Trading Restriction Measure and Release

We propose a new measure capturing three dimensions of trading restriction tightness: trading quantity, speed, and cost. By using this new measure, we document a positive effect of restriction tightness on illiquidity discounts of restricted shares relative to their liquid counterparts, inferred from Division Reform, a market-level process of releasing trading restrictions in China Stock Market. We also justify the 38.65% illiquidity discount by comparing it with results from theoretical models, finding that it lies below the 48.67% upper bound suggested by Longstaff (1995) and it falls within the range between 23.82% and 41.70% suggested by Longstaff (2001). We conclude that the considerations paid in Division Reform are adequate in general and relative wealth of two classes of shareholders remains after the trading constraints are released. JEL Classification: G1 G12 G30