Does Government Ownership Always Reduce Firm Values? Evidence from Publicly Listed Companies in China

A recent fascinating study by Lihui Tian of Peking University and Saul Estrin of the London School of Economics tested the relationship between government ownership and firm performance in China's near-laboratory setting. Tian and Estrin used data on Chinese listed firms between 1994 and 2004 to analyze the unusual ownership structure of Chinese PLCs. They next assessed firm market value by calculating Tobin's Q (an adjusted measure of firms' market value over book value) and used return on assets to measure profitability. After confirming the presence of a U-shaped relationship between state ownership and corporate value, they concluded that once state ownership passes 25%, corporate performance increases with government ownership, while below 25% state shareholding detracts from firm performance. Firms with large state ownership interests perform better than firms where private and state ownership are more evenly balanced.