Valuation of Restricted Shares by Conflicting Shareholders in the Split Share Structure Reform

European Journal of Finance, Forthcoming

42 Pages Posted: 2 Dec 2008 Last revised: 23 Jan 2012

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Wenxuan Hou

University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Date Written: November 15, 2011

Abstract

The recent Split Share Structure Reform launched by the government in the Chinese stock market terminates trading constraints on restricted shares. In exchange for the consent of freely-traded shareholders, restricted shareholders offer them consideration mainly in the form of restricted shares. We estimate the implied discount of restricted shares as 38.22% on average, which is in line with the empirical and theoretical findings in the literature suggesting that the consideration is not systematically underpaid and reform is fair at the market level. At the firm level, however, freely-traded shareholders receive less consideration when their bargaining power is weaker. The impact of state shareholders on the size of consideration has been found to be non-monotonic. Consistent with the literature that state shareholders exaggerate agency problem, they tend to exploit freely-traded shareholders by offering less consideration when the latter’s bargaining power is weaker. Meanwhile, state shareholders are under political pressure to accomplish the reform as quickly as possible and to set a good example for other firms. They therefore refrain from offering underpaid consideration when their freely-traded counterparts have strong bargaining power and are more capable of rejecting unfair schemes and substantially delaying the reform progress.

Keywords: restricted share, state ownership, bargaining power, Split Share Structure Reform, China consideration

JEL Classification: G1, G12, G30, C70

Suggested Citation

Cumming, Douglas J. and Hou, Wenxuan, Valuation of Restricted Shares by Conflicting Shareholders in the Split Share Structure Reform (November 15, 2011). European Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1308210 or http://dx.doi.org/10.2139/ssrn.1308210

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

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