Strengthened State Capitalism: Nationalized Firms in China

We examine the nationalization of listed firms in China. Using a manually collected data set of 115 cases of ownership transfer from private to state control, we find that nationalization is positively associated with firm performance. When we analyze potential mechanisms through which nationalization may affect firm performance, we find a positive effect on benefits in the form of market power, government subsidies and bank financing. We also identify significant costs in the form of a higher tax burden, higher employment costs, and higher levels of corporate donations following nationalization. Finally, we show that weak local institutions exacerbate the influence nationalization has on firm performance and the benefits and costs tied to a shift to state control. These findings shed light on the effects when the government actively takes a more prominent role in the economy by becoming a controlling shareholder in large companies.