Academic journal article Financial Management

The Financial and Operating Performance of China's Newly Privatized Firms

Academic journal article Financial Management

The Financial and Operating Performance of China's Newly Privatized Firms

Article excerpt

This study examines the pre- and post-privatization financial and operating performance of 208 firms privatized in China during the period 1990-97. The full sample results show significant improvements in real output, real assets, and sales efficiency, and significant declines in leverage following privatization. but no significant change in profitability. Further analysis shows that privatized firms experience significant improvements in profitability compared to fully state-owned enterprises during the same period. Firms in which more than 50% voting control is conveyed to private investors via privatization experience significantly greater improvements in profitability, employment, and sales efficiency compared to those that remain under the state control. Privatization seems to work in China, especially the more private firms become.


Privatization as an economic reform measure has swept the globe during the past twenty years, as more than one hundred countries of all economic and political persuasions have launched ambitious programs to privatize once state-owned enterprises (SOE) (see Megginson and Netter, 2001). These programs have contributed to nondebt financing of the public deficit, attracted foreign capital and technology, and promoted the return of flight capital (Perotti and Guney, 1993). Over the last two decades, privatizations have transformed the structure of corporate ownership and dramatically increased the number of shareholders in many countries (Boutchkova and Megginson, 2000), including China. Indeed, China's share issue privatizations (SIP) of SOEs have been a catalyst to the development of its stock markets. This ongoing program in the world's most populous country with the highest number of SOEs is yet to be fully implemented.

An important milestone of the Chinese economic reform was establishment of the Shanghai Stock Exchange in 1990 and the Shenzhen Stock Exchange in 1991, helping to institutionalize China's privatization program. (1) The number of listed companies increased from 10 in 1990 to 1,160 by year-end 2001. Listed companies represented a total market capitalization of renminbi yuan (RMB) 4,809 billion as of year-end 2000 (approximately US$586 billion) and had raised cumulative capital of RMB780 billion (US$95 billion) by year-end 2001. The presence of over 54 million shareholders in China by year-end 2000 may be the strongest evidence of the credibility of its privatization program (see Table I).

The published evidence on China's economic reform has focused mainly on the effectiveness of various reform measures, although several authors have examined issues related to China's privatized firms. (2) Gul (1999) finds state ownership to be positively related to debt financing and dividend policy and growth opportunities to be negatively related to debt financing and dividend policy. Qi, Wu, and Zhang (2000) find post-issue return on equity positively related to institutional ownership and negatively related to state ownership. Wei and Varela (2003) also document a negative relationship between Tobin's q and state equity ownership in China's newly privatized firms.

Substantial empirical evidence on privatization in other countries has also been developed over the past decade. Eckel, Eckel, and Singhal (1997) study the privatization of British Airways. Barberis, Boycko, Shleifer, and Tsukanova (1996) study the divestment of 452 Russian retail businesses in the early 1990s. Claessens, Djankov, and Pohl (1997) examine ownership and governance issues of 706 Czech firms that were mass-privatized during 1991 and 1992, and Aggarwal and Harper (2000) study the auction process and equity valuation issues of the Czech voucher privatization.

Bortolotti, D'Souza, Fantini, and Megginson (2002), in a single-industry study, investigate performance changes following the privatization of 31 national telecommunications companies. Sun and Tong (2002) study 24 Malaysian share issue privatizations (SIP) during 1983-1997. …

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