ABSTRACT
Governments in transitional economies have long been concerned with whether privatization of state-owned enterprises can improve firm performance and, if so, through which mechanisms this can be achieved. Using 135 publicly listed firms that China privatized via control transfer from 1998 to 2005 as a sample, we investigate whether newly privatized firms enhance incentives of top management and employees and, consequently, whether post-privatization firm performance is improved. Our findings reveal several post-privatization effects: (1) a much lower level of large shareholder expropriation, (2) higher and more performance-sensitive executive compensation, and (3) lower levels of management perk consumption and employment, which increase more slowly when sales grow and decrease more quickly when sales shrink. These enhancements in incentives help explain post-privatization firm performance improvement.
JEL Classifications: G34; M48.
