Insider Ownership and Privatization

30 Pages Posted: 5 Mar 2005

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: January 2005


This paper analyses the trade-off between the need to restructure a firm before privatization and to provide an appropriate corporate governance for the privatized firm. In order to provide managers with appropriate incentives to run the company, once privatized, it may be optimal to let them acquire equity in the firm. However, they may then have incentives to under-perform before the privatization takes place, in order to pretend that the firm's assets are not valuable. If investors believe it (and therefore are not willing to pay a high price for the shares) managers (and insiders in general) can get a larger amount of the firm shares during privatization. Empirical observations are generally consistent with this theory.

Keywords: Restructuring, Transition, Privatization

JEL Classification: G34

Suggested Citation

Cornelli, Francesca and Li, David Daokui, Insider Ownership and Privatization (January 2005). Available at SSRN: or

Francesca Cornelli (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7262 5050 x3225 (Phone)
+44 20 7724 3317 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
(852) 2358-7610 (Phone)
(852) 2358-2084 (Fax)


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