| The non-tradable shares reform is an issue unique to the capital market in China. Since the foundation of securities market in China, non-tradable shares has been existed in listed companies, which has become an obstacle to the stable development of China's securities market. Historically, the government had tried different ways to deal with the problem of non-tradable shares, including the trial floating of legal person' shares, or the reducing holding of state-owned shares, but all of them failed in the end. On April 29, 2005, with the passage of Circular on Issues relating to Pilot Reform of Listed Companies'Non-Tradable Shares by China Securities Regulatory Commission, the pilot reform of non-tradable shares started, and it has been a milestone in the development history of China's securities market.On the issue about how to reform non-tradable shares, a key element to the future development of China' capital market, there are no precedent cases and experience to draw on, also no strong theories to support. Thus, how to design and set up reform plans is a key issue for the non-tradable shares reform and a puzzle for the scholars, investors and securities regulatory authorities. Now, research on the non-tradable shares reform is at the initial phrase, and no systematic, in-depth studies have been conducted. Given the importance of this issue and rarity of related studies, it is very important that theoretical and empirical research on Chinese listed companies' non-tradable shares reform be conducted as soon as possible to strengthen the understanding this new object and to fill in gaps of research on this issue.Based on related literature and China's reality, this paper will start with the unique viewpoint of the relationship between legal investor protection and listed companies' ownership concentration, and analyze in detail whether ownership concentration will be affected by legal investor protection in China. Then, this paper will use Game Theory to probe the mechanisms that form compensation ratio. Finally, drawing on related theories, this paper will conduct a comprehensive research on the following issues: how to set up compensation ratio and the determinants of compensation ratio, what affect the choice of compensation methods, and how does the market react to the reformed firms in question. Thus, this paper develops a framework for studying Chinese listed companies' non-tradable shares reform: why to reform non-tradable shares—how to reform non-tradable shares—the economic consequence of non-tradable shares reform.This paper consists of nine chapters. Major contents of each chapter are outlined as follow:Chapter1 is the introduction, which briefly introduces the research background, issues under research, research ideas, research contents, and research improvements and innovations.Chapter2 is the literature review. In this chapter, the author reviews and comments on the literature about the relationship between legal investor protection and ownership concentration, the research on the non-tradable shares reform, "anchoring effect" and its related research.Chapter3 describes the institutional background of non-tradable shares reform of listed companies in China, including the origin of non-tradable shares, the characteristics of ownership structure, the problems that the non-tradable shares have brought, and what had been done to reform non-tradable shares in the history.Chapter4 studies the theory support to the non-tradable shares reform. Eepecially, this chapter will investigate the relationship between legal investor protection and ownership concentration.Chapter5, based on Game Theory, develop theoretical models about equilibrium compensation ratio to analyze the forming mechanism of compensation ratio.Chapter6 empirically examines the forming mechanism of compensation ratio and its determinants. In detail, this chapter uses the theory of "anchoring effect" in psychology to investigate two issues: whether there exists "anchoring effect" when setting up compensation ratio, and how strong the "anchoring effect" is.Chapter 7 examines what determine the choice of compensation methods. Based on related theories, this chapter comprehensively investigates the determinants and motives for the choice among different compensation methods and additional commitments by non-tradable-share holders.Chapter 8 examines the market reactions to the non-tradable shares reforms and factors that influence market reactions. Especially, this chapter will investigate how compensation ratio, additional commitment, as well as the interaction between these two affect market reactions.Chapter 9 sums up the research findings of this paper, and reports the lessons we learn, the caveats about this research, and points out the direction for further research.This paper has reached the following conclusions:1. Non-tradable shares, to a certain extent, not only lead to the result that ownership concentration does not decline as the improvement of legal investor protection, but also reduces the efficiency of legal investor protection.2. Negotiation ability of tradable-share holders and the anchor of compensation ratio are two key factors that influence equilibrium compensation ratio. The higher the anchor, the higher the equilibrium compensation ratio; but the relationship between negotiation ability of tradable-share holders and the equilibrium compensation ratio is nonlinear. What's more, with government's intervention, when the negotiation ability of tradable-share holders is too strong or too weak, the equilibrium compensation ratio will decrease. Thus, to some extent, intervention by the government may exacerbate the expropriation of tradable-share holders.3. As the reform progresses, the compensation ratios are more and more affected by other variables, but less and less affected by the "anchor", so anchoring effect is getting weaker and weaker. Furthermore, the anchoring effect is strong for firms which offer low compensation ratio, but weak for firms which offer high compensation ratio. Thus, compensation ratio is set up irrationally by the reformed firms, there exists significant "anchoring and adjustment" biases.4. Mispricing is a key factor that influences the choice of compensation methods. The more overvalued is the firm, the higher the probability that the non-tradable-share holders will use the method of "paying shares" or "shrinking shares". Also, risk and mispricing are two important determinants for the choice of different additional commitments by non-tradable-share holders. When the risk is higher, or the firm is more undervalued by the market, then the probability for the non-tradable-share holders to use (a) additional commitments, or (b) more additional commitments, or (c) more strict additional commitments, is higher.5. Unexpected compensation ratio, compensation ratio estimated from the viewpoint of tradable-share holders, and the degree of additional commitments, are three key factors that influence market reactions. The extent that the tradable-share holders got exceeds the expected compensation ratio, and the degree of additional commitments, are positively related to market reaction. But there is a significant "U" shape between market reaction and compensation ratio estimated from the viewpoint of tradable-share holders.This research is exploratory in nature; major improvements and innovations are evident in the following aspects:1. This paper has constructed the first set of "legal investor protection index" in China, which provides an analytical tool and testing method for other related research on legal investor protection in China.2. In terms of research framework, based on the reality of China's non-tradable shares reform, this paper has, for the first time, presented three major topics requiring academic attention: why to reform non-tradable shares, how to reform non-tradable shares, and the economic consequence of non-tradable shares reform. It has also built a new framework for future study on listed companies' non-tradable shares reform in China.3. Based on Game Theory and the reality that there may exist "anchoring effect" in the process of non-tradable shares reform and the government's policy intervention, for the first time, this paper has developed and built analytical models about compensation ratio in equilibrium under the condition with and without government's intervention respectively, and reached six theorems and five corollaries, which provide key theoretical evidence to understand and track the mechanisms to form the compensation ratio.4. This paper has not only used the theory of "anchoring effect" in psychology to explain the forming mechanism about compensation ratio from a new viewpoint, but also designed a set of rules to test the "anchoring effect", which provide fresh ideas and methods to investigate other issues related to "anchoring effect" in capital market.5. For the first time, this paper has drew on classical finance theories, including control theory, signaling theory, and mispricing theory to analyze and examine the determinants for the choice among different compensation methods and additional commitments comprehensively. This study not only provides theories to support the choice of complicated compensation methods and additional commitments, but also presents an ideal sample and setting to test classical finance theories.6. This paper has analyzed in depth how compensation ratio, additional commitment, and the interaction between these two affect the market reactions of the reforms. It has overcome the limitation of other studies that focus solely on the influence of compensation ratio but neglected the influence of additional commitments. In addition, this study used economic Expectation Theory to build the compensation ratio formation model, which decomposes the compensation ratio into "expected compensation ratio" and "unexpected compensation ratio", and further investigated how "unexpected compensation ratio" affect market reactions.
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