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


*Graduate Institute of Finance, Fu-Jen Catholic University, 510, Chung Cheng Rd, Hsin-chuang, Taipei County 24205 Taiwan. Tel: +886-2-2905-2725; Fax: +886-2-2901-9779; E-mail:


Manuscript Type: Empirical

Research Question/Issue: 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.

Research Findings/Insights: 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.

Theoretical/Academic Implications: 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.

Practitioner/Policy Implications: 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.