Split Share Structure Reform Research Articles

Privatization and Innovation: Evidence from a Quasi-Natural Experience in China

We examine the real effect of privatization in terms of technological innovation. To address endogeneity concerns, we explore plausibly exogenous variation in privatization generated by a quasi-natural experiment, China’s split share structure reform, which mandatorily converts non tradable shares to be freely tradable and opens up the gate to the privatization of state-owned enterprises (SOEs). Using a difference-in-differences approach, we find that the expectation of privatization has a positive effect on firm innovation. We further show that better interest alignments between controlling and minority shareholders and enhanced stock price informativeness are two plausible underlying mechanisms through which privatization prospects promote innovation. Our paper sheds new light on the real effect of privatization and has important implications for policymakers who aim to promote technological innovation.

The immediate impact of purchasing/sales contract announcements on the market value of firms: An empirical study in China

With the progressive realization of split share structure reform, China׳s stock market has undergone a fundamental change. The interests of major shareholders and minor shareholders are the same, resulting in greater attention to the market value management of listed firms. Therefore, the study of the relationship between firms׳ operational decisions and their stock market returns is of practical significance. In this study, we empirically investigated the reaction of the stock market to announcements of purchasing or sales contracts. Based on 318 such announcements made by publicly traded firms in China from 2001 to 2012, we used the event study method to investigate the economic impact of purchasing or sales contract announcements on shareholder wealth. The results indicate that several factors—contract type effect, industry effect, trade partner effect, scale effect, and capital structure—have positive and significant effects on firms׳ reactions in terms of market value. However, the lack of detailed descriptions in contracts about risk information, along with investors׳ limited risk awareness, causes risk prompts to have surprisingly little influence on the market value of firms. Furthermore, growth prospects and the ratio of the contract value to operating income have not been found to enhance firm value.

Media Coverage of Mergers and Acquisitions in China

A text analysis of domestic Chinese newspaper articles on 797 proposed mergers shows that media in developing countries are quantifiably susceptible to pressure: media coverage is more favorable for deals consistent with government objectives and involving powerful local firms. However, we also find that media tone can affect the outcome of proposed M&A deals by informing the market. We identify this effect using the exogenous shock to market-driven governance from the Split-Share Structure Reform in 2007. Negative tone during negotiation coverage also predicts long-term performance for the bidder. Despite biased coverage, domestic media in developing countries can function as an alternative channel for corporate governance.

China׳s secondary privatization: Perspectives from the Split-Share Structure Reform

The Split-Share Structure Reform granted legitimate trading rights to the state-owned shares of listed state-owned enterprises (SOEs), opening up the gate to China׳s secondary privatization. The expectation of privatization quickly boosted SOE output, profits, and employment, but did not change their operating efficiency and corporate governance. The improvements to SOE performance are positively correlated to government agents’ privatization-led incentive of increasing state-owned share value. In terms of privatization methodology, the reform adopted a market mechanism that played an effective information discovery role in aligning the interests of the government and public investors.

Internal control, related party transactions and corporate value of enterprises directly controlled by Chinese central government

State-owned enterprises (SOEs) play a crucial role in China's economy. Those directly controlled by the central government (CSOEs) take leading positions almost in all industries in China. In this paper, we analyse the impacts of internal control quality of CSOEs on related party transactions and corporate value of CSOEs after the Chinese government introduced regulatory changes and the split share structure reform. Current literature offers little empirical evidence in this area. The primary information collected from 167 questionnaires responded by 22 CSOEs is analysed using structural equation models. We find that internal controls of a higher quality reduce unfair related party transactions for private benefits at the cost of corporate value and hence increase the corporate value of CSOEs. However, the overall perception of the internal control quality of CSOEs is not satisfactory with a mean of 5.3174 based on a seven-point Likert scale. This indicates that effective implementation of internal control is critical for CSOEs after setting up regulations and systems.

Reversal in the relative performance of state- and legal person-owned companies during the Chinese split share structure reform

The split share structure reform was started in 2005 with the object of re-designating state-related, nontradable shares into tradable shares. The article compares the two major forms of state ownership in China (direct or indirect ownership) showing that, close to the reform period, companies directly held by the state experience a significant increase in market performance relative to indirectly held companies. Results suggest that investors’ perception about the worth of these two forms of state ownership may have suffered a reversal, thus bringing to light value-related consequences ensuing from protective schemes usual in China and elsewhere. The article also addresses a recurrent pitfall relating to the use in empirical models of fractions of the same total and shows that U-shaped patterns found in the relationship between ownership and performance are transient rather than stable.

