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Ultimate Privatization and Change in Firm Performance: Evidence from China

时间:2010.11.15

Zhangkai Huang and Kun Wang
School of Economics and Management
Tsinghua University
China

Abstract
We extend the current empirical literature on privatization by exploring the effect of ultimate privatization on the performance of Chinese listed companies. Ultimate privatization is defined as the incidence of transferring the ultimate control of a state-owned company from the government to private owners. Using a sample of 127 Chinese listed companies that have had controlling blocks transferred from the government to private owners, we show that firm performance improved significantly following this transfer. In addition, gains in profitability and efficiency are more prominent when the new controlling shareholder is an “outsider”, one who does not own shares in the company prior to the transfer of control. Our results suggest that the Chinese government should continue to reduce its controlling ownership in listed companies, as the transfer of control to private owners enhances operating efficiency and profitability.

Key words: Ultimate privatization; Control transfer; State-owned enterprises; Insider; Outsider
JEL classification: G15, G32, G34

I.    Introduction
There have been widespread waves of privatization in recent decades. This change has caught intense interest from academia and has generated a large amount of literature on the effect of privatization on firm performance.  China’s government uses partial privatization to reform state-owned enterprises (SOEs) after the stock markets were opened in Shenzhen and Shanghai in 1990 and 1991, respectively. In particular, the government allowed SOEs to issue a small proportion of shares to individual investors while maintaining the government’s ultimate control . Although there is evidence that share issue privatization has a positive impact on some profitability measures, most studies have found little or no improvement or have even found a decline in performance following an IPO as a result of government control (Chen, Firth and Rui, 2006; Sun and Tong, 2003; Wang, 2005).
 


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