Market Reactions to the Split-share Structure Reform and the Determinants of Compensation: Evidence from Chinese Listed Firms

The split-share structure is a unique characteristic of corporate ownership in China, and is often linked to poor firm performance and inefficient corporate governance. In this paper, we investigate market reactions around several important event days during the process of the split-share structure reform (share reform) in Chinese listed firms. The market reacts differently to different events during the process. First, the market reacts positively to firms intention of implementing the share reform when the reform prospectus is disclosed and when the compensation is actually paid. Second, after the reform is actually implemented, the market reacts negatively when the expiration date of the lockup agreement is announced, because the restricted trading shares can be freely traded and thus share supply increases after the expiration date. In addition, the compensation paid to tradable shareholders by non-tradable shareholders is determined by the stock liquidity before the reform, the proportion of restricted trading shares, and the type of ultimate shareholders. We further find that the payment of compensation, the proportion of restricted shares after the share reform, and a time gap between suspension and resumption days are the main factors affecting the market reaction.