Before 2005, only 30 percent of stocks from Chinese firms were available on the market. Why?

“In China, historically, most of the firms belonged to the government because they didn’t want to lose control of the firm,” explained Albert Wang, associate professor in finance at the Harbert College of Business. “They didn’t want people to have control over what the firm should do.”

But that changed -- and the split market reform of 2005 cast the remaining 70 percent of shares into the secondary markets. Wang co-authored the paper “Is the Stock Market Just a Side Show? Evidence from a Structural Reform,” which reviewed the impact of China’s split-share market reform and found “largely positive effects of stock trading on corporate outcomes.”

• Investment in fixed assets increased by 27 percent just two years after a firm’s stocks were allowed to trade … with net operating revenues growing, on average, by 13 percent;
• Increased productivity and sales to the tune of 26 percent after the conversion

Wang’s work, with co-authors Murillo Campello of Cornell, and Rafael P. Ribas of Illinois, was awarded Best Paper at $10,000 from The Review of Corporate Finance Studies, an elite publication, in 2014.

Wang believes that investor empowerment instills greater incentives for managers.

“Previously, the government held control over the firm and the managers didn’t have to worry about stock price,” Wang said. “Now, the managers are working for the shareholders. If firm performance is not good, you might worry about losing your job because the shareholder can vote you out.

“Because the market is more liquid, the stock price is going to be more informative. The decisions the managers are making will be reflected in the stock price.”

The paper also found: “the increase in business performance is accompanied by an expansion of capital investment, followed by improvements in productivity. The reform also allowed firms to have greater access to equity financing and prompted them to engage in more corporate acquisition deals.”

“The paper addresses a very important question in finance,” Wang said. “That is how the corporate behavior, such as investment decision and financing policy, changes when it coverts from private to public.”