The Real Effects of Privatization : Evidence from China’s Split Share Structure Reform

We examine the real effect of privatization in terms of technological innovation. To establish causality, we explore plausibly exogenous variation in privatization generated by a quasi-natural experiment – China's split share structure reform, which mandatorily converts non-tradable shares to be freely tradable and opens up the gate to the privatization of state-owned enterprises (SOEs). Using a difference-in-differences approach, we find that the expectation of privatization has a positive, causal effect on firm innovation. We further show that better interest alignments between controlling and minority shareholders, enhanced stock price informativeness, and improved risk sharing are three plausible underlying mechanisms through which privatization prospects promote innovation. Our paper sheds new light on the real effect of privatization prospects and has important implications for policymakers who aim to promote innovation