We document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off.
We argue that this results from the absence of a Chinese political transition to accompany economic reforms, so that the positive effects on profits of political ties through government ownership outweigh the potential efficiency costs of government shareholdings.
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