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Political and economic incentives of government in partial privatization

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  • Li, Zhaohua
  • Yamada, Takeshi

Abstract

This study examines the government's incentives to control partially privatized SOEs in share issue privatization in China. In addition to controlling firms in strategic industries, in certain geographical areas, and that have related party transactions, our result shows that government selects and controls firms that have better valuations and employs more workers vis-à-vis comparable private firms. Particularly, local governments, which are more likely to face hard budget constraints, might spend the profits of government controlled firms to hire more workers (Boycko et al., 1996), suggesting that government pursues efficiency and political objectives simultaneously. Our study finds that local governments prefer to control relatively more efficient firms that hire more workers, while central government prefer to controls firms that hire more workers regardless of efficiency. We estimate the impact of government's decision on firm valuations and employment and find a pronounced economic impact to preserve employment and a limited impact to improve efficiency.

Suggested Citation

  • Li, Zhaohua & Yamada, Takeshi, 2015. "Political and economic incentives of government in partial privatization," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 169-189.
  • Handle: RePEc:eee:corfin:v:32:y:2015:i:c:p:169-189
    DOI: 10.1016/j.jcorpfin.2014.04.008
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    Cited by:

    1. Randall Morck & Bernard Yeung, 2017. "East Asian Financial and Economic Development," NBER Working Papers 23845, National Bureau of Economic Research, Inc.
    2. Randall Morck & Bernard Yeung, 2017. "East Asian Financial and Economic Development," Working Papers id:12112, eSocialSciences.

    More about this item

    Keywords

    Partial privatization; Political objectives; State ownership; Employment; Chinese economy;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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