A Study On The Performance Of The Non-tradable Share Reform In China

Since the pilot reform of the non-tradable shares reform started on April 29 in 2005, after the process of two years reform, the reform tends to finish. The non-tradable share reform is the most important issue since the foundation of China's securities market, which will deeply changed the direction of its development. Therefore, summarizing the advantages and disadvantages of this reform will have important implications for the next step in the capital market development. However, most of the literature about the non-tradable share reform focuses on the normative analyses, but the empirical evidence in this field is relatively limited.Based on related literature, this paper develops a framework for evaluating the performance of the non-tradable share reform from three dimensions: the compensation ration performance, the firm performance and the market performance. Then, this paper uses the theoretical and empirical analysis methods to investigate the performance of the non-tradable share reform, which will not only provide scientific evidence to explain the phenomenon in the reform, but also have important implications for the security market regulator's policy making.This paper consists of seven chapters. Major contents of each chapter are outlined as follows:Chapter 1 is the introduction, which briefly introduces the research background, issues under research, research ideas, research contents, and research improvements and innovations.Chapter2 is the literature review. In this chapter, the author fully reviews and comments on the literature about the non-tradable shares reform, and the literature about the relationship between ownership structure, corporate governance and firm performance.Chapter3 describes the institutional background of non-tradable shares reform of listed companies in China, including the origin and consequence of the non-tradable shares, the process and status quo of the non-tradable shares reform.Chapter 4 examines the performance of non-tradable share reform. This chapter starts with analyzing the determinants of the compensation ratios, then investigates the performance of the reform and the efficiency and justice of the reform.Chapter 5 examines the firm performance of the reform. This chapter uses the ownership structure and the behavior of the large shareholder to examine the relationship between the reform and firm performance of listed firms. Based on related financial theory, this chapter develops hypotheses to investigate the effect of the reform on the corporate governance and firm performance of listed firms.Chapter 6 examines the market reactions to the non-tradable share reform. This chapter will investigate how and what affect the market reactions to the reform.Chapter 7 sums up the research findings of this paper, including its conclusions and lessons, research limitations, and the direction of further research.This paper has arrived at the following conclusions after research:1. From the efficiency of the compensation ratios, the results of the quick process of the reform in the last two years, the high votes for the compensation package, and the different compensation ratios in the different industries indicate the high efficiency of the reform. However, the results that the compensation ratios are mainly determined by the non-tradable shareholders and other non-economic factors, but not the bargaining power of the tradable shareholders indicate that the justice of the reform is limited.2. In detail, the bargaining process between tradable shareholders and non-tradable shareholders indicates that the bargaining power of the non-tradable shareholders plays a critical role in the reform, but the bargaining power of the tradable shareholders does not play its own role. What's more, the institutional shareholders do not fully protect the interest of the minority investors. In addition, the compensation ratios are more determined by the political influence than the fundamentals of the reformed firms.3. The non-tradable share reform leads to the significant change in the ownership structure of listed firms: the change in different kinds of ownership structure and the decline of ownership concentration. Most of the literature and practice on the corporate governance of listed firms in China show that the highly concentrated ownership has a negative impact on the corporate governance of listed firm in China. Thus, the change in the ownership structure resulting from the non-tradable share reform suggests that the reform have positive effect on the corporate governance.4. The non-tradable share reform significantly impacts the performance of reformed firms. The controlling shareholders are willing to make the listed firms more strong and infuse assets into the listed firms, which lead to the better earning performance and improvement of the ability of asset management. However, considering the limitation of the data, the relationship between the reform and firm performance is needed to be examined in the future.5. The market reaction to the reform is significantly positive. The cumulative abnormal return (CAR) for the period from ten days before the announcement to the reform day is 5.187 percent, and the average abnormal return on the announcement day is most significant. The results of what determine the market reaction show that the compensation ratio and the percent of tradable shareholders' veto for the reform affect the CAR, but the corporate governance and M/B do not affect the CAR. These results indicate the investors view the reform as only a short time issue, and have no confidence for the long term consequence that the reform will result in.This research is exploratory in nature; major improvements and innovations are evident in the following aspects:1. In terms of research framework, this paper first defines the performance of non-tradable share reform from three dimensions: the compensation ration performance, the firm performance and the market performance. Thus, this paper builds a systematical framework for evaluating the performance of the non-tradable shares reform of listed companies in China.2. This paper evaluates the performance of non-tradable share reform from the viewpoints of efficiency and justice. Different from other studies that just examine the determinants of compensation ratios, this paper also evaluates the consequence of the related policies and arrangements in the reform, and focus on the bargaining result evaluation. Thus, this paper can evaluate the performance of the reform more comprehensively. 3. Based on the background of the non-tradable share reform, this paper constructs the corporate governance evaluation system and firm performance evaluation system, which provide a base for constructing the index of corporate governance and evaluating the performance of listed firms.4. For the first time, this paper provides a theoretical and empirical analysis on how the non-tradable reform affecting the performance of listed firm. Different from other studies that just normatively analyze the relationship between the reform and the firm value, this paper examines the mechanism of how the reform affecting firm performance, based on the relationship between ownership structure, large shareholders and firm performance.5. Different from the previous literature that just focusing on the market reaction to the non-tradable reform, this paper investigate not only how market reaction to the reform, but also what determine the reactions, which will shed better insights on the market performance of the reform.6. Based on financial theories and the reality of the reform, this paper develops a comprehensive system to investigate the determinants of compensation ratios. In detail, this paper investigates the determinants of compensation ratio between the pilot reformed firms and non-pilot reformed firms, in different patches of the reform, in different nature of the firms, in different firm size and different compensation methods...