The Role of Consideration in China's Split Share Structure Reform

This paper investigates the share market response to China's reform of the split share structure. Using a sample of companies included in the China Securities Index 300, we find that average daily return to be negative and significant at government announcement of the reform on 29 April 2005. However, there is a turnaround at individual companies' decision to implement the reform where we find a positive and significant average daily return. We attribute this change in market sentiment to the release of information during the company's announcement that the reform includes a consideration component to existing holders of tradable A-shares. Our results also show that existing holders of tradable A-shares earn significant abnormal returns the day after the announcement when companies pay in cash or warrants or combine this payment method with shares. However, we find no relation between the level of consideration and share market response, suggesting that investors perceive the consideration to be adequate