Principal-principal agency problems and stock price crash risk: Evidence from the split-share structure reform in China

The Split Share Structure Reform in China offers a unique opportunity to test whether the supply of tradable shares (i.e., float) has a significant impact on the degree of speculation. After firms completed the reform, their float increased by 31% on average, while turnover and trading volume also increased substantially. We use information from firms’ reform plan to derive an estimate of the price premium of tradable shares over non-tradable shares before the reform and find that, after controlling for differences in liquidity and profitability, the price premium is significantly related to proxies for the level of speculative trading in tradable shares. Moreover, firms that were highly speculated before the reform had significantly smaller increase in turnover and trading volume than firms that were less speculated. Overall, our evidence confirms that there is a significant speculative component in the market price of tradable shares in China and a large increase in float dampens speculative trading.

Download Full-text

Split share structure reform and earnings informativeness in China

Corporate Ownership and Control ◽

10.22495/cocv10i1c5art2 ◽

2012 ◽

Vol 10 (1) ◽

pp. 499-514 ◽

Cited By ~ 2

Author(s):

Haiyan Jiang ◽

Ahsan Habib

Keyword(s):

Agency Problems ◽

Market Place ◽

Minority Shareholders ◽

Earnings Informativeness ◽

Split Share Structure Reform ◽

Split Share Structure ◽

Regulatory Commission ◽

Cash Flow Rights ◽

Share Structure ◽

The Impact

This paper investigates the impact of split share structure reform on earnings informativeness in China. A unique institutional feature of China was the co-existence of two types of share that endowed all shareholders with equal voting and cash flow rights but different tradability. This split share structure significantly constrained the tradability of shares held by the state and ‘legal persons’ and has been the alleged cause of severe agency problems between controlling shareholders and minority shareholders. In order to overcome these agency problems, the Chinese Securities Regulatory Commission (CSRC) mandated the conversion of non-tradable shares (NTS) into tradable shares (TS) from 2006 onwards. Although the regulation did not directly address the issue of the effect of this reform on the informativeness of earnings, we believe that the emphasis given by the CSRC to the concept of ‘price discovery’ during reform has relevance for testing earnings informativeness. NTS holders can sell their shares gradually in the market with a 12 month lock-up period. This provides an opportunity for TS holders with more time to better evaluate corporate governance and firm performance of reforming companies which is expected to encourage NTS holders to provide better quality accounting information into the market place. We find support for increased earnings informativeness hypothesis in the post reform period.

Download Full-text

Dynamic relation of Chinese stock price-volume pre- and post- the Split Share Structure Reform

China Finance Review International ◽

10.1108/cfri-03-2015-0024 ◽

2015 ◽

Vol 5 (4) ◽

pp. 386-401 ◽

Cited By ~ 5

Author(s):

Dong-Hua Wang ◽

Nan Qing ◽

Man Lei ◽

Xiaohui Chang

Keyword(s):

Stock Market ◽

Stock Price ◽

Markov Switching ◽

Chinese Stock Market ◽

Content Type ◽

Bear Market ◽

Volume Relationship ◽

Split Share Structure Reform ◽

Split Share Structure ◽

Share Structure

Purpose – The purpose of this paper is to identify the bull and bear regimes in Chinese stock market and empirically analyze the dynamic relation of Chinese stock price-volume pre- and post- the Split Share Structure Reform. Design/methodology/approach – The authors investigate the price-volume relationship in the Chinese stock market before and after the Split Share Structure Reform using Shanghai Composite Index daily data from July 1994 to April 2013. Using a two-state Markov-switching autoregressive model and a modified two-state Markov-switching vector autoregression model, this study identifies bull or bear market and also examine the existence of regime-dependent Granger causality. Findings – Using a two-state Markov-switching autoregressive model, the authors detect structural changes in the market volatility due to the reform, and find evidence of a positive rather than an asymmetric price-volume contemporaneous correlation. There is a strong dynamic Granger causal relation from stock returns to trading volume before and after the reform regardless of the market conditions, but the causal effects of volume on returns are only seen in the bear markets before the reform. The model is robust when using different stock indices and time periods. Originality/value – The work is different from previous studies in the following aspects: most of the existing empirical literature focus on the well-developed economies, but our interest lies in the emerging Chinese market that has witnessed rapid growth in the past decade; in contrast to many works in the literature that examine the price-volume relationship during one market condition, the authors compare the relationship in a bull market with that in a bear market, using a two-state MS-AR model; the authors also employ a modified two-state Markov-switching vector autoregression model to examine the existence of regime-dependent Granger causality; as the most massive systematic reform for the Chinese stock market since its inception in 2005, the Split Share Structure Reform has a profound impact on the Chinese stock market, thus it is of vital importance to explore its effects on both the price-volume relationship and the market structure.

Download Full-text