The Invisible Hand of the State in Privatization

We document evidence of firm bribery in China’s split share reform, which allows controlling non-tradable shareholders to compensate tradable shareholders to make their shares tradable. We find that firms provided private benefits to some tradable shareholders in exchange for their vote on compensation plans favoring non-tradable shareholders. Firms with more retail investors, more challenging reform, worse corporate governance and tighter financial constraints were more likely to engage in bribery. In addition, the bribery was conducted strategically, targeting firms with higher post-reform performance improvement and stock returns. Our study highlights the possibility that the state might exploit unorganized individuals during privatization