The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China

This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002–2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms' quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms' use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms' earnings behaviors in developed countries where the investor protection environment is strong. We suggest that firms' shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.

Ownership Structure, Corporate Governance and IPO Post-Listing Liquidity

This paper investigates how ownership concentration and structure and corporate governance relate to the post-listing liquidity of IPO firms, where the latter is measured by various dimensions of trading activity, breadth, and depth. Using a sample of 1,049 Chinese IPOs issued on the Shanghai and Shenzhen Stock Exchanges over the 2001-2010 period, we find firms with a broader shareholder base and higher ownership concentration have greater post-listing liquidity. So do firms with a higher state ownership and lower institution ownership. Corporate governance is also important in explaining the cross-sectional differences in post-listing liquidity; specifically, post-listing liquidity is higher for firms with CEO duality, a larger and more independent board, and more frequent board meetings. The 2005 Split Share Structure Reform, which increased the proportion of tradable shares, has a positive impact on liquidity.

Block trade targets in China

We examine characteristics associated with the probability of Chinese companies being block trade targets. We find that the proportion of non-publicly tradable shares over total outstanding shares is positively related to the probability of firms being block trade targets before the split-share structure reform. Ownership concentration, director ownership, and firm size were negatively related to the frequency of firms being block trade targets during the pre-reform period. Pre-reform firms with high free cash flow were likely to be block trade targets, and bidders paid a high premium to acquire those companies. The cost of a block trade increased significantly after the split-share structure reform, and the frequency of block trades declined considerably. These results suggest that before the reform Chinese bidders mainly pursued private benefits of control rather than capital gains from value-increasing takeovers. After the reform, bidders have bought tradable shares and paid a negative premium, suggesting that being a blockholder in Chinese companies implies costs that exceed benefits.

Price Elasticity for Stocks: Evidence from China's Split-Share Structure Reform

In 2005 and 2006, the split-share structure reform converted the nontradable shares of most domestic public firms in China to tradable shares. This conversion imparted a drastic supply shock to the public market. Studying this unique event, we provide direct evidence to support an inelastic demand curve for stocks. Abnormal returns of the sample firms resulting from the reform are found to be negatively associated with the size of the supply shock. This finding is free from the confounding information effects present in many prior studies of stock price elasticity. It is also robust after controlling for opposite price impacts of ROA, firm size, and ownership concentration.

Executive compensation and the split share structure reform in China

The split share structure reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more strongly related to share price movements. We predict that this reform will create remuneration arrangements that strengthen the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing that there is such an effect among state-controlled firms, and especially those where the dominant shareholders have a greater incentive to improve share return performance. Our results indicate that this reform strengthens the accountability of executives to external monitoring by the stock market, and therefore benefits minority shareholders in China.

Controlling shareholder, split-share structure reform and cash dividend payments in China

We investigated the relationship between changes in cash dividend payments, non-public tradable shares, and the percentage ownership of the controlling shareholder in Chinese firms before and after the split-share structure reform. We found a significant reduction in cash dividends before and after the reform. Importantly, the reduction in cash dividends is significantly related to the reduction in the largest shareholder's ownership; however, it is not associated with the decline in non-publicly tradable shares. These results suggest that Chinese controlling shareholders' preference for cash dividends is attributable to the inherent illiquidity of their shares rather than non-tradability of shares.

How do accounting standards and insiders' incentives affect earnings management? Evidence from China

Chinese listed companies recently experienced two important institutional changes: split share structure reform (SSSR) and the mandatory adoption of IFRS-convergent new accounting standards (NAS). We find that the introduction of NAS significantly increased earnings management. Although we do not find evidence that SSSR directly decreased earnings management of the average firm, the increase in earnings management surrounding the introduction of NAS is negatively related to the reduction in non-tradable shares. These results suggest that accounting standards are the more important factor associated with the level of earnings management. Insiders' incentives affect earnings management given a specific set of accounting standards.

