Is the Stock Market Just a Side Show? Evidence from a Structural Reform

Abstract:     
The 2005 split-share reform in China mandated the conversion of previously non-tradable shares into tradable status. The reform was swift and changed investors' ability to trade corporate equities in a US$400 billion market. This paper examines the effects of the 2005 stock market reform on firms' real and financial outcomes. It does so exploiting multiple institutional features of the conversion program. We first examine a small pilot trial conducted at the beginning of the reform, which we are able to replicate using the same data and selection criteria that was used by regulators. We also take advantage of the staggered nature of the larger conversion schedule, whereby over a thousand firms converted their outstanding shares at different times within a pre-specified window. These various wrinkles produce counterfactuals against which to gauge the economic effects of secondary equity trading. Using a time-varying treatment estimation approach, we identify increases in corporate profitability, investment, value, and productivity as pre-existing shares were allowed to trade in organized exchanges. We also identify changes in firms' propensity to issue new shares, pay dividends, and engage in merger deals. Our findings provide new insights on the role of stock markets in shaping corporate behavior and on the impact of regulation on economic growth.

Number of Pages in PDF File: 57

working papers series