Research Articles

Friend or Foe? The Role of State and Mutual Fund Ownership in the Split Share Structure Reform in China

Michael Firtha1, Chen Lina2 and Hong Zoua3

a1 Department of Finance and Insurance, Lingnan University, Tuen Mun, Hong Kong, China. mafirth@ln.edu.hk

a2 Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Ave., Kowloon Tong, Kowloon, Hong Kong, China. chenlin@cityu.edu.hk

a3 Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Ave., Kowloon Tong, Kowloon, Hong Kong, China. hongzou@cityu.edu.hk

Abstract

The recent split share structure reform in China involves the nontradable shareholders proposing a compensation package to the tradable shareholders in exchange for the listing rights of their shares. We find that state ownership (the major owners of nontradable shares) has a positive effect on the final compensation ratio. In contrast, mutual fund ownership (the major institutional owner of tradable shares) has a negative effect on the compensation ratio and especially in state-owned firms. The evidence is consistent with our predictions that state shareholders have incentives to complete the reform quickly and exert political pressure on mutual funds to accept the terms without a fight.

Footnotes

We thank Stephen Brown (the editor) and Zhiwu Chen (the referee) for insightful comments that have helped significantly improve the paper. We are also grateful to Mike Adams, Ping Lin, Wanbin Pan, Gang Wei, Jason Xiao, and Rongli Yuan for helpful suggestions on the paper. Firth acknowledges the financial support of an earmarked grant from the Hong Kong SAR (CERG LU340307) and Zou acknowledges the financial support of the Research Office of City University of Hong Kong (Grant No. 7200107). The excellent research assistance of Wanbin Pan is greatly appreciated.

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