Higher State Ownership Research Articles

State ownership, implicit government guarantees, and crash risk: Evidence from China

Using a large sample of Chinese listed firms, we examine the link between state ownership and firms' stock price crash risk. We find that state ownership is significantly associated with lower crash risk. Channels to explain the association are investigated. We do not find an increase in information diffusion in firms with higher state ownership. However, we find that an implicit government guarantee through state ownership plays a vital role in reducing firms' crash risk. State-owned firms with higher bailout guarantees are found to have lower crash risk. The embedded implicit government guarantee changes investors' perception, and crowds out short sellers and informed traders from the market. Difference-in-differences tests and tests based on instrumental variables provide confirming evidence of a causal link. Overall, our findings suggest that the presence of state ownership can reduce crash risk through implicit government guarantees, however, at the cost of lower market efficiency.

State ownership and securities fraud: A political governance perspective

AbstractResearch question/issueThis study attempts to shed new light on how the state as a controlling shareholder can affect the interests of minority shareholders by investigating the role of state ownership in deterring securities fraud commission.Research findings/insightsUsing archival data from a large sample of Chinese publicly traded firms, we uncover that state ownership is negatively associated with the likelihood of securities fraud commission. Further, CEO political background reinforces this negative relationship. We also uncover that firms with high state ownership are more likely to dismiss CEOs than those with low or no state ownership upon securities fraud detection.Theoretical/academic implicationsDeparting from agency theory‐centric research on state ownership and corporate governance, this study introduces a political governance perspective to unpack the role of state ownership in corporate governance. Political governance refers to organizational control mechanisms deployed by political actors to achieve their objectives.Practitioner/policy implicationsStudying how political governance systems influence managerial behaviors is critical to gaining a complete insight into the implications of state ownership on corporate governance.

Direct overseas listing versus cross-listing: A multivalued treatment effects analysis of Chinese listed firms

Firms of emerging economies are increasingly seeking various forms of overseas listing as alternatives to the widely studied cross-listing to fund their growth. We examine the motivations and consequences of these alternative forms of overseas listing within the potential-outcome framework using Chinese data. In the setting of multiple treatment groups, high-tech firms are found most likely to seek direct overseas listing. Firms with high pre-IPO state ownership concentrations tend to directly list in Hong Kong rather than in the U.S., rejecting legal bonding as a motive of overseas listing. Although an equity issuance explanation implied by the market segmentation hypothesis is more plausible for the listing decisions, we do not obtain any evidence to support its prediction of a lower cost of capital for firms that have access to the overseas finance. The positive longer-term average treatment effects found in this study suggest that the potential expected returns would have been higher, if all firms were to list overseas rather than domestically.

Has the Split-Share Reform Influenced Corporate Behaviour? Chinese Firms’ Fixed Capital Investment 2002–2016

In 2005, China took an important step in its privatisation process by initiating the Split Share Reform, whereby state-owned shares became tradeable. As a consequence, there was a significant rise in private holdings of shares of listed companies which previously had high state ownership. This paper considers the impact of this change, by examining how the SSR impacted on firms’ capital investment. Using a value-maximising approach, we empirically model Chinese firms’ fixed capital investment recognising that this was a period of global instability caused by the Global Financial Crisis. Controlling for its effects, we are able to consider if and how the reform influenced firms’ behaviour.

THE RESPONSE OF STATE‐OWNED ENTERPRISES TO IMPORT COMPETITION: EVIDENCE FROM CHINESE MANUFACTURING FIRMS

ABSTRACTWe examine the wage and employment impact on Chinese firms of an increase in import competition associated with China's WTO accession in December 2001, with an emphasis on state‐owned enterprises (SOEs). We find that both wage and employment are negatively impacted by an increase in import competition, but firms with high state ownership cut employment less and reduce wages more than their private counterparts, suggesting that they prioritize the protection of employment over that of wages. This finding supports the notion that SOEs may have ‘multitask’ responsibilities in terms of protecting employment as well as achieving efficiency. We also find that firms with higher capital intensity reduce their wages less but cut employment more in response to intensified import competition. This provides empirical support for the efficiency wage theory.

The Response of State-Owned Enterprises to Import Competition: Evidence from Chinese Manufacturing Firms

We examine the wage and employment impact on Chinese firms of an increase in import competition associated with China’s WTO accession in December 2001, with an emphasis on state-owned enterprises (SOEs). We find that both wage and employment are negatively impacted by an increase in import competition, but firms with high state ownership cut employment less and reduce wages more than their private counterparts, suggesting that they prioritize the protection of employment over that of wages. This finding supports the notion that SOEs may have “multitask” responsibilities in terms of protecting employment as well as achieving efficiency. We also find that firms with higher capital intensity reduce their wages less but cut employment more in response to intensified import competition. This provides empirical support for the efficiency wage theory.

