Non-tradable Share Reform Research Articles

The role of anchoring on investors’ gambling preference: Evidence from China

This paper examines the anchoring effect of 52-week high price on the investors’ gambling preference in the Chinese A-share market. We document the gambling preference only exists among stocks valued much lower than their 52-week high prices. Specifically, using return skewness as a proxy for lottery stocks, we find that buying stocks in the lowest skewness quintile and selling the highest earns a significant risk-adjusted return of 0.85% per month for stocks far below their 52-week high prices. By contrast, it earns an insignificant return of 0.04% per month for stocks close to their 52-week high prices. Moreover, high arbitrage risk and investor sentiment strengthen the effect of anchoring on gambling preference. Our findings are robust after considering the effects of capital gains overhang, under-reaction to news, firm’s ownership status, and China’s non-tradable share reform.

Does residual state ownership increase stock return volatility? Evidence from China's secondary privatization

Abstract Using hand-collected data, we find residual state ownership is negatively related to stock return volatility, following China's secondary privatization initiated by the non-tradable share reform. Conservative corporate policies are channels through which residual state ownership reduces stock return volatility. Further, the volatility-mitigating effect is more prevalent in firms in which the government has greater influence on corporate decisions. However, the volatility-mitigating effect is temporary, lasting up to three years after state shares become fully tradable. The evidence suggests the government can send credible signals by retaining state ownership, which reduces investor uncertainty. However, investors must weigh the positive signaling effect of residual state ownership in reducing uncertainty, surrounding sudden policy changes, against the inefficiencies of state control.

Does Gold Hedge Stock Market in China? Evidence from Time-Frequency Analysis

Gold is considered the most strategic commodities and the most important financial assets all over the world. This paper investigates the co-movements between the gold price and stock market in China by using the wavelet approach. The results show that gold cannot act as a hedging tool in the short term, which is quite consistent with the results in the UK and US. However, it serves as a hedging tool against stock market only in China in the long term after 2005. We own the hedge attribution of gold in the long term after 2005 only in China to some important market policies shifting, such as the non-tradable share reform in Chinese capital market and the exchange rate reform in 2005. The results also reveal that the stock market in China has been dominated by the gold price over the long term.

Stock liquidity and firm value: evidence from China

ABSTRACTEmpirical evidence for the effect of stock liquidity on firm value is limited and mixed due to a severe endogeneity problem. This article adds to the literature on this topic by providing new empirical evidence using the nontradable share reform in China as a quasi-natural experiment. Our results show that higher stock liquidity can lead to significant firm value improvement.

From share issue privatisation to non-tradable share reform: a review of privatisation in China

Privatisation in China has proceeded on a gradual path over 30 years. In this paper, we present a detailed review of China's privatisation programmes from its Share Issue Privatisation (SIP) to its Non-tradable Share (NTS) reform. The SIP was a primary offering process with state-owned enterprises (SOEs) issuing new shares to private investors, but after their Initial Public Offering (IPO) approximately two-thirds of the shares remained non-tradable and were mainly held by the government. The SIP achieved only limited success because of its partial trading and partial privatisation, which led to the implementation of the NTS reform in 2005. The NTS reform aimed to dismantle the split share structure and provide opportunities for improving corporate governance and further privatisation. The review shows that the NTS reform has yielded greater success in improving firm performance and corporate governance than the SIP.

Gender diversity, state control, and corporate risk-taking: Evidence from China

Corporate risk-taking activities among Chinese corporations generally increase with the presence of male-only boards but are mitigated by state ownership. The positive relation between corporate risk-taking and male dominance in boardrooms became more prominent after the Government reduced its ownership control following the Non-Tradable Share (NTS) reform launched in 2005. The reduction in corporate risk-taking through state ownership tends to weaken after the NTS reform. Our results are robust to endogeneity issues and highlight the benefit of gender diversity in alleviating excess corporate risk-taking behavior, especially in countries with relatively weaker overall investor protection.

Politicians, insiders and non-tradable share reform decisions in China

We use the natural experiment provided by the non-tradable share (NTS) reform in China to examine how CEOs respond to a time-window within which they were able to convert non-tradable shares into tradable shares. We find that more politically connected firms delayed the conversion, on average. This aligns with the view that conversions diminished politically connected CEOs access to political benefits. More generally, this is evidence of political agency costs and reducing such costs, through initiatives such as the NTS reform, is important in establishing an efficient business environment.

