The impact of non-tradable share reform on the linkage between direct and indirect real estate in China

The existence of non-tradable shares was a unique phenomenon in the Chinese mainland stock market. Before the non-tradable share reform, only newly issued A-shares were tradable shares. Other shares issued before IPO were non-tradable. Non-tradable shareholders are usually major shareholders who also appoint the managers (CEO) of the company. Due to the absence of the rights to transfer in the stock market, non-tradable shares are, in theory, less valuable than tradable shares. The purpose of the non-tradable share reform was to equalize the rights of all shareholders. Non-tradable share reform has increased the shareholders’ rights, which also increased their incentive to monitor the performance of the management and thus corporate governance of the company. This study aims to investigate whether the non-tradable share reform has impacted on the corporate governance of listed real estate companies (“Indirect Real Estate”). Previous studies are inconclusive, and the empirical results were also mixed. This study measures the quality of corporate governance by the linkage between share price movements of the listed property companies and the price movements of the tangible asset (“Direct Real Estate”) held by these companies (“Linkage”). This measure is viable for real estate companies due to the availability of real estate price indices (indicator of Direct Real Estate Prices). Since the major form of tangible asset held by listed property companies are real estate assets, good governance should minimize the agency problems so that the company’s valuation reflects closely the price movements of the real estate assets it holds and therefore a stronger Linkage. A difference-in-differences approach is used to test the impact of the non-tradable share reform on the strength of the Linkage. The empirical results show that the increase in the strength of the Linkage after the reform for central state-owned companies is the largest and most significant, while that for private companies is the smallest and least significant. Among the state-owned companies, the strength of the Linkage after the reform has increase less for the local state-owned companies compared to that of the central state-owned companies. The results are consistent with the conjecture that the impact of non-tradable share reform on corporate governance, measured by the strength of the Linkage, decreases with the management’s incentive to maximize the value of the company.