Responding to Financial Crisis: The Rise of State Ownership and Implications for Firm Performance

We examine changes to corporate ownership in nine East Asian countries following the Asian Financial Crisis of 1997 and find that those countries with lower incomes and in which policymaking involves greater transactions costs (i.e., veto points) tend to have more firms with state ownership. An increase in GDP per capital by $US1, 000 results in a 16% reduction in the likelihood of state participation, while an increase in veto points of one leads to an increase in the likelihood of state participation by over 73%.  We then examine the performance of firms with no state ownership, minority and dominant state ownership during the 2008 crisis. On an annualized basis, we find that firms with minority state ownership exhibit 5% lower idiosyncratic volatility in the quarter of the Lehman Brothers collapse than firms with either no state ownership or dominant state ownership.  Minority state-owned firms also enjoy a higher abnormal return of 3.7% and 6.1% in the two quarters following the collapse of Lehman Brothers when compared to their industry peers.