Market Participation In Non-tradable Share Reform: A Composite Event Study Methodology

Non-tradable Share is a special phenomenon in the process of economy transition and capital market development of China,and it restricted the healthy and benign development of capital market.On September,2005,after two rounds of pilot project,Non-tradable Share Reform took place on all the listed company in ChinaBased on an overall review of relative studies on Non-tradable Share Reform,from a prospect of market participation,this paper studies the game between tradable shareholders,and the game between tradable shareholders and non-tradable shareholders in the process of the Reform,and heterogeneous belief and the market reaction after the Reform.From these three aspects,this paper proposes three theory hypotheses,and uses Composite Event Study Methodology to testify them.The studying sample of this paper consists of 523 Chinese Listed Companies,which successfully finished the Reform before 30^th Dec of 2006 and only use share as compensation.The conclusions are outlined as follows:First,through an analysis of the structure of tradable shareholders before the Reform,we find that the structure of tradable shareholders has a significant effect on the investors' market participation;the investors believe that institutional investors will infringe their benefits,but major individuals have the same benefit with them,will protect their interests.Secondly,from a prospect of market participation,the more market participation of tradable shareholders,the less satisfaction of the Reform Proposal,and the less CAR of the Proposal announcement.The bargaining power of the tradable shareholders was not fully reflected in the Reform,but only reflected in the concession of non-tradable shareholders to make additional promise;however,in fact such negotiating power is minimal.Therefore the Reform did not protect the interest of tradable shareholders.Thirdly,heterogeneous belief is an important factor that affects the market response after the Reform,and this effect is different on different Additional Commitments.The degree of opinion difference on the Proposal is heaviest when the non-tradable shareholders promised a minimal tradable price,and on this situation,the heterogeneous belief affected the market response most. Based on these conclusions,this paper proposes three policy recommendations:(1) Only taking the interest of all market participants into account,the Reform can adhere to the "fair,just and open" principle completely setting at the basis of market participation;(2) Regulators should protect disadvantaged minority in the reform from the angle of System construction;(3) The Reform should improve the information transparency and assurance to maintain the stability of stock market before and after the reform.