Insider Privatization with a Tail: The Screening Contract and Performance of Privatized Firms in Rural China

Posted: 9 Feb 2005

See all articles by Hongbin Li

Hongbin Li

Chinese University of Hong Kong - Department of Economics

Scott Rozelle

University of California, Davis - Department of Agricultural and Resource Economics

Abstract

This paper studies insider privatization in rural China and provides an explanation of why some firms have performed well after privatization but others have not. We show theoretically that the underperformance of insider-privatized firms could be due to the manager-cum-owner's lack of incentives after privatization. A screening theory predicts that the buyout price is correlated with the postprivatization incentives, and a firm's postprivatization performance increases with both the buyout price and postprivatization incentives. Drawing on data we collected in China, we find evidence supporting the theory. We also find that the buyout price decreases with the degree of information asymmetry.

Keywords: Insider, Privatization, Screening, Contracting, China

JEL Classification: G3, P26, P31

Suggested Citation

Li, Hongbin and Rozelle, Scott, Insider Privatization with a Tail: The Screening Contract and Performance of Privatized Firms in Rural China. Available at SSRN: https://ssrn.com/abstract=664627

Hongbin Li (Contact Author)

Chinese University of Hong Kong - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Scott Rozelle

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-9897 (Phone)

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