Private Benefits in IPOs: Evidence from State-Owned Firms

44 Pages Posted: 4 Feb 2008

See all articles by Zhaohui Chen

Zhaohui Chen


Jongmoo Jay Choi

Temple University; National Bureau of Economic Research (NBER); Temple University - International Business

Cao Jiang

Wenzhou-Kean University

Date Written: March 15, 2008


It is a common notion that a significant conflict of interest exists between the state and the bureaucrats who control state-owned firms because the bureaucrats have essentially all the control rights but negligible cash flow rights in those firms. Yet, there is little systematic evidence on whether and how bureaucrats pursue private benefits at the cost of the state-owned firms. Using data from IPOs of state-owned firms in China, we find strong evidence that CEOs of state firms attempt to get promotions in the bureaucratic hierarchy by underpricing IPOs and allocating IPO shares to parties important to their careers. Specifically, we find that i) executives' chance of promotion is positively correlated with the level of IPO underpricing, and ii) those executives who can benefit more from underpricing, such as younger executives and those with government experience, actually underprice more. We don't find similar effects in private firms. These results point to a source of efficiency gains that privatization may achieve.

Keywords: Corruption, IPO underpricing, Privatization, Government ownership, State-owned enterprise, Agency cost, Private benefits, Asian corporate governance

JEL Classification: G32, D72, D73, L33

Suggested Citation

Chen, Zhaohui and Choi, Jongmoo Jay and Jiang, Cao, Private Benefits in IPOs: Evidence from State-Owned Firms (March 15, 2008). Second Singapore International Conference on Finance 2008, AFA 2009 San Francisco Meetings Paper, Available at SSRN: or

Zhaohui Chen


Jongmoo Jay Choi (Contact Author)

Temple University ( email )

Fox School of Business
Temple University
Philadelphia, PA 19122
United States
215-204-5084 (Phone)
215-204-1697 (Fax)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Temple University - International Business ( email )

Philadelphia, PA 19122
United States

Cao Jiang

Wenzhou-Kean University ( email )

Zhejiang Province

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