Non-state shareholders entering of state-owned enterprises and equity mispricing: Evidence from China

Equity mispricing is a common occurrence in emerging capital markets. Based on a sample of 10,864 firm-year observations of state-owned listed companies (SOEs) in China, we investigate how the non-state shareholders entering in SOEs (NSSESOEs) affects equity mispricing. The results show that the NSSESOEs significantly reduces the equity mispricing. Our results are not altered by a battery of robustness checks, such as the difference-in-differences approach, propensity score matching, Heckman two stage and instrumental variable regressions. Further analysis shows that the mitigating role of the NSSESOEs is especially prominent for SOEs faced with more agency conflicts or more serious government intervention; these firms have a higher proportion of retail investors, more positive media coverage, and constrained short selling. In addition, we found that equity mispricing in the current period reduces future stock returns in terms of market value, while the NSSESOEs mitigate such adverse effects. These findings not only reveal that encouraging non-state shareholders to enter SOEs can mitigate the mispricing, but also provide meaningful implications for the current mixed ownership reform in China and other countries in which have implemented or are going to implement the mixed ownership reform.