Split share structure reform and earnings informativeness in China

Abstract

This paper investigates the impact of split share structure reform on earnings informativeness in China. A unique institutional feature of China was the co-existence of two types of share that endowed all shareholders with equal voting and cash flow rights but different tradability. This split share structure significantly constrained the tradability of shares held by the state and ‘legal persons’ and has been the alleged cause of severe agency problems between controlling shareholders and minority shareholders. In order to overcome these agency problems, the Chinese Securities Regulatory Commission (CSRC) mandated the conversion of non-tradable shares (NTS) into tradable shares (TS) from 2006 onwards. Although the regulation did not directly address the issue of the effect of this reform on the informativeness of earnings, we believe that the emphasis given by the CSRC to the concept of ‘price discovery’ during reform has relevance for testing earnings informativeness. NTS holders can sell their shares gradually in the market with a 12 month lock-up period. This provides an opportunity for TS holders with more time to better evaluate corporate governance and firm performance of reforming companies which is expected to encourage NTS holders to provide better quality accounting information into the market place. We find support for increased earnings informativeness hypothesis in the post reform period.