Does State Ownership Drive M&A Performance? Evidence from China

Date01 January 2015
Published date01 January 2015
European Financial Management, Vol. 21, No. 1, 2015, 79–105
doi: 10.1111/j.1468-036X.2012.00660.x
Does State Ownership Drive M&A
Performance? Evidence from China
Bilei Zhou
Business School, Central South University,Changsha, 410083, PR China
Jie (Michael) Guo
The Institute of China Development and Research, Durham Business School, University of Durham,
DH1 3LB, Durham, UK
Jun Hua
Orient Securities Co. Ltd., Shanghai, China
Angelos J. Doukas
Durham Business School, University of Durham, DH1 3LB, Durham, UK
This paper examines the role of state ownership in mergers and acquisitions
by analysing the short- and long-term performance of Chinese state-owned
enterprise (SOE) acquirers relative to privately owned enterprise (POE) peers
from 1994 to 2008. The empirical resultsshow that SOE acquirers outperform POE
acquirers in terms of long-run stock performance and operating performance. In
addition, consistent with previous literature, our results suggest that the gains from
government intervention outweigh the inefficiency of state ownership in Chinese
mergers and acquisitions.
Keywords: state ownership,mergers and acquisitions,market valuations,Chinese
JEL Classification: G14, G34
1. Introduction
State ownership has significant impacts on firm value, especially in emerging markets
(Megginson and Netter, 2001). China is one of the largest emerging markets but its
Comments received throughout the formulation of this work are gratefully acknowledged.
Special thanks go to John Doukas, two anonymous referees as well as the participants
of the 2011 EFMA Asian Financial Management Symposium for valuable comments and
suggestions received throughout this work. Correspondence: Jie (Michael) Guo.
2012 Blackwell Publishing Ltd
© 2012 John Wiley & Sons Ltd
Deree College, The American College of Greece
Bilei Zhou, Jie (Michael) Guo, Jun Hua and Angelos J. Doukas
© 2012 John Wiley & Sons Ltd
government still plays a decisive role in its economy. This makes China a desirable
laboratory to research the influence of state ownership in business operations and firm
value. Previous literature has carried out many empirical studies in the Chinese market;
however, the results are mixed. Some researchers show that state-owned firms have
less profitability and lower market valuation (Chen et al., 2007), while Calomiris et al.
(2010), among others, find a positive relation between state ownership and firm value.
Yet studies such as those of Caves and Christensen (1980), Kay and Thompson (1986),
Wortzel and Wortzel (1989), Martin and Parker (1995), and Kole and Mulherin (1997)
suggest that state ownership is not necessarily less efficient than private ownership.
In fact, when a government privatises, it seldom sells all of its stakes or controlling
shares to private hands. This may be for political reasons, as suggested by Biais and
Perotti (2002), or due to the country’s legal structure, as found by Bortolotti et al.
(2002). But even for economic reasons, retaining partial government ownership can
have a positive effect.1Perotti (1995) show that governments tend to privatise smaller
proportions of such firms and obtain better perfor mance. Being the largest stakeholder
of a partially privatised SOE, the government sends a credible signal to the market that
it is not expropriating shareholder wealth. Boardman and Laurin (2000) find a positive
relation between government ownership and the stock returns of companies undergoing
Despite various analyses of state ownership in China, none has paid attention to its
influence in mergers and acquisitions (M&As). The uniqueness of the Chinese economy
is that corporate investment and financing decisions are significantly influenced by
government intervention (Firth et al., 2008) and a large proportion of companies are
ultimately owned or controlled by central or local government agencies. As a direct
means of resource reallocation and ownership transfer, M&As are therefore influenced
by the government to achieve political and economic goals.
Moreover, the trading volume of China-related mergers has been increasing dra-
matically in recent years and a considerable proportion of these deals are conducted by
SOEs. Therefore investigating Chinese M&A activitiessheds light on the nexus between
government intervention and merger outcomes and responds to the real practical concern
of the growing impact of Chinese M&As on the world economy.
Our motivation rests in the fact that much is unknown about both the state ownership
of Chinese firms and their M&A activities. Since China’s entry into the World Trade
Organization, the world has witnessed a significant increase in Chinese firms gaining
global presence Through M&As across the globe, the Chinese economy has become
the second largest in the world, with a high level of f inancial resources ready to spend
domestically and abroad. Given globalisation and increased financial market integration,
this situation is set to have broader international implications. The reform of Chinese
economic policy is undoubtedly set to have a worldwide impact. Given these reasons,
this study offers a unique contribution to the literature.
This study investigates the role of Chinese state ownership in the context of SOE
mergers relative to transactions carried out by POE acquirers. There are several possible
ways in which state ownership relates to merger activities and helps SOEs conduct
more profitable merger deals. First, SOE acquirers may have governmental suppor t to
1For example,the government may help state-owned enterprises (SOEs) taking over privately
owned companies in the same industry to increase industry concentration and enhance control
power on that industry.

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