Can Politics Tame the Market? Market Responses to Government Control of Fully and Partially Privatized Firms in China

Mavrovitis (Mavis), Christos () and Sarmistha Pal ()
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Mavrovitis (Mavis), Christos: University of Surrey
Sarmistha Pal: University of Surrey

No 17985, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This study examines factors influencing full (FP) versus partial (PP) privatization and how markets respond to government control in PP and FP firms. Exploiting China’s 2005 NTS reform as a natural experiment, we find that treated PP firms experienced significantly lower post-reform performance, driven by persistent private benefits of control, failure to adopt value-maximizing behavior, and unchanged liquidity and information asymmetry. In contrast, FP firms eliminated all NTS, maximized value; showed higher stock market liquidity and lower information asymmetry, improved market performance; and gained market confidence in the post-reform period. These findings challenge the effectiveness of China's authoritarian approach to private sector development.

Keywords: local government incentives; authoritarian central government; firm value maximization; full and partial privatization; non-tradable shares reform; difference-in-differences (search for similar items in EconPapers)
JEL-codes: G31 G38 L33 (search for similar items in EconPapers)
Date: 2025-07
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Forthcoming - forthcoming in: European Financial Management Journal

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