We document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off. We argue that this results from the absence of a Chinese political transition to accompany economic reforms, so that the positive effects on profits of political ties through government ownership outweigh the potential efficiency costs of government shareholdings. Companies with former government officials in management have positive abnormal returns, suggesting that personal ties can substitute for the benefits of government ownership. The "privatization discount" is higher for firms located in Special Economic Zones, where local government discretionary authority is highest. This is consistent with the view that firms in these locations are more dependent on government connections. We also find that companies with relatively high welfare payments to employees, which presumably would fall with privatization, benefit disproportionately from the privatization announcement.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13774.
Length: Date of creation: Feb 2008 Date of revision: Handle: RePEc:nbr:nberwo:13774
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Find related papers by JEL classification: G15 - Financial Economics - - General Financial Markets - - - International Financial Markets G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out
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