The Impacts of State Ownership on Information Asymmetry: Evidence from an Emerging Market

Jongmoo Jay Choi

Temple University

Heibatollah Sami
Lehigh University

Haiyan Zhou
University of Texas - Pan American May 23, 2010 China Journal of Accounting Research, Forthcoming Abstract: In this paper, we examine the effect of corporate ownership on information asymmetry measured by bid-ask spread in the emerging markets of China. We find that government ownership has significant and positive impacts on bid-ask spread during the period of 1995-2000 which disappears afterward during the period of 2001-2003. The finding that state ownership raised bidask spread in the early period is consistent with recent studies on emerging markets including China, which indicate that firms with higher state ownership tend to have a greater deviation between cash flow rights and control rights (e.g., Wei et al., 2005). This implies that lower state ownership is associated with lower information asymmetry in the market, an economic consequence of significant economic reform and privatization regarding the market microstructure. However, with more active control transfers and emergence of private controlling shareholders, regulatory changes in ownership structure and corporate governance mechanisms, and thus an improved legal and institutional environment, the link between the government ownership and information asymmetry turns to be insignificant in the later period. These results have important implications for transparency and information disclosure policies as well as privatization in emerging markets. Keywords: Bid-ask spread, Information asymmetry, Transparency, Adverse selection, Government (State) ownership, Emerging market (China) JEL Classification: G14, G15, G32, M41 Accepted Paper Series

Date posted: July 15, 2010 ; Last revised: September 29, 2010