State Ownership, Implicit Government Bailout Guarantee, and Crash Risk: Evidence From China

Using a large sample of the Chinese public firms, this study documents that the government intervention via state ownership can mitigate the stock crash risk. The mitigation effect of state ownership is more pronounced in the crisis periods and in the sample of firms with shares held by central government. Further evidence indicates that high state ownership mitigates the crash risk by deterring the short selling activities. Our empirical results reveal that short sellers especially informed short sellers, view high state ownership as the implicit government bailout guarantee against bankruptcy and voluntarily withdraw shares shorted. The decreased informed short selling activities block the incorporation of bad news.

State Ownership, Implicit Government Bailout Guarantee, and Crash Risk: Evidence From China

Using a large sample of the Chinese public firms, this study documents that the government intervention via state ownership can mitigate the stock crash risk. The mitigation effect of state ownership is more pronounced in the crisis periods and in the sample of firms with shares held by central government. Further evidence indicates that high state ownership mitigates the crash risk by deterring the short selling activities. Our empirical results reveal that short sellers especially informed short sellers, view high state ownership as the implicit government bailout guarantee against bankruptcy and voluntarily withdraw shares shorted. The decreased informed short selling activities block the incorporation of bad news.

Mutual fund ownership and foreign exchange risk in Chinese firms

We examine the effect of a potentially important external governance mechanism – mutual fund ownership – on the extent to which Chinese firms are exposed to exchange rate movements. Using a sample of 560 firms over the period 2005–2011, we show that greater mutual fund ownership is associated with lower exposure to the US dollar, and that this effect is greatest for firms with higher state ownership. We contend that these findings can be explained by mutual funds ensuring that Chinese firms limit their unhedged dollar-denominated borrowing. This paper contributes to the literature on the benefits to Chinese firms’ shareholders of institutional ownership, and to the growing body of evidence on the favorable effects of good governance on firms’ risk management practices.

R&D Investments and Firm Value: Evidence from China

This study examines whether R&D investments are non-linearly related to firm value. Using a sample of 563 Chinese listed firms between 2005 and 2013, we find that R&D investments have an inverted U-shaped relationship with firm value. This finding indicates that as R&D investments increase, firm value increases to a certain level and then decreases. We further find the presence of an inverted U-shaped relationship in firms with low state ownership. However, we find no evidence of a non-linear relationship in firms with high state ownership. These results suggest that the inverted U-shaped relationship is more pronounced for firms with low state ownership than for firms with high state ownership. Moreover, we find that there is an inverted U-shaped relationship between R&D investments and firm value in firms with high growth opportunities. In contrast, for firms with low growth opportunities, their relationship has a U-shaped pattern. These results are robust to robust standard errors clustered at the firm level, controlling for industry fixed effects, and omitting variable biases. Overall, our empirical evidence extends and complements the literature on the R&D investments–firm value relationship by considering their non-linear pattern. This study provides important implications for stakeholders, such as investors, policy makers, standard-setters, state owners, and regulators. Specifically, our findings can be useful to policy makers who pursue long-term performance objectives.

Policy uncertainty, investment, and the cost of capital

We examine the effect of economic policy uncertainty on the relation between investment and the cost of capital. Using the news-based index developed by Baker et al. (2016) for twenty-one countries, we find that the strength of the negative relation between investment and the cost of capital decreases during times of high economic policy uncertainty. An increase in policy uncertainty reduces the sensitivity of investment to the cost of capital most for firms operating in industries that depend strongly on government subsidies and government consumption as well as in countries with high state ownership. Consistent with the price informativeness channel, we find that an increase in policy uncertainty reduces the investment-cost of capital sensitivity for firms from more opaque countries, firms with low analyst coverage, firms with no credit rating, and small firms. We conclude that economic policy uncertainty distorts the fundamental relation between investment and the cost of capital.

Dividend policy of Indonesian listed firms: The role of families and the state

We investigate factors influencing the dividend policy of the listed Indonesian firms by focusing on agency costs and ownership structure. Our study finds that firms with higher conflicts of interest among managers and shareholders pay lower dividends. In the context of the conflicts of interest among major and minor shareholders, we find that such conflicts would exert little impact on dividend payments. Further, we find that the family-controlled firms prefer to pay less dividends whereas the corporations with higher state ownership are associated with larger dividend payments. Our findings are in line with the argument that the Indonesian state consider corporate dividends as one of the main sources of revenues other than corporate taxes in their government budget. This issue may have adverse effects on the growth of cash-constrained small and medium-sized enterprises.

The effects of a comply-or-explain dividend regulation in China

We examine the effects of the world's first comply-or-explain dividend regulation in China's Shanghai Stock Exchange, which requires firms to either pay at least 30% of profits as dividends or explain the use of funds. We find that many firms increased their payout ratio to comply, by increasing dividends or decreasing earnings. Firms with high profitability, state ownership, and fewer agency conflicts were more likely to comply. However, complying firms subsequently issued more debt and had a decline in accounting performance and firm valuation. The evidence suggests that the comply-or-explain regulation increased firms' dividends at substantial costs.

