Can politics tame the market? Market Responses to Government Control of Privatised Firms in China

Abstract

We examine the driver of full (as against partial) privatization and also the market responses to government control of partially (PP) and fully (FP) privatized firms to respectively account for the command of the central government and that of the market. Using China’s 2005 Non-Tradeable Shares (NTS) reform as a natural experiment, we exploit the exogenous variation in the timing of the NTS conversion which was beyond firms’ influence. Difference-in-difference estimates show that Tobin’s Q was significantly lower among treated PP firms that continue to hold some NTS. Treated FP firms were, however, successful in increasing Tobin’s Q by getting rid of all NTS that limited government interference and increased firm value, both of which helped boosting market trust. PP firms failed to do so. These results raise questions about Chinese authoritarian model of private sector development.

Keywords: Non-tradable shares reform; Lock-up rule; Market performance; Fully and partially privatized firms; Government control of private firms; Difference-in-difference model; China;

JEL Classification: G31, G38, C36, L33