Effects of China's non-tradable shares reform on firm ownership concentration, performance and dividend policy

Abstract

China has carried out two rounds of privatisation during the past 30 years along with its economic reform. The first round was marked by the establishment of the Shanghai and Shenzhen Stock Exchanges in 1990 and 1991, with the partial share issue privatisation (SIP) of its State-owned enterprises (SOEs). The second round was characterized by the Non-tradable Shares Reform (NTS reform) which started in 2005 and was eventually completed in 2014. With further privatisation of SOEs, NTS Reform was expected to unleash positive effects on China’s stock market. This reform was aimed at making all non-tradable shares (NTS) tradable and realising the full and free circulation of all outstanding shares in the secondary market. Therefore, transfer of ownership resulting from trading of NTS would entail more concentrated ownership or even dispersed ownership of firms in the long run. Based on the theory of ownership structure, large blockholder ownership may have different effects on firm performance. Thus, changes in the ownership structure of listed firms may have effects on the performance of listed firms, their efficiency, as well as their dividend payout policies. The present study constructs dynamic panel regression model based on sample firms from 2000 to 2016, performs comparative study of the firms’ performance in pre- and post-NTS reform period; and applies the estimator of Generalized Method of Moments (GMM) using STATA to investigate how the diminishing trend of the NTS ratio affects the propensity to change firm ownership concentration (OC) following the NTS Reform. This study also seeks to assess how the changes of NTS ratio and firm OC affect firms’ financial performance in the pre- and post-NTS Reform period, and also to examine if the reform results in different cash dividend payout policies adopted by listed firms prior to and after the NTS reform. From the results of this study, it is found that the mean NTS ratio has dropped from 58.28 % in the pre-NTS reform period to 20.80 % in the post-NTS reform period, whereas the mean Top1 largest shareholder’s equity share portion decreased from 41.65 % in the pre-NTS reform period to 36.07 % in the post-NTS reform period. Additionally, this study has shown the lock-up period implemented on NTS in the post-reform period results in stable ownership concentration of Top2 to Top5 largest shareholders’ share portion. Furthermore, this study also confirms the traditional concepts of privatisation theory, and supports the notion that NTS reform has largely met the expectations of market stakeholders, and that the overall firms’ performance have been improved in the post-NTS reform period. However, this study does not find any statistical and significant impact of NTS ratio and Top five largest shareholders’ OC on firms’ performance as measured by ROS, ROA and ROE in the long run. Lastly, the results also do not find any significant influence of Top1 to Top5 largest shareholders’ OC on the firms’ dividend policy. On the other hand, this study confirms that the NTS ratio has a significant positive influence on the dividend payout ratio (DPR) in the post-NTS reform period; whereas, the NTS ratio is not significantly related to the absolute level of cash dividends per share (DPS). Therefore, the results on dividend payout policy remain ambiguous. Present study also does not support the blockholder effect neither on firm performance, nor on firm cash dividend policy in post-NTS reform period. In conclusion, the listing rules of lock-up period which are imposed on NTS and controlling party’s IPO helps to increase the DPR in post-NTS reform period, and would benefit the interests of minority shareholders in the long-run; nevertheless, the significant drop in DPR in post reform period should be of concern to the controlling parties of listed firms.