Indirect State Ownership and Corporate Performance of China’s Privatized Companies

This study examines the relation between state ownership and the performance of Chinese listed companies during the period 2002-2004. Results confirm that higher levels of direct state ownership have a negative, significant impact on market performance (Tobin’s Q) but not on operating performance (ROA). However, higher levels of indirect state ownership (ownership by “legal person” firms, mandated to own legal shares) exhibit a positive relation to both market and operating performance. The study also examines the effect on performance of the two types of legal person shares (those held by state-owned legal persons and those held by non-state-owned legal persons). Finally, the study investigates the determinants of state and legal person ownership, highlighting the inverse effects of direct and indirect state ownership and the characteristic effect associated with regulated industries. Results contribute to clarify seemingly contradictory findings in previous studies while showing that, in China, indirect state ownership is linked to an increase in corporate efficiency