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

57 Pages Posted: 5 Nov 2011  

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Rafael P. Ribas

University of Amsterdam - Finance Group

Yan Albert Wang

Auburn University

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Date Written: November 4, 2011


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.

Suggested Citation

Campello, Murillo and Ribas, Rafael P. and Wang, Yan Albert, Is the Stock Market Just a Side Show? Evidence from a Structural Reform (November 4, 2011). Available at SSRN: or

Murillo Campello (Contact Author)

Cornell University ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Rafael Perez Ribas

University of Amsterdam - Finance Group ( email )

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Room M 3.06
Amsterdam, 1018 TV

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Yan Albert Wang

Auburn University ( email )

315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States

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