Improving corporate governance where the State is the controlling block holder: Evidence from China

We examine changes in market values and accounting returns for a sample of publicly traded Chinese firms around announcements of large block-share transfers among government agencies (“State Bureaucrats”), market-oriented State-owned enterprises (“MOSOEs”) and private investors (“Private Entities”). We find evidence that these large block transfers are true control transactions for all types of block holders, resulting in positive abnormal returns around the transfer announcements. Moreover, we provide evidence that transfers from State Bureaucrats and MOSOEs result in larger increases in market value and accounting returns than transfers from Private Entities—consistent with their superior incentives and expertise relative to State block holders. We also find that CEO turnover occurs more quickly when shares are transferred to Private Entities. We conclude that corporate governance can be improved at State-controlled firms by improving the incentives and managerial expertise of controlling block holders, and that this is better accomplished by transferring ownership to private investors rather than by shuffling ownership among State-controlled entities.