Study On The Governance Effect Of The Split Share Reform In China

This study attempts to examine whether the shift in corporate governance caused by the split share reform helps to reduce value-decreasing connected transactions for firms domiciled in weak investor protection countries.Previous research suggests that corporate governance is less likely to be of efficacy in countries where investors’rights are poorly protected by law. As a substitution, corporate ownership is usually concentrated in a large shareholder, which creates incentives and ability for these shareholder to tunnel through, for example, related party transactions, impairing firm value. The split share reform represents an exogenous shock to corporate governance, because it attenuates divergent interests of shareholders by drawing large shareholders’attention to share prices. Thus it’s interesting how the shift in corporate governance affect controlling shareholders’behavior.The main sample of this study consists of notifiable connected transactions of listed firms on Shanghai and Shenzhen stock exchanges over2001-2012. Using non-connected transactions as a control sample, this study examines quality of related party transactions in which controlling shareholders are involved, and whether the transaction quality are significantly different before and after the share reform. The main findings are:(1) controlling shareholders conduct value-decreasing related party transactions in the pre-reform period;(2) controlling shareholders are less likely to engage in value-decreasing related party transactions in the post-reform period;(3) NTS holding before the reform is positively correlated with controlling shareholders’tunneling behavior;(4) in the post-reform period, prior NTS holders are less likely to engage in tunneling behavior. Therefore, this study establishes the causal effect of corporate governance on constraining controlling shareholders’tunneling in weak investor protection countries such as China. I also propose several suggestions to improve corporate governance mechanisms in the post-reform period.