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Split Share Structure Reform, corporate governance, and the foreign share discount puzzle in China


  • Wenxuan Hou
  • Edward Lee


We examine the impact of the Split Share Structure Reform on the well-known foreign share discount puzzle in China. Existing literature confirms that foreign investors are more concerned about insider expropriation because of their information disadvantage relative to domestic investors. The split share structure of the ownership of Chinese listed firms created a conflict of interests between state and private shareholders. Since, before the reform, state shareholders held restricted shares that denied them any wealth effect from share price movements, they had a limited incentive to work with private shareholders to ensure that managers maximized the stock market value of the firm. By abolishing the trading restrictions for state shareholders, this reform has increased the incentive alignment between state and private shareholders, encouraging them to monitor managers. If foreign investors' concerns over the corporate governance implications of the split share structure at least partly contributed to their discounting of Chinese listed firms, then this discount should be reduced following the reform. Indeed, our evidence confirms this prediction, especially among Chinese listed firms with more state ownership or restricted shares. Our findings imply that this significant institutional reform of the Chinese stock market has benefitted minority investors.

Suggested Citation

  • Wenxuan Hou & Edward Lee, 2014. "Split Share Structure Reform, corporate governance, and the foreign share discount puzzle in China," The European Journal of Finance, Taylor & Francis Journals, vol. 20(7-9), pages 703-727, September.
  • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:703-727
    DOI: 10.1080/1351847X.2012.671781

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    4. Qianqian Wang & Choi, 2015. "Co-movement of the Chinese and U.S. aggregate stock returns," Applied Economics, Taylor & Francis Journals, vol. 47(50), pages 5337-5353, October.
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    7. Min Zhang & Lu Xie & Haoran Xu, 2016. "Corporate Philanthropy and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 139(3), pages 595-617, December.
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