Nationalization of private enterprises and default risk: Evidence from mixed-ownership reform in China

Abstract

We contribute to the existing literature by demonstrating how the default risk of enterprises is driven by the nationalization of private enterprises (NPE). Overall, we find that the implementation of NPE promotes default risk, and the effect follows an inverted U-shape over time. Mechanism tests show that the effect of NPE on default risk works mainly through three channels: weakening corporate governance, exacerbating debt expansion, and reducing investment efficiency. Further distinguishing the characteristics of NPE, we find that the effect of NPE on default risk is more pronounced for private enterprises transformed into local state-owned enterprises (SOEs), private enterprises acquired across regions, private enterprises with a higher external guarantee rate, and equity pledge rate.