Lessons from the Chinese Privatization Process: Reversal in Investors’ Perception of the Relative Value of State and Legal Person Owned Companies During the Split Share Structure Reform

Abstract

The Split Share Structure reform may be the final episode in the measured process of privatization of Chinese companies. The reform was started in May 2005 with the object of re-designating state-held shares into tradable shares. By the end of 2008, almost all of such shares had indeed become tradable. The paper compares the performance of the two major forms of state ownership (direct or indirect ownership) before and after this reform. It is shown that before the reform companies indirectly held by the state outperform directly held companies whereas after the reform the same companies now underperform directly held companies. Results suggest that the perception of investors about the relative value of these two forms of state ownership suffered a reversal. The paper thus brings to light value-related consequences from protective schemes involving the state, such as those currently found in Southern European and other countries, not just in China. Also, in the face of frequent claims that the relationship between state ownership and performance should be U-shaped, the paper establishes the transient character of such pattern. Finally, the paper also addresses a recurrent methodological pitfall relating to the use, in empirical models, of fractions of the same total.