The Relationship between Ownership Identity, Ownership Concentration, and Firm Operating Efficiency: Evidence from China 2005-2012

Abstract

China restructured its state assets management system through the establishment of the State-owned Assets Supervision and Administration Commission (SASAC) in 2003. In consequence, de facto ownership rights to local state-owned enterprises (lo-cal SOEs) were granted to local governments. Chinese policymakers assumed that the split of state ownership between central government and local authorities would in-crease government’s fiscal incentives for improving SOEs’ economic efficiency. This study investigates whether the redefined state-owned firms have improved their performance and whether this performance is better than that of local government SOEs and privately owned firms. We have traced the identity of the largest shareholder among publicly listed firms and have classified it as the central government (SOECG), local government (SOELG), or privately owned (PRIVATE). Using panel data com-prising 13,273 firm-year observations for the period 2005-2012 and OLS, 2SLS, difference, and difference-in-difference regression, we report that the identity of the largest shareholder does matter. Our results show that the listed, central government owned SOEs’ operating costs are similar to those of local government owned SOEs and privately owned firms. The fact that the performance of central government owned SOEs is inferior to that of local government owned SOEs and privately owned firms suggests that helping-hand and protectionist policies have been an important contributing factor to SOECGs’ performance. This result is also supported by empirical analysis which suggests that central government shareholding is an important determinant for SOECGs’ performance. The policy implication of this study is that helping-hand and protectionist policies have been a barrier to fully realizing the benefits of ownership reform of listed companies in the absence of a competitive market and an effective legal infrastructure in China.