The Dark Side of Institutional Shareholders Activism in Emerging Markets: Evidence from China's Non-Tradable Share Reform

Abstract

The study aims to analyze the role of institutional investors in mediating the interest conflicts between blockholders and minority shareholders in emerging markets. China's Non-tradable Share Reform provides us a perfect research environment. Before the reform, the ownership of Chinese public firms was concentrated in one or several blockholders. This part of block shares was non-tradable, and tradable shares were held by minority shareholders and institutional investors like mutual funds. Chinese government launched Non-tradable Share Reform in 2005, giving non-tradable shares liquidity rights. At the same time, non-tradable share owners had to compensate tradable share owners, such as offering a certain percentage of shares to them. The compensation schemes were advanced by non-tradable share owners and must be supported by two-thirds of votes cast by tradable share owners. Our study finds that institutional investors did actively participate in voting, but their number and holdings were reversely related with the compensation level. Our results suggest that institutional investors played shareholder activism in this reform, but their activism served for blockholder's interests rather than minority shareholders'.

Keywords: Shareholder activism, Institutional investors, Non-tradable Share Reform

JEL Classification: G32, G38, O53