Impacts of Dividend Announcement on Stock Price: An Empirical Study of the Vietnam Stock Market

The Vietnam stock market is a new market in which dividend taxes are higher than capital gains taxes, Vietnamese firms have a high state-ownership, a majority of dividends are paid by cash and there is significant inconsistency in dividend payouts. This paper investigates the effect of dividend increase announcements on stock price reactions. A total of 198 announcements for 101 companies listed on the HOSE market was investigated, the results indicated that announcements of dividend increase do not cause reactions in security prices. The obtained results support Black’s tax-based dividend signaling hypothesis about the condition for dividend announcements becoming market information when dividend taxes are higher than capital gains taxes. These findings of this study are also in line with other previous studies.

Risk Taking Activities of State-Owned Firms in a Transition Economy

This paper investigates the impact of state ownership on the corporate risk taking activity in a transition economy. More specially, we analyze the relationship between government ownership and corporate risk at the firm level in Vietnam. Employing different techniques of panel data estimation, we find that firms with higher state ownership tend to take more risk-taking activities. The findings support the privatization strategy in transition economies.

Policy Uncertainty, Investment, and the Cost of Capital

We examine the effect of economic policy uncertainty on the relation between investment and the cost of capital. Using the news-based index developed by Baker, Bloom, and Davis (2016) for twenty-one countries, we find that the strength of the negative relation between investment and the cost of capital decreases during times of high economic policy uncertainty. An increase in policy uncertainty reduces the sensitivity of investment to the cost of capital most for firms operating in industries that depend strongly on government subsidies and government consumption as well as in countries with high state ownership. Consistent with the price informativeness channel, we find that an increase in policy uncertainty reduces the investment-cost of capital sensitivity for firms from more opaque countries, firms with low analyst coverage, firms with no credit rating, and small firms. We conclude that economic policy uncertainty distorts the fundamental relation between investment and the cost of capital.

National culture and privatization: The relationship between collectivism and residual state ownership

Using a large hand-collected database of 605 privatized firms from 48 countries, we examine the relationship between the collectivism measure of culture and residual state ownership in privatized firms. We find that the continued role of government in privatized firms is positively related to collectivism. This result is robust to using alternative measures of collectivism and government control, as well as when we address the endogeneity of collectivism. Finally, we examine the economic outcomes of culture at the firm level, focusing primarily on performance, efficiency, risk taking, and valuation measures. We report that privatized firms with high residual state ownership exhibit lower performance, valuation, efficiency, and risk taking in collectivist societies. Our results suggest that formal institutions are not, as sustained by previous studies, the main/exclusive constraints on the privatization reform.

Government Ownership and Collectivism: Evidence from Privatization

Using a large hand-collected database of 605 privatized firms from 48 countries, we examine the relationship between the collectivism measure of culture and residual state ownership in privatized firms. We find that the continued role of government in privatized firms is positively related to collectivism. This result is robust to using alternative measures of collectivism and government control, as well as when we address the endogeneity of collectivism. Finally, we examine the economic outcomes of culture at the firm level, focusing primarily on performance, efficiency, risk taking, and valuation measures. We report that privatized firms with high residual state ownership exhibit lower performance, valuation, efficiency, and risk taking in collectivist societies. Our results suggest that formal institutions are not, as sustained by previous studies, the main/exclusive constraints on the privatization reform.

Ownership Structure, Corporate Governance and IPO Post-Listing Liquidity

This paper investigates how ownership concentration and structure and corporate governance relate to the post-listing liquidity of IPO firms, where the latter is measured by various dimensions of trading activity, breadth, and depth. Using a sample of 1,049 Chinese IPOs issued on the Shanghai and Shenzhen Stock Exchanges over the 2001-2010 period, we find firms with a broader shareholder base and higher ownership concentration have greater post-listing liquidity. So do firms with a higher state ownership and lower institution ownership. Corporate governance is also important in explaining the cross-sectional differences in post-listing liquidity; specifically, post-listing liquidity is higher for firms with CEO duality, a larger and more independent board, and more frequent board meetings. The 2005 Split Share Structure Reform, which increased the proportion of tradable shares, has a positive impact on liquidity.

Risk Determinants of China's Hotel Industry

This study examines the risk determinants of China's hotel industry. The risks under consideration are systematic risk (beta), unsystematic risk and total risk. The determinants are debt leverage, size, liquidity, operating efficiency, profitability, growth opportunity and state ownership. Given the distinctive features of its stock markets and its rapidly growing tourism industry, China offers a good case study for this research. Moreover, the rapid expansion of the domestic and international tourism markets in China will create a huge demand for hotels and hospitality services; risk management will consequently be a critical task for hotel executives and investors in China. Thus, a good understanding of risk determinants of the Chinese hotel industry will provide valuable information that will allow both local and foreign hotel business managers and investors to adopt wise investment strategies. Panel regression test results show that debt leverage, size and state ownership are three critical risk determinants of China's hotel industry. Specifically, high debt leverage and state ownership significantly raise all three types of risk for Chinese hotels, whereas large hotels substantially reduce their systematic and total risks.