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Privatization and Management Incentives: Evidence from the United Kingdom

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  • Michael I. Cragg
  • I. J. Alexander Dyck

Abstract

This article examines whether privatization affects management incentives and provides an estimate of the magnitude of the change. Using data from large firms in the United Kingdom, we find no relationship between compensation and financial performance in state-owned firms, both before and after corporate governance reforms. In contrast, we find a strong sensitivity in privatized firms both immediately and in more mature privatized firms driven largely by stock options and shareholding. For more mature privatized firms, compensation and dismissal sensitivities are complementary with our estimates, suggesting a 443,000 pound increase in management returns for a one standard deviation improvement in firm performance. This estimated incentive intensity is higher than in established publicly traded firms. Our results support the theoretical focus on incentives in the dominant theories of state and private ownership. Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

Volume (Year): 19 (2003)
Issue (Month): 1 (April)
Pages: 176-217

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Handle: RePEc:oup:jleorg:v:19:y:2003:i:1:p:176-217

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Cited by:
  1. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
  2. Kato, Takao & Long, Cheryl, 2006. "Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges," Economic Development and Cultural Change, University of Chicago Press, vol. 54(4), pages 945-83, July.
  3. K. Arin & Mehmet Ulubaşoğlu, 2009. "Leviathan resists: the endogenous relationship between privatization and firm performance," Public Choice, Springer, vol. 140(1), pages 185-204, July.
  4. Kato, Takao & Kim, Woochan & Lee, Ju Ho, 2005. "Executive Compensation, Firm Performance, and Chaebols in Korea: Evidence from New Panel Data," IZA Discussion Papers 1783, Institute for the Study of Labor (IZA).
  5. Takao Kato & Cheryl Long, 2004. "Executive Compensation, Firm Performance, and State Ownership in China: Evidence from New Panel Data," William Davidson Institute Working Papers Series 2004-690, William Davidson Institute at the University of Michigan.
  6. Panagiotis Staikouras, 2004. "Structural Reform Policy: Privatisation and Beyond—The Case of Greece," European Journal of Law and Economics, Springer, vol. 17(3), pages 373-398, May.
  7. Scheele, Ulrich, 2007. "Privatisierung, Liberalisierung und Deregulierung in netzgebundenen Infrastruktursektoren," Forschungs- und Sitzungsberichte der ARL: Aufsätze, in: Wandel der Stromversorgung und räumliche Politik, pages 35-67 Akademie für Raumforschung und Landesplanung (ARL) - Leibniz-Forum für Raumwissenschaften.

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