State ownership and firm performance: Empirical evidence from Chinese listed companies

While the relationship between state ownership and firm performance has been widely researched, the empirical evidence has provided mixed results. This study applies panel data regression techniques to 10,639 firm-year observations of non-financial Chinese listed firms during 2003–2010 to examine the relationship between state ownership and firm performance. The results show that state ownership has a U-shaped relationship with firm performance. The Split Share Structure Reform in 2005–2006 played a positive role in enhancing the relationship between state ownership and firm profitability ratios. Although state ownership decreased significantly after 2006, it remains high in strategically important industry sectors such as the oil, natural gas and mining sector and the publishing, broadcasting and media sector. The findings reveal that a higher level of state ownership is superior to a dispersed ownership structure due to the benefits of government support and political connections. The Split Share Structure Reform made previously non-tradable shares legally tradable, improving corporate governance and reducing the negative effect of non-tradable state shares.

Does Ownership Reform Influence Executive Pay in China?

The Split Share Structure Reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more related to share price movements. We predict this reform will create remuneration arrangements that increase the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing such effect among state-controlled firms and especially those where dominant shareholders have greater incentives to improve share return performance. Our results indicate this reform strengthens the accountability of executives to external monitoring by stock market and therefore benefit minority shareholders in China. (First version: 29 March 2010)

Block Trade Targets in China

We examine characteristics associated with the probability of Chinese companies being block trade targets. We find that the probability decreases once a company has completed its split-share structure reform, and thereby, substantially decreases non-publicly tradable shares. Accordingly, block trade costs increased significantly after the reform. Firms with less concentrated (well-balanced) ownership structures are more likely to be block trade targets, and bidders pay low costs to obtain control rights of those companies. Finally, bidders tend to target small companies with low directors’ ownership. In China, bidders are likely to target companies that provide new controlling shareholders a low-cost opportunity to extract private benefits.

Float, Speculation, and Stock Price: Evidence from the Share Structure Reform in China

The Split Share Structure Reform in China offers a unique opportunity to test whether the supply of tradable shares (i.e. float) has a significant impact on the degree of speculation. After firms completed the reform, their float increased by 31% on average, while turnover and trading volume also increased substantially. We use information from firms’ reform plan to derive an estimate of the price premium of tradable shares over non-tradable shares before the reform and find that, after controlling for differences in liquidity and profitability, the price premium is significantly related to proxies for the level of speculative trading in tradable shares. Moreover, firms that were highly speculated before the reform had significantly smaller increase in turnover and trading volume than firms that were less speculated. Overall, our evidence confirms that there is a significant speculative component in the market price of tradable shares in China and a large increase in float dampens speculative trading.

The Effects of Trading Rights and Ownership Structure on the Informativeness of Accounting Earnings: Evidence from China’ Split Share Structure Reform

The Effects of Trading Rights and Ownership Structure on the Informativeness of Accounting Earnings: Evidence from China’ Split Share Structure Reform

The Effects of Trading Rights and Ownership Structure on the Informativeness of Accounting Earnings: Evidence from Chinaa Split Share Structure Reform

The Effects of Trading Rights and Ownership Structure on the Informativeness of Accounting Earnings: Evidence from Chinaa Split Share Structure Reform

An Empirical Study of Chinese Large Shareholders’ Behavior under the Background of the Split Share Structure Reform

Using the data on related-party transactions between Chinese publicly listed firms and their controlling shareholders in 2005, this article empirically examines the characteristics of related-party transactions and their impact on the firms’ performance. The results show that the companies that completed related-party transactions with their large shareholders possess a higher concentration of ownership structure and lower P/E ratios, and their performance is significantly improved after these transactions. The current related-party transaction is also not used to achieve the necessary requirements for refinancing and the tunneling behavior of large shareholders follows a significant declining trend. Further regression analysis shows that the size of related-party transactions is positively correlated with the large shareholders’ equity ratio, and is negatively related to the P/E ratio and the performance of listed companies prior to the transactions. Finally, the research reveals that Chinese listed company performance has a significant positive correlation with the size of related-party transactions and the large shareholders’ equity ratio. Since China launched the split share structure reform (SSSR) in 2005, we have attributed all the above results to the change in the environment caused by the SSSR and concluded that large shareholders prop up a listed company through related-party transactions.