Privatization and Risk Sharing: Evidence from the Split Share Structure Reform in China
University of British Columbia - Sauder School of Business; China Academy of Financial Research (CAFR)
University of British Columbia - Division of Finance; China Academy of Financial Research (CAFR)
Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences
School of International Trade and Economics, University of International Business and Economics
September 14, 2010
A fundamental question in finance is whether and how removing market frictions is associated with efficiency gains. We study this question using share issue privatization in China that took place through the split share structure reform. Prior to the reform, domestic A-shares were divided into tradable and non-tradable shares with identical cash flow and voting rights. Under the reform, holders of the non-tradable shares negotiated a compensation plan with holders of the tradable shares in order to make their shares tradable. We hypothesize that efficiency gains in terms of better risk sharing play an important role in the determination of compensation. We show that the size of compensation is positively associated with both the gain in risk sharing and the price impact of more shares coming on the market after the reform, and is negatively associated with the bargaining power of the holders of non-tradable shares and firm performance. Our study highlights the role of risk sharing in China’s share issue privatization.
Number of Pages in PDF File: 43
Keywords: bargaining power, compensation ratio, price impact, risk sharing, share issue privatization
JEL Classification: G11, G12, G18, G32Accepted Paper Series
Date posted: May 18, 2011
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