Non‐Tradable Share Reform and Corporate Governance in the Chinese Stock Market

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Prior to China's split-share structure reform, domestic A shares were divided into non-tradable and tradable shares. Non-tradable shareholders represent the government, hold roughly a two-thirds majority, and manage the firms, while tradable shareholders have little power to affect the decisions made by non-tradable shareholders. This is a typical structure to exhibit agency problems. The 2005 structure reform program stipulates that non-tradable shareholders have to bargain with tradable shareholders in order to gain liquidity. The price that non-tradable shareholders pay to tradable shareholders for gaining liquidity is defined as "compensation." We explore the issue of why corporate governance might play an important role in affecting the level of compensation. Research Findings/Insights: Firms with a weak governance structure or severe agency problems are required to have a higher level of compensation. The level of compensation is positively correlated with the non-tradable shareholding, the pledge ratio, and related-party transactions, and is negatively correlated with foreign shareholdings. The same set of variables dictates the ex-post wealth effect of tradable shareholders, but in the reverse direction. Theoretical/Academic Implications: The share reform provides a natural setting that allows tradable shareholders to reflect their concerns with agency problems. The mechanism could ameliorate the agency problems. Corporate governance, in a broad sense, is related to compensation and the ex-post wealth effect of tradable shares. Practitioner/Policy Implications: A successful mechanism should be designed to have minority shareholders involved in the process and have the final compensation reflect the quality of corporate governance.

Idiosyncratic volatility, executive compensation and corporate governance: examination of the direct and moderate effects

“…This may be reflected in stock prices which could quickly lead to volatility (Chen et al 2005;Gompers et al 2003). CEO compensation can be affected by various political and social objectives (Yeh et al 2009), or to satisfy dominant shareholders' benefits. Our expectation is consistent with Wright et al (2007), who argued that lower risk-taking behavior may be related to the CEOs' personal wealth.…”

Empirical Research on Corporate Governance in China: A Review and New Directions for the Future

“…Although some studies find board independence to relate positively to executive turnover (Firth et al, 2006b;Lau, Fan, Young, & Wu, 2007;You & Du, 2012) and negatively to expropriation (Shan, 2013), earnings management (Liu & Lu, 2007), and financial fraud (Chen et al, 2006), most studies find it to be insignificant in executive compensation Conyon & He, 2011Markoczy et al, 2013), strategic decisions (Chen & Cheng, 2007;Jia & Zhang, 2011;Li, Wright, & Scholes, 2010;Yeh et al, 2009), financial fraud (Ding et al, 2010;Firth et al, 2011;Huyghebaert & Wang, 2012;Jia et al, 2009), or firm performance (Du, 2013;Gang, 2007;Hu et al, 2010;Li & Naughton, 2007;Shen & Lin, 2009;Tian & Lau, 2001;Xu, Zeng, & Zhang, 2011).…”

The effect of ownership structure on leverage decision: new evidence from Chinese listed firms

“…This is known as split share structure. The split share structure has often been blamed for leading to severe ageny problems between largest non-tradable shareholders and minority tradable shareholders (Yeh, et al 2009) and reducing firms' corporate governance quality and performance efficiency (Sun and Tong, 2003). For example, Firth et al (2006) argue that holding restricted shares gives less incentive for the controlling state shareholders to monitor executives to ensure that they maximize stock value.…”