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How Does Government Control Affect Firm Value? New Evidence for China

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  • Marzieh Abolhassani
  • Zhi Wang
  • Jakob de Haan

Abstract

The role of government involvement in firms has received a lot of attention in the last few decades. Government involvement could result in a ‘supporting hand’ and a ‘grabbing hand’. This paper investigates how government control influences the financial performance of Chinese listed firms. We use a panel data set of firms publicly traded on the stock exchanges of Shanghai and Shenzhen over the period 2009‐2013. Our dataset includes 5501 firm‐year observations. Our results suggest that government control of firms, measured by the shareholdings that are directly and indirectly controlled by the government, is negatively related with firms’ financial performance. More specifically, the return on assets, the return on equity and the market‐to‐book ratio are, on average, 1.3%, 2.0% and 8.2% lower for government‐controlled firms. Both central and local government control is undermining firm performance. These findings provide support for the ‘grabbing hand’ theory of the government. Our results also suggest that the negative effect of government control becomes stronger when firm profitability is higher. Firms with a poor financial performance benefit from government control, which supports the ‘supporting hand’ theory of the government.

Suggested Citation

  • Marzieh Abolhassani & Zhi Wang & Jakob de Haan, 2020. "How Does Government Control Affect Firm Value? New Evidence for China," Kyklos, Wiley Blackwell, vol. 73(1), pages 3-21, February.
    • Handle: RePEc:bla:kyklos:v:73:y:2020:i:1:p:3-21
    DOI: 10.1111/kykl.12216
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    Cited by:

    1. Fawad Rauf & Cosmina L. Voinea & Khwaja Naveed & Cosmin Fratostiteanu, 2021. "CSR Disclosure: Effects of Political Ties, Executive Turnover and Shareholder Equity. Evidence from China," Sustainability, MDPI, vol. 13(7), pages 1-18, March.
    2. Guangwei Zhang & Yahan Shi & Nuozhou Huang, 2024. "Government Subsidies, Green Innovation, and Firm Total Factor Productivity of Listed Artificial Intelligence Firms in China," Sustainability, MDPI, vol. 16(8), pages 1-20, April.

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