The effect of the split share structure reform on working capital management of Chinese companies |
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| Affiliation: | 1. Mississippi State University, Department of Finance and Economics, College of Business, Mississippi State, MS 39762, USA;2. University of New Orleans, Department of Economics and Finance, New Orleans, LA 70148, USA;3. American University, Kogod School of Business, Department of Finance and Real Estate, 4400 Massachusetts Avenue, NW, Washington, DC 20016, USA;1. Florida State University, United States;2. University of Missouri, Kansas City, United States;1. Southampton Management School, University of Southampton, Highfield, Southampton SO17 1BJ, UK;2. School of Business and Management, Francis Bancroft Building, Queen Mary, University of London, Mile End Road, London E1 4NS, UK;3. Beijing Institute of Securities and Futures, East Wing, Fortune Times Building, Taipingqiao Street, Xicheng District, Beijing 100032, China;1. WHU Otto Beisheim School of Management, Vallendar, Germany;2. Universita'' Cattolica del Sacro Cuore, Milan, Italy;3. Surrey Business School, University of Surrey, Guildford, Surrey GU2 7XH, UK |
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| Abstract: | Before the introduction of the Split Share Structure Reform (SSSR) of 2005, a dual stock system characterized Chinese-listed firms. The states owned non-tradable shares and private owners held tradable shares. The dual system generated agency problems because state owners enjoyed all the rights reserved for tradable shares but escaped the stock market risk faced by non-state shareholders. Because executives of state-owned enterprises (SOEs) received rewards based on the book value of assets rather than the market price of shares, they had no incentive to maximize the share price. The SSSR led to the conversion of non-tradable shares to tradable shares, with two major implications: (1) the interests of government and private owners are now more closely aligned and (2) government agents of SOEs are now rewarded and punished based on a firm's market performance. Thus, the expectation is that government agents turn their attention to improving a firm's market performance rather than its book value during the post-reform era. We examine the impact of the SSSR on Chinese firms' investments in working capital. Based on 511 manufacturing firms between 2003 and 2011, we find that the SSSR is associated with significant reductions in working capital investments during the post-reform period. The reduced investment in working capital is associated with improved market performance of these firms. |
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