Ownership and Financing Discrimination: Evidence from the Split-Share Structure Reform in China

Abstract

We study the existence of financing discrimination between state-owned and non-state owned enterprises from the perspective of investment-cash flow sensitivity, and the effects of privatization reform on muffling the institutionally-rooted discrimination. Hit by negative cash flow shocks, firms either reduce investment or raise capital. A firm has no choice but to reduce investment if it cannot raise capital, giving rise to investment-cash flow sensitivity. By employing the dynamic multi-equation model, we find that State-owned Enterprises (SOEs) exhibit significantly lower investment-cash flow sensitivity than that of non-State-owned Enterprises (non-SOEs), suggesting their privileged accessibility to the financial market when cash flow plummets and thereby their stronger capability to protect investment opportunities against cash flow fluctuations. The evidence of firms’ financing behaviors illustrated in the multi-equation model further confirms the existence of ownership discrimination. Moreover, we find that the difference in investment-cash flow sensitivities between SOEs and non-SOEs declined sharply after the Split-share Structure Reform in China, shedding light on the positive impacts of the reform in alleviating ownership discrimination and improving credit allocation efficiency of the capital market.