Does privatization reform alleviate ownership discrimination? Evidence from the Split-share structure reform in China

Abstract

This paper investigates the institutional origins of ownership discrimination in bank lending through a staggered quasi-natural experiment: China's Split-share Structure Reform. State-Owned Enterprises (SOEs) have an advantage over non-SOEs in securing external financing to protect investment opportunities from cash flow fluctuations. This financing privilege declined significantly after the reform, which mandatorily converted SOEs' non-tradable state-owned shares into tradable shares, sharply increasing the likelihood of further privatization. Consistent evidence also exists in terms of bank lending behaviors. Further, we show both direct and indirect evidence that the effects were more pronounced among SOEs under higher threats of privatization (e.g., firms with larger increases in tradable shares, smaller workforce, and in industries peripheral to national strategy). The evidence suggests that banks proactively prefer SOEs for the perceived safety of loans under implicit government guarantee; when this privilege disappeared after the reform, banks reacted by allocating credits more fairly. This paper provides new evidence on the bright side of share structure reforms in mitigating credit misallocation and enlightens policy makers to practical resolutions to the financing inefficiency in emerging capital markets.