Financial performance of Chinese airlines: Does state ownership matter?

Abstract

Abstract This study investigates whether state ownership significantly affects the performance of publicly traded Chinese airlines over the 1994–2011 period. The sample consists of six listed Chinese airlines, five on the Shanghai Stock Exchange and one on the Shenzhen Stock Exchange. Panel regression test results display persistently a U-shaped relationship between state ownership and firm performance for the airline industry. Furthermore, the evidenced convex relationship holds true for both market and operating performance measures. Thus, Chinese airlines with mixed ownership perform worse than their heavily privately held or majority state-owned peers. We attribute the poor performance experienced by mixed-controlled Chinese airlines to the grabbing hand exerted by their government shareholders and the excessive agency costs associated with severe conflicts of interest between their managers and dispersed shareholders. The findings affirm and highlight the importance of control and ownership unambiguity. Given the Chinese government's ongoing intention to privatize state-owned enterprises (SOEs) and the demonstrated U-shaped relationship, the optimal course of action for Chinese policy makers and Chinese airline executives to follow in order to further improve the performance of the industry is to expedite the privatization process for all state-owned airlines to break away from their state owners and to become fully privatized. This study enriches finance literature in at least two aspects. It serves as the first attempt to study the impact of state ownership on the performance of Chinese airlines. It also sheds additional light on the dynamic between state ownership and the performance of newly privatized SOEs while adopting multiple performance indicators and performing panel regression tests under three estimation methods.