Market Reaction To Non-tradable Share Desterilization

Since the first non-tradable shares became tradable on June 19,2006,the desterilization of non-tradable shares came to our sight gradually.Questions such as what impact the selling off will bring to the market and how the tradable share-holders should react are what this thesis tries to answer from the prospective of heterogeneous beliefs.Miller(1977) first studied the influence of heterogeneous beliefs on stock returns and claimed that provided heterogeneous beliefs and forbidding rules of short-selling, the heterogeneity of investors' expectation as to the future will change the equilibrium state of the stock price.Because the optimistic investors will buy and hold specific stock;but for short-selling pessimistic investors could not participate in trading.So the stock price will only reflect the opinion of the optimistic and result in higher price relative to their true value.With time passing by,investors would get sufficient information,their opinion would also converge and the stock price would tend to its true value resulting in a negative correlation between the future return and the degree of heterogeneous beliefs.This thesis tried to explain the cumulated abnormal return after the desterilization of non-tradable shares by heterogeneous beliefs.By choosing a sample of 499 stocks for each of which there is only one desterilization event from June,2006 to June,2007,firstly I used the methodology of event study to analyze the cumulated abnormal returns during the next month of the desterilization day;then by using the average turnovers of the desterilization day and the day after as an agent index of heterogeneous believe to explain the cumulated abnormal returns through regressive method,I found that:there is no intensive selling-off on desterilization day for most samples;heterogeneous beliefs is an important factor affecting the returns after desterilization;the cumulated abnormal returns in one month after the desterilization are negatively correlated with the degree of heterogeneity in investors' believe as to the desterilization of non-tradable shares,which is in support of Miller's(1977) forecast.I also found that with the institutional limitation of forbidding rules on short selling,heterogeneous beliefs of investors as to the desterilization of non-tradable shares can lead to speculative bubbles in the stock market.The reform of non-tradable shares will influence corporate governance, information disclosure and share-holder behavior of public firms and thus would undoubtedly have a significant impact on China's stock market in the next decade. And some policy suggestions are given based on the above empirical results.