A Re-Examination of China's Share Issue Privatization: Does it Not Improve SOE Profitability?

36 Pages Posted: 22 Feb 2006

See all articles by Guohua Jiang

Guohua Jiang

Peking University - Guanghua School of Management

Heng Yue

Singapore Management University - School of Accountancy

Longkai Zhao

Peking University - Department of Finance

Date Written: February 14, 2006

Abstract

Previous studies (e.g., Sun and Tong, 2003; Wang et al., 2004) show that Share Issue Privatization (SIP) in China did not improve the profitability of State-owned Enterprises (SOEs). This is puzzling given that SIP improves firm profitability almost around the world and China's economic reform is widely recognized as a success. We argue that these studies did not consider the mean reversion nature of corporate profitability. In China, only SOEs with the highest profitability are chosen to privatize. After SIP, the high profitability reverses to the average level so that SIP firms will have negative profitability changes. We design a matched sample method to deal with the mean reversion problem. For a sample of 149 SIP firms, we select matching firms from a large sample of non-SIP SOEs, according to the pre-SIP firm size and profitability. We find that SIP substantially improves firms' profitability relative to the matching firms. Our results are consistent with the theory and carry important policy implication for the China's reform of SOEs.

Keywords: Share Issue Privatization, State-owned Enterprise, Profitability, China

JEL Classification: G15, G32, G34, M41, M47, G38, C10

Suggested Citation

Jiang, Guohua and Yue, Heng and Zhao, Longkai, A Re-Examination of China's Share Issue Privatization: Does it Not Improve SOE Profitability? (February 14, 2006). Available at SSRN: https://ssrn.com/abstract=884308 or http://dx.doi.org/10.2139/ssrn.884308

Guohua Jiang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China
+8610 62757930 (Phone)
+8610 62751470 (Fax)

Heng Yue (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Longkai Zhao

Peking University - Department of Finance ( email )

Beijing, 100871
China

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