Abstract
This study investigates the factors driving full privatization versus partial privatization and
examines how markets respond differently to government control in partially (PP) and fully
(FP) privatized firms. Using China’s 2005 Non-Tradeable Shares (NTS) reform as a natural
experiment, the analysis leverages the timing of NTS conversion, determined by an
administrative lock-up rule beyond firms’ control. Results indicate that Tobin’s Q was
significantly lower for treated PP firms retaining some NTS, reflecting weak market confidence
due to persistent private benefits of control and absence of firm value maximization.
Conversely, FP firms eliminated all NTS, minimising government interference and gaining
market trust – consequently their market value did not fall after 2005. These findings challenge
the effectiveness of China's authoritarian approach to private sector development.