Market Timing of New Equity Offerings: Evidence from Chinese Listed Firms

A well-established paradigm of the developed financial market is that firms take advantage of market valuations to make financial decisions. Do firms operating in a highly controlled market follow similar financial strategies? We find that the new equity offerings of Chinese listed firms are strongly associated with market valuations. However, the market timing effectiveness is relatively lower in the firms owned by the State and in the time when firms conduct non-tradable share reform by liquidating non-tradable shares. We also find that the proceeds from equity offerings are expended more in the form of opportunistic and discretionary usage than investment requirements. Our empirical evidence supports the general applicability of the equity market timing theory to the highly controlled emerging market of China.

The Long-run Performance of Chinese Private Firm IPOs

This paper examines the three-year long run performance of Initial Public Offerings (IPOs) in the Chinese stock markets from 2002 to 2012. We find that private firm IPO long-term returns are significantly higher than those of non-private firms, measured by both cumulative abnormal returns (CARs) and buy-and-hold abnormal returns (BHARs). Furthermore, the long-term performance of IPOs in the Chinese stock markets seems to have a significant upward tendency after the Non-tradable share (NTS) reform launched in 2005. However, private firm IPO long-run outperformance has experienced a diminishing increase after the NTS reform. This result indicates that state-owned enterprises turn to be more market-oriented after the NTS reform.

Stock Return Synchronicity and Technical Trading Rules

We explore the potential source of returns from technical trading rules at the firm-level by examining the cross-sectional relationship between technical trading returns and stock return synchronicity. Inspired by Roll (1988) and Morck, Yeung and Yu (2000), we use R 2 of a regression of individual stock returns on the market return as our measure of synchronicity. If a low R 2 is largely attributable to noise trading, stocks will have lower synchronicity with market factors and lower R 2 . Low R 2 stocks earn higher expected returns, according to De Long, Shleifer, Summers, and Waldmann (1989, 1990), or due to limits of arbitrage (Shleifer and Vishny, 1997), a predicted relationship which we termed as the Noise Hypothesis. Overwhelming support in prior literature is in favor of lower expected returns in low R 2 stocks, or the Price-Informativeness Hypothesis according to Morck, Yeung and Zarowin (2003). China is our context for investigation; it is the second most synchronous market in the study by Morck et al (2000) which has grown to become the world’s third largest stock market by market capitalization. We find evidence of a negative relationship between returns from technical trading rules and R 2 over 1991-2009, in favor of the Noise Hypothesis. Our results remain robust after controlling for firm-specific characteristics which include market-to-book, size, leverage, dividend payout ratio, turnover and firm age. Thus, an additional simple yet practical statistics - the R 2 - can guide trading decisions using technical trading rules. Do technical trading rules work? Possibly only when the R 2 is low, and for larger and younger stocks with lower turnover. However, sub-period analysis reveal that when there is an improvement in the information environment after the punctuation by an economically significant fundamental shock - the NonTradable Share (NTS) reform in China in April 2005 - technical analysis work better post-NTS reform during 2005-09 for stocks with higher R 2 , consistent with the Price-Informativeness Hypothesis, and generally for older and bigger stocks with lower turnover and higher market-to-book ratio. Thus, without the guide of R 2 , investors should take the market prognosis by all these “alchemists” with their “voodoo” charts with a heavy dose of salt. We also reconciled the lively debate and extremely mixed evidence on the interpretation of R 2 and its relationship with the cross-sectional returns of stocks.

Family control and corporate cash holdings: Evidence from China

This study examines the effect of family control on the cash holding policy in China. We find that family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders. We further show that the incentive for controlling families to hold cash and for tunneling is exacerbated by the agency conflict between controlling and minority shareholders, i.e., it is weakened after the Chinese Non-tradable share (NTS) reform and strengthened by the presence of multiple large shareholders who probably play no monitoring role in Chinese family firms. Furthermore, family firms’ incentive to hold cash for tunneling is influenced by the unique characteristics of Chinese firms in the following ways: the incentive is stronger when the family founder has one child and face family succession problem, and when the founder has political connections and directly involves in firm’s management; while it is weakened by family founder’s social interpersonal trust with other entrepreneurs through their membership of Chambers of Commerce. Overall, we argue that family firms in China tend to hold high levels of cash for tunneling, which harms firm value, while the severe controlling-minority shareholder agency conflicts and unique Chinese family characteristics only make this situation worse.

An Empirical Study of Liquidity and Return Autocorrelations in the Chinese Stock Market

We investigate how the Nontradable Share Reform (NTS Reform) affects cross-sectional relations between liquidity and stock return autocorrelations using a new illiquidity measure that measures more precisely the liquidity of the Chinese stock market. We find that winner and loser portfolios exhibit different return autocorrelations before and after the NTS Reform. All return autocorrelations are stronger for high-illiquidity portfolios after controlling for turnover ratio. We use market capitalization to determine the extent of speculative trading and assume that return reversal (continuation) accompanied by high illiquidity occurs in large (small) stocks. Our empirical results are remarkably consistent with our hypothesis after the NTS Reform.

