State Ownership : A Blessing Kitty and a Worrying Lion

We provide firm-level evidence that a private firm may lower its financing costs by introducing a small (kitty) share of state ownership. However, if the state acquires the lion's share of the private firm, the firm may become inefficient. Therefore, the results show a non-linear relationship and an inverse U-shape between a firm's performance and its share of state ownership. Specifically, a firm with a small share of state ownership has better export performance than a pure private firm in financially more vulnerable sectors in China, but this superior performance deteriorates as the share of state ownership increases. These results are not driven by firm, sector, or time characteristics. This paper reconciles these findings with the fact that although a firm with state ownership is less liquidity constrained due to its low financing cost, while inefficiency, a frequent concomitant of state ownership, will eventually outweigh this credit advantage as the share of state ownership rises