The Impacts of State Ownership on Information Asymmetry: Evidence from an Emerging Market*

This study examines the effect of corporate ownership on information asymmetry as measured by bid-ask spread in the emerging markets of China. Government ownership has significant and positive impacts on bid-ask spread during the period 1995-2000, but disappears afterward during 2001-2003. The finding that state ownership raised bid-ask spread in the early period is consistent with recent studies on emerging markets including China, which indicate that firms with higher state ownership tend to have a greater deviation between cash flow rights and control rights (eg, Wei et al., 2005). This implies that lower state ownership is associated with lower information asymmetry in the market, an economic consequence of significant economic reform and privatization regarding the market microstructure. However, with more active control transfers and * We would like to thank Dr. Xijia Su, the editor, Dr. Yuan Ding, the discussant, and the participants at the 3rd Symposium of China Journal of Accounting Research, and the 2008 Mid-Year Meeting of the International Accounting Section of the American Accounting Association for their insightful comments and suggestions on an earlier version of this paper. We also would like to express our gratefulness to Dr. Junxiong Fang for his help in editing our Chinese version of the abstract. This paper was developed based on a portion of an earlier paper under a different title presented at the 2006 Annual Conference of American Accounting Association (AAA) and the 2006 Symposium of Journal of Contemporary Accounting & Economics. Any remaining error is the responsibility of the authors. ** Corresponding author. Heibatollah Sami: E-mail address: [email protected]. Correspondence address: Department of Accounting, Lehigh University, Bethlehem, PA 18015, USA. Jongmoo Jay Choi: E-mail address: [email protected]. Correspondence address: Department of Finance, Fox School of Business, Temple University, Philadelphia, PA 19122, USA. Haiyan Zhou: E-mail address: [email protected]. Correspondence address: Department of Accounting and Business Law, University of Texas–Pan American, Edinburg, TX 78539, USA. JONGMOO JAY CHOI, HEIBATOLLAH SAMI AND HAIYAN ZHOU 14 emergence of private controlling shareholders, regulatory changes in ownership structure and corporate governance mechanisms, and thus an improved legal and institutional environment, the link between the government ownership and information asymmetry turns to be insignificant in the later period. These results have important implications for transparency and information disclosure policies as well as privatization in emerging markets. JEL classification: G14; G15; G32; M41