Trading and earnings management: Evidence from China's non-tradable share reform

This paper examines the effect of trading on earnings management under the setting of China's non-tradable share reform. The government-enforced reform converted non-tradable shares to tradable and thus enabled blockholders and insiders to reduce holdings via public trading. We find significant increases in accruals among Chinese listed companies after the reform. The impact of the reform on earnings manipulations is increasing with the potential for share trading, the degree of information asymmetry and the intensity of stock selling by insiders and blockholders. Our findings support that trading by large shareholders and insiders significantly increases earnings manipulations.

Non-Tradable Share Reform, Liquidity and Stock Returns in China

Non-Tradable Share Reform, Liquidity and Stock Returns in China

Controlling Shareholder, Expropriations and Firm's Leverage Decision: Evidence from Chinese Non-Tradable Share Reform

In this paper we examine the effect of excess control rights on the leverage decisions of Chinese non-SOEs before and after the reforms of non-tradable shares. We identify that both inter-corporate loans and related party transactions are channels through which controlling shareholders expropriate minority shareholders by adopting a policy of excess leverage. We found that firms with more excess control rights also have more excess leverage and the controlling shareholders of these firms used the resources they obtained to facilitate tunneling activities rather than invest in positive NPV projects. We also found that the excess leverage in firms with excess control rights decreased after the non-tradable shares were reformed. We further found a positive market reaction to firms’ announcement of related party transactions and better performance in firms with more excess control rights after the reform, confirming a reduction in the controlling shareholder’s tunneling behavior. We argue that in emerging markets when legal protection for both creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel.

The success of China’s non-tradable share reform

This paper examines the impact of the Non-tradable Share (NTS) Reform on the financial and operating performance of China’s listed firms, using a sample of 563 state-owned enterprises (SOEs) that were partially-privatized through share issue privatizations (SIPs) from 1994 to 1998 and then carried out the NTS reform from 2005 to 2008. We find that the NTS reform has greatly improved firm profitability (measured by real net profit, real EBIT, return on sales and EBIT to sales), output (measured by real sales), operating efficiency (measured by real sales, real net profit and real EBIT per employee) and employment (measured by total employment). The positive effect of the NTS reform on firm operating performance is much stronger than that of the first round SIPs. The regression results show that the decrease of state ownership control is a significant determinant of the increase of firm profitability after the NTS reform.

Research on Impacts of Non-Tradable Share Reform on Large Shareholders�� Embezzlement of Funds

Research on Impacts of Non-Tradable Share Reform on Large Shareholders�� Embezzlement of Funds

An empirical study on the impact of non-tradable share reform on ownership structure and agency costs

The purpose of this paper is to examine the impact of non-tradable share reform on ownership structure and the influencing path on equity agency costs in depth. Data from listed companies is used to analyse the changes of relationships between ownership structure and equity agency costs after non-tradable share reform. The result of the research shows non-tradable share reform has a distinct impact on agency costs. After non-tradable share reform, the correlation of ownership concentration and Type I agency costs becomes significantly negative, and the negative relation with Type II agency costs is enhanced. Furthermore, the relations between equity restriction and two types of agency costs shift from non-correlations to significantly positive ones. The link between proportion of public shares and Type I agency costs shifts from non-correlation to significantly positive correlation while the positive correlation with Type II agency costs is strengthened. The negative correlations among institutional investors and two types of agency costs are strengthened.

Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform

This paper examines the effect of excess control rights on the leverage decisions made by Chinese non-SOEs before and after the Non-tradable share reform (NTS reform). We find that firms with excess control rights have more excess leverage and their controlling shareholders use the resources for tunneling rather than investing in positive NPV projects. We also find that excess leverage in firms with excess control rights decreases and the market reaction to announcements of related party transactions are more positive after NTS reform. This confirms that tunneling by the controlling shareholders actually reduced. We argue that in emerging markets where legal protection for creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel through inter-corporate loans and related party transactions. Furthermore the privatization of these economies can reduce the controlling shareholders' tunneling activities and associated excess leverage which destroys firm value.

Research on the Influence of Non-Tradable Share Reform on Cash Dividends in Chinese Listed Companies

In this paper, authors analyze the influences of non-tradable share reform on cash dividends in Chinese listed companies and find that the distribution intensity of cash dividends has been weakened in listed companies after the non-tradable share reform. The research shows that the non-tradable share reform weakens the “tunneling” effect of large shareholder cash dividends. While non-tradable shares of large shareholder are in circulation, the large shareholder agency problem is further eased.