Charles Calomiris

Profiting from government stakes in a command economy: Evidence from Chinese asset sales

Coauthor(s): Raymond Fisman, Yongxiang Wang.


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. In both cases, we may rule out explanations based on a supply effect of the share sales. We further find that the "privatization discount" is higher for firms located in Special Economic Zones, where local government discretionary authority is highest, And 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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Source: Journal of Financial Economics
Exact Citation:
Fisman, Raymond, Yongxiang Wang, and Charles Calomiris. "Profiting from government stakes in a command economy: Evidence from Chinese asset sales." Journal of Financial Economics 96, no. 3 (June 2010): 399-412.
Volume: 96
Number: 3
Pages: 399-412
Date: 6 2010