Minority State Ownership and Firm Performance: Evidence from the Chinese Stock Market Crash in 2015

We examine the effect of minority state ownership on firm performance using the Chinese stock market crash in 2015. We find that treatment firms with minority state ownership accumulated from governmental purchases of equities experience significant reductions in operating performance. The negative impact is more severe in firms with higher riskiness and firms with less powerful large shareholders. We also find that treatment firms’ risk decreases and their employment increases after minority state shareholders step in, providing supportive evidence on the government’s motives of reducing risk and preventing mass layoffs. Further tests reveal the channels through which minority state ownership impedes investment efficiency, productivity, and innovation. The negative impact diminishes when government institutions divest their shares in a timely manner. Overall, our results suggest there are unintended negative consequences of minority state ownership arising from the governmental rescue package in a market crisis.