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

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Rafael P. Ribas

University of Amsterdam - Finance Group

Yan Albert Wang

Auburn University

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.

Number of Pages in PDF File: 57

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Date posted: November 5, 2011  

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: https://ssrn.com/abstract=1954234 or http://dx.doi.org/10.2139/ssrn.1954234

Contact Information

Murillo Campello (Contact Author)
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
Rafael Perez Ribas
University of Amsterdam - Finance Group ( email )
Plantage Muidergracht 12
Room M 3.06
Amsterdam, 1018 TV
HOME PAGE: http://https://sites.google.com/site/r4ribas/
Yan Albert Wang
Auburn University ( email )
315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States
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