Privatization and Innovation: Evidence from a Quasi-Natural Experience in China

We examine the real effect of privatization in terms of technological innovation. To address endogeneity concerns, we explore plausibly exogenous variation in privatization generated by a quasi-natural experiment, China’s split share structure reform, which mandatorily converts non tradable shares to be freely tradable and opens up the gate to the privatization of state-owned enterprises (SOEs). Using a difference-in-differences approach, we find that the expectation of privatization has a positive effect on firm innovation. We further show that better interest alignments between controlling and minority shareholders and enhanced stock price informativeness are two plausible underlying mechanisms through which privatization prospects promote innovation. Our paper sheds new light on the real effect of privatization and has important implications for policymakers who aim to promote technological innovation.