Valuation of Restricted Shares by Conflicting Shareholders in the Split Share Structure Reform

The recent Split Share Structure Reform launched by the government in the Chinese stock market terminates trading constraints on restricted shares. In exchange for the consent of freely-traded shareholders, restricted shareholders offer them consideration mainly in the form of restricted shares. We estimate the implied discount of restricted shares as 38.22% on average, which is in line with the empirical and theoretical findings in the literature suggesting that the consideration is not systematically underpaid and reform is fair at the market level. At the firm level, however, freely-traded shareholders receive less consideration when their bargaining power is weaker. The impact of state shareholders on the size of consideration has been found to be non-monotonic. Consistent with the literature that state shareholders exaggerate agency problem, they tend to exploit freely-traded shareholders by offering less consideration when the latter's bargaining power is weaker. Meanwhile, state shareholders are under political pressure to accomplish the reform as quickly as possible and to set a good example for other firms. They therefore refrain from offering underpaid consideration when their freely-traded counterparts have strong bargaining power and are more capable of rejecting unfair schemes and substantially delaying the reform progress