The helping hand, the lazy hand, or the grabbing hand? Government shareholders in publicly listed firms in China

Yan-Leung Cheung, Lihua Jing, P. Raghavendra Rau, and Aris Stouraitis

City University of Hong Kong, City University of Hong Kong, Purdue University, and City University of Hong Kong

We analyze related party transactions between Chinese publicly listed firms and their state-owned enterprise (SOEs) shareholders to answer three questions. Do companies always benefit from the presence of government shareholders? Are government shareholders inefficient in maximizing shareholder value? Or do governments extract resources from companies, either to perform a social role or because they are corrupt? We find that related party transactions between firms and their government shareholders seem to result in the expropriation of the minority shareholders of the firm. The expropriation is concentrated in firms with the highest state ownership and controlled by local government SOEs, and in provinces where local government bureaucrats are less likely to be prosecuted for misappropriation of state funds. Overall, our results are most consistent with the grabbing hand model of government.

This paper has been presented at

• University of Columbia at Missouri, November 2005;
• Università degli Studi di Palermo, June 2005;
• Università di Bologna, June 2005;
• Tulane University, April 2005;
• Wake Forest University, April 2005;
• European Finance Association meetings, Moscow 2005

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