Compliance by large shareholders and forced share reductions

Purpose Prior research focuses on self-initiated share reductions, while evidence on the determinants of forced share reductions remains limited. This paper examines how compliance by large shareholders affects their forced share reductions. Design/methodology/approach We document 9,084 firm-year observations for Chinese A-share firms during the 2018–2022 period. Findings Based on the behavioral-consistency theoretical lens, we find that firms with low compliance by large shareholders are more likely to experience forced share reductions by large shareholders, and the number and proportion of forced share reductions are significantly higher. The above relations are more prominent in non-state-owned enterprises, as well as firms with higher institutional ownership and lower analyst coverage. Furthermore, forced share reductions reduce firm value, as reflected in negative market reactions, consistent with informational effects. The weakening effect of internal control deficiencies on compliance by large shareholders is the underlying channel through which compliance by large shareholders affects their forced share reductions. Originality/value Our study expands the literature on large shareholders' share reductions from the perspective of forced share reductions and provides novel evidence for how to regulate forced share reductions through the lens of compliance by large shareholders. Our findings also have cross-market implications for the regulation of forced share reductions beyond China.