown in Table 2:

Table 2: Descriptive statistical analysis.

N Max Min Mean St

ROE 2810 0.311 -0.613 0.096 0.501

RTA 2810 0.361 -0.609 0.080 0.509

OPM 2810 0.459 -9.032 0.055 5.332

ESR 2810 0.648 0 0.276 0.011

SIZE 2810

24.54

19.29

21.39

0.794

FIRST 2810 0.624 0.056 0.249 0.008

LEV 2810 1.037 0.021 0.302 0.166

The average return on net assets is 0.096, and the

profitability of net assets is strong; The difference

between the maximum value and the minimum value

of the return on total assets is large, with the average

value of 0.080. The level of input and output is

strong, and the assets are well used; The minimum

value of operating profit margin is -9.032, and the

average value is 0.055, indicating that some sample

companies have excessive losses, but the overall

development potential is fair and the profitability is

strong.

The shareholding ratio of senior executives

reached 64.8% at the highest level. The value of

some sample companies was 0, with an average of

27.6%, indicating that the index value of the whole

market was high, indicating that the equity incentive

of GEM listed companies was widely implemented

and successfully implemented.

As can be seen from Table 2, the difference in

the size of the company is small; the average

shareholding ratio of the largest shareholder is

24.9%, and the equity is relatively concentrated;

Under normal circumstances, the asset-liability ratio

of companies with a good asset structure should not

exceed 50%, as can be seen from Table 2, the

maximum is 1.016 higher than the minimum, and

the gap in financial risks is large, but the average

value is 30.2%, indicating that the overall risk is at a

reasonable level.

3.2 Regression Analysis

Table 3: Regression analysis results.

ROE RTA OPM

ESR

0.180

(

2.480

)

0.185

(

2.500

)

0.196

(

3.914

)

SIZE

0.227

(

2.746

)

0.239

(

2.492

)

0.163

(

5.592

)

FIRST

-0.322

(

-3.340

)

-0.338

(

-3.440

)

-0.246

(

-2.573

)

LEV

0.156

(

2.326

)

0.208

(

2.726

)

0.215

(

3.821

)

0.097 0.101 0.044

ust R

0.087 0.091 0.033

F 9.850

10.250

4.170

N 2810 2810 2810

Note: ** indicates a significant correlation at the 0.01

level (bilateral) and * indicates a significant correlation at

the 0.05 level (bilateral).

Adjust R

is a comprehensive measure of how well a

regression model fits. Table 3 shows that the model

Research on the Impact of Executive Shareholding Ratio on Proﬁtability of GEM Listed Companies

177

fit is average, but it is significant at 1% and 5%

levels F and the model is usable.

The executive shareholding ratio and return on

net assets coefficient is 0.180, the growth of this

indicator will pull up the return on net assets, that is,

the proportion of executive shareholding positively

affects the profitability of capital, and the executive

shareholding ratio and total return on assets

coefficient is 0.185, indicating that the growth of

executive shareholding ratio will increase the return

on total assets, that is, the proportion of executive

shareholding positively affects asset profitability,

and the executive shareholding ratio and operating

profit margin coefficient are 0.196, indicating that

the growth of executive shareholding ratio will

increase the operating profit margin, that is, the

proportion of executive shareholding positively

affects operating profitability, assuming that H1 is

verified.

The results show that the shareholding ratio of

senior executives of GEM listed companies is

positively correlated with capital, assets and

operating profitability. After the executives hold the

company's shares, they have a certain shareholder

role, take into account their own benefits when

making company operation decisions, will adopt

higher returns, relatively stable investment strategies

and business methods, the company's value will rise,

similarly, their own interests will gradually be

consistent with the interests of the company and

investors, and the risk appetite of company

executives for investment and projects will also

converge with the company's shareholders, which

will increase the return on investors' investment

assets and increase the return on investment. It can

also effectively improve the ability of investors to

generate income on the funds invested in the

company, thereby improving the profitability of

assets. On the other hand, the company grants

executives a certain amount of equity, which is to

affirm their past work performance, and mobilize

their work enthusiasm, it also strengthen their

growth needs, and maximize work efficiency, so that

it can enable them to prove their excellent

management ability through the company's operating

efficiency, and at the same time realize self-worth,

and promote the growth and development of the

company, so that the company's operating profit

margin can be improved and profitability enhanced.

4 RESEARCH CONCLUSIONS

AND RECMMENDATIONS

This paper uses 2810 sets of data from 562 listed

companies in China's GEM market from 2017 to

2021 as research samples, first reviews and

summarizes relevant domestic and foreign research

results and theories, and then analyzes each variable,

on this basis, uses multiple regression models to

carry out empirical analysis of the three research

hypotheses proposed, and concludes: (1) capital

profitability will increase with the increase of

executive shareholding; (2) asset profitability will

increase with the increase of executive shareholding;

(3) Operating profitability will increase with the

increase of executive shareholding.

Based on the previous analysis and conclusions,

the following recommendations are made:

 Reasonably formulate an equity incentive

system

The shareholders of the company will strengthen

the supervision of senior executives or give equity

so that senior executives do not make business

decisions that harm the interests of the company, and

the interests of senior executives are consistent, and

the equity incentive system can make the interests of

the two converge and solve the problem of agency

conflict, so executive shareholding has become a

common incentive method for many companies.

According to the research of this paper, executive

shareholding has been a very common phenomenon

in the GEM board, and positively affects the

profitability of the company, so it is necessary to

reasonably formulate the executive incentive

system, conduct regular assessment of the executive

behavior and management level, and establish a

long-term incentive and short-term incentive

combined executive salary and remuneration

system, when the long-term remuneration directly

obtained by the executive and the benefits obtained

through encroachment on the company's interests

tend to be at the same time, the constraint of moral

hazard can play a role again, and the behavior of

operators harming the interests of the company can

be effectively avoided. It ensures a high degree of

unity of interests between managers and

shareholders.

 Rationalization of the equity distribution

of the company

GEM listed companies are special in nature,

many are family businesses, and the operator is also

the chairman of the board, the person who holds the

largest share of the company, and the direct

decision-maker of the company. The company's

ICEMME 2022 - The International Conference on Economic Management and Model Engineering

178

equity is too concentrated and easy to listen to the

decision-making of the person with the highest

shares, does not absorb the opinions of other

shareholders, resulting in losses to the company, and

the largest shareholding ratio is too high is not

conducive to mutual restraint and balance between

shareholders, and is not conducive to the

improvement of the company's profitability.

Therefore, for GEM listed companies, scientific

methods should be adopted to correctly guide the

largest shareholder to transfer part of its equity to

other shareholders, or the company should absorb

more investors, reduce the shareholding ratio, and

rationalize the equity distribution, so as to promote

the company to solve problems efficiently, it also

make economic decisions more effective, and

improve the company's profitability. At the same

time, the company should establish a structure of

mutual restraint among shareholders, maintain a

moderate level of shareholding of the largest

shareholder of the company, and further optimize the

ownership structure.

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