Who gains from financial reforms? Evidence from the Chinese Stock Market. Unpublished working paper

Abstract: We evaluate the stock price effects of the 2005-2006 reform of the Chinese stock market associated with the elimination of nontradable shares and the consequent change in the ownership structure of firms. We claim that there are several reasons why the reform can affect stock prices, among which are corporate governance, dividends, liquidity, transparency, and supply. We conjecture that, cross-sectionally, companies with weaker fundamentals but better positioned to profit from the change in ownership should be the main beneficiaries of the reform. We study abnormal returns at the time of the announcement of the reform and find that indeed the prices of stocks characterized by lower liquidity, inactive investors and less transparency rise more than others. We conclude that the recent financial reforms significantly improved market fundamentals on the Chinese stock market