Tunneling or Not? The Change of Legal Environment on the Effect of Post-Privatization Performance

42 Pages Posted: 6 Sep 2014 Last revised: 9 Sep 2014

See all articles by Frank Yu

Frank Yu

China Europe International Business School

Guoqian Tu

Chongqing University

Date Written: December 2013

Abstract

Motivated by Hoff and Stiglitz (2004)’s theory, we examine empirically how the creation of "rules of the game" affect the behavior of economic agents in a transition economy. Using a sample of Chinese state-owned enterprises (SOEs) in which controlling ownership was transferred to private acquirers between 1994 and 2006, we find that the post-privatization performance (PPP) of firms depends on institutional factors. Before 2003, we observe severe post-privatization tunneling behaviors by acquirers and worse PPP. However, from 2003, when the State issued regulations against tunneling and strengthened enforcement, the incidence of tunneling behaviors declined and PPP improved. We find that better implementation of ownership transfer and more prior experience of private acquirers are key factors that contribute to the improvement.

Keywords: tunneling, privatization, investor protection, law and finance, ethics

JEL Classification: G34, M13, N25, N45

Suggested Citation

Yu, Fang and Tu, Guoqian, Tunneling or Not? The Change of Legal Environment on the Effect of Post-Privatization Performance (December 2013). Journal of Business Ethics, Vol. 121, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2490994

Fang Yu (Contact Author)

China Europe International Business School ( email )

669 Hongfeng Road
Pudong
Shanghai, 201206
China

Guoqian Tu

Chongqing University ( email )

No. 174 Shazhengjie, Shapingba
Chongqing
China
15025355091 (Phone)

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