Dark Side of Institutional Shareholder Activism in Emerging Markets: Evidence from China’s Split Share Structure Reform*

Abstract This study aims to investigate the role that institutional investors played exploiting the split share structure reform launched in 2005 in China. Since that time, non‐tradable majority shareholders have had to compensate minority tradable shareholders to obtain the rights to transfer their shares in the capital markets. The compensation ratio proposed by non‐tradable majority shareholders needs to be approved in at least two‐thirds of the votes cast by tradable shareholders, among which the most powerful are the institutional investors. Our study finds that institutional investors actively participate in voting, but their activism is beneficial to majority shareholders rather than minority shareholders. Specifically, we find a significant negative relation between institutional shareholdings and (i) the initial compensation ratio, (ii) the probability and amount of the upward revision of the initial compensation ratio during the bargaining process, and (iii) the final compensation ratio. Collectively, our results suggest that institutional shareholders are more likely to collude rather than fight with controlling shareholders in emerging markets where investor protection is weak.