Non-credible privatization

Abstract

This paper analyzes government incentives in privatization and shows that governments’ cheap talk results in non-credible policy. Ex-post, only bad firms will take a sequential strategy in privatization, which will reveal its type and lead to a price drop. These results are used to analyse China's share issue privatization plan and market reaction to it.

Acknowledgements

The author is grateful to Chinese National Science Foundation Project No. 70432002 for financial support.

Notes

¹ For a review of empirical studies of privatization and its success, see Megginson and Netter (2001).

² Changing this assumption does not change the main results of the paper.

³ In China, most SOEs sell part of their assets in the IPO and remain the controlling shareholder of the newly created listed company.

⁴ The Shanghai Stock Exchange Index dropped from around 2200 in June 2001 to around 1600 in October 2001.