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

19 Pages Posted: 8 Oct 2009

See all articles by Yin-Hua Yeh

Yin-Hua Yeh

Fu-Jen Catholic University - Department of International Trade and Finance

Pei-Gi Shu

Fu-Jen Catholic University - Department of Business Administration

Tsun-Siou Lee

Fu-Jen Catholic University

Yu-Hui Su

Soochow University

Abstract

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.

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.

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.

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.

Suggested Citation

Yeh, Yin Hua and Shu, Pei-Gi and Lee, Tsun-Siou and Su, Yu-Hui, Non-Tradable Share Reform and Corporate Governance in the Chinese Stock Market. Corporate Governance: An International Review, Vol. 17, Issue 4, pp. 457-475, July 2009, Available at SSRN: https://ssrn.com/abstract=1484115 or http://dx.doi.org/10.1111/j.1467-8683.2009.00754.x

Yin Hua Yeh (Contact Author)

Fu-Jen Catholic University - Department of International Trade and Finance ( email )

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan
+886-2-2903-1111 (Phone)
+886-2-2901-9779 (Fax)

Pei-Gi Shu

Fu-Jen Catholic University - Department of Business Administration ( email )

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan

Tsun-Siou Lee

Fu-Jen Catholic University ( email )

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan

Yu-Hui Su

Soochow University ( email )

No. 1 Shizi Street
Taipei, Jiangsu 215006
Taiwan

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