Profiting from Gaizhi: Management Buyout During China's Privatization

38 Pages Posted: 23 Feb 2009 Last revised: 16 Mar 2010

Date Written: Decmeber 22, 2007


During the late 1990s, China introduced the gaizhi process for privatizing state-owned firms. Under gaizhi, managers could acquire their firms at a price that was based on recent profitability. Systematic analysis of longitudinal data reveals the following: (1) There is a statistically significant 4 percent decrease in net margin relative to trend in the one year period immediately prior to privatization; (2) There is no statistically meaningful difference in net margin in the period after privatization relative to the period one year or more before privatization. These findings suggest that managers intentionally suppressed the performance of their firms so as to acquire them at less than fair value. We test and reject other, more innocuous explanations for this profit pattern.

Keywords: Privatization, Moral Hazard, Management Buyout, Hidden Information

JEL Classification: P2, G3, L2

Suggested Citation

Lu, Susan Feng and Dranove, David, Profiting from Gaizhi: Management Buyout During China's Privatization (Decmeber 22, 2007). Available at SSRN: or

Susan Feng Lu (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://

David Dranove

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8682 (Phone)
847-467-1777 (Fax)

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