Faculty & Research
Faculty & Research
How the Rules of the Game Have Affected Performance of Privatized SOEs in China
Diversifying the ownership of state-owned enterprises (SOEs) has been among the policies that China’s leaders have called for in their continued efforts to reform the country’s economy. But privatizing an SOE is no guarantee that it will become more profitable and efficient, as a new study co-authored by CEIBS Assistant Professor of Finance Fang (Frank) Yu shows.
The study looks at all Chinese listed companies that went through a controlling rights transfer from a state owner to a private enterprise between 1994 and 2006. In total 300 firms are included in the study sample. The authors compared the performance of Chinese SOEs that were privatized between 1994 and 2003, when the legal system to regulate privatization was relatively immature, and those privatized between 2003 and 2006, when there were significant improvements made to regulations and enforcement aimed at preventing tunnelling, a practice in which private acquirers of SOEs embezzle funds and other assets from these firms for their own gain.
Among their findings:
- There were instances of tunnelling behaviours at a significant percentage of SOEs that were privatized prior to 2003, and their return on assets, return on sales and stock performance all deteriorated following privatization;
- Prior to 2003, many acquirers were able to gain premature control of the enterprise, which made it easier for them to strip assets from the firm for their own gain;
- There was a significant decline in cases of tunnelling in enterprises that were privatized after 2003, when regulations and enforcement were tightened. The financial performances of these enterprises also showed greater improvement;
- Prior to 2003, 71% of SOE acquirers were inexperienced enterprise operators. After regulations tightened in 2003, only 30% of SOE acquirers were inexperienced. The researchers believe this increase in experienced operators acquiring SOEs is one reason for the improved returns of SOEs privatized after 2003.
The results of the study co-authored by Prof. Yu and Guoqian Tu of at Chongqing University appear in the paper “Tunnelling or Not? The Change of Legal Environment on the Effect of Post-Privatization Performance” which is forthcoming from theJournal of Business Ethics.
