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We investigate performance effects for China's listed firms when there is a change in the controlling shareholder. These changes include ownership transfers from one state entity to another state entity and from a state entity to a private entity. We find positive performance effects when control is passed to a private entity. In contrast, when the transfer is made to another branch of the state, there is little change in performance. The stock market responds positively to a change in control, with the largest effect observed for private transfers. Our results suggest the Chinese government should continue to sell down its share ownership in listed firms as the transfer of control to private owners enhances corporate profitability and efficiency. Moreover, to help ownership reform, China should encourage an active market for corporate control.

This study explores the role of bank connections as an important informal institution in debt contracting. Drawing on a sample of Chinese listed firms from 2004 to 2012, we find that bank connections, established through personal networks, asymmetrically affect the speed of leverage adjustment. Bank connections can reduce the marginal costs of leverage adjustment for under‐levered firms. We further find that such connections are especially important for firms with low levels of collateral and young firms, in areas with relatively underdeveloped financial markets, during periods of tight monetary policy, and when there is little competition in the banking industry.

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