How Does Government Ownership Affect Firm Performance? Evidence from China's Privatization Experience

Privatization shifts ownership and control of public assets to private investors. Many governments use it as an important means to invigorate their state-owned enterprises (SOEs). However, it is not clear how changes in government ownership affect firm performance. Some economists argue that, in competitive markets without significant externalities, government ownership is inferior to private ownership (see for example, Boycko, Shleifer and Vishny, 1996; and Dewenter and Malatesta, 2001). This is generally explained by the government's lack of transferable residual claims, government's choice of social and political policy goals over profit maximization, the government's employment of staff based on political connections rather than ability to perform, or the greater information asymmetries and higher transaction costs in the government. Vining and Boardman (1992), Boardman et al. (1989) and Megginson, Nash and Van Journal of Business Finance & Accounting, 29(1) & (2), January/March 2002, 0306-686X