Insider Privatization with a Tail: The Buyout Price and Performance of Privatized Firms in Rural China

Abstract

This paper studies insider privatization in transition economies. We show theoretically that the underperformance of insider-privatized firms could be due to the manager-cum-owner's lack of incentives after privatization. A screening theory predicts that a firm's postprivatization incentives increase with the firm's buyout price. The empirical results show that the buyout price decreases with the degree of information asymmetry and that a firm's postprivatization performance increases with the buyout price. We also find that the performance of premium-paying firms converges with that of private firms after privatization; in contrast, heavily discounted firms perform indistinguishably from government-owned firms.

Privatization of tubewells in North China: Determinants and impacts on irrigated area, productivity and the water table

“…Because of disruption effects and differences in access to output and revenue flows, economists studying privatization, in general, are frequently worried about how the transfer of ownership rights will affect agricultural output, productivity and income (Li and Rozelle 2004). In the groundwater sector in China's agricultural economy, with the exception of Wang et al (2005b)-which examines the rise of tubewell privatization in a small subset of villages in three counties-there is almost nothing published on the rise or impact of the large scale privatization of tubewells that is now occurring in northern China.…”

The impact of privatization on efficiency and profitability

“…Second, our data cover 226 listed firms in over 100 cities (including counties) and 21 industries for 2001–2010. These firms are geographically dispersed – that is our study is not limited to the developed cities or rural areas as many other papers are (Li and Rozelle, ). Also, a long‐term study containing information for 10 years provides a useful opportunity to examine both short‐ and medium‐term effects of privatization.…”

“…The same data are also used by Bhaumik and Estrin (). Li and Rozelle () conduct surveys on 168 rural manufacturing enterprises in two provinces (Jiangsu and Zhejiang) in 1997 and early 1998. Our observations come from a wider range of firms, not limited to certain geographical areas or industries.…”

“…There are numerous studies on the efficiency of SOEs vs. private firms in China, as well as the consequences of Chinese privatization, but the empirical results are controversial (e.g., Bhaumik and Estrin, 2007;Chen et al, 2006;Dong et al, 2006;Hu et al, 2004;Jefferson and Su, 2006;Li and Rozelle, 2001). The variation in empirical findings may arise for several reasons.…”

“…For instance Hu et al (2004) define SOEs as the firms in which the state owns 100 percent shares, whereas Chen et al (2006) use the type of the dominant shareholder to identify a firm's ownership. Second, samples used in many studies are small and cover very limited regions and/or industries (e.g., Bhaumik and Estrin, 2007;Hu et al, 2004;Li and Rozelle, 2001). Third, studies covering a short time period may be able to capture a phenomenon immediately before and after privatization, but their results are insufficient to describe the change over a longer time (e.g., Hu et al, 2004;Jefferson and Su, 2006).…”