Using data from a recent national survey of the ownership reform of state-owned enterprises in China, we study the effects of politician control and agency problems

Using data from a recent national survey of the ownership reform of state-owned enterprises in China, we study the effects of politician control and agency problems on the performance of the reformed firms. Taking into account of the endogenous nature of the reform, we find that firm performance is positively affected by the lessening of politician control through increasing the firm’s flexibility in labor deployment and by the mitigation of agency costs through introducing more effective corporate governance mechanisms such as one-share one-vote and shareholding-based composition of board structure. Ownership structure also matters to performance: relative to shareholding by the state, foreign ownership has a positive effect, individual (including employee) shareholding has a negative effect, whereas the effect of collective and legal person shareholding is indistinguishable from state shareholding. Somewhat surprisingly, business autonomy (except for labor decision autonomy) has a negative effect on performance, indicating serious agency problems in the reformed enterprises. JEL Classification: P21, P31, D23