Do Share Issue Privatizations Really Improve Firm Performance In China?
University of Oklahoma
Xiamen University – School of Management
October 30, 2015
This paper argues that the documented post-share issue privatization (SIP) decline in profitability of divested Chinese companies is not evidence per se that China’s SIP program is ineffective or unsuccessful. Instead, the positive privatization effect is often outweighed by a negative listing effect. We employ a triple difference approach to separate these two effects, and examine a sample of 248 Chinese SIPs from 1999-2009 matched with otherwise comparable SOEs and privately-owned firms. We document a negative listing effect since ROS of privately-owned firms tends to decline after going public by 2.6% and their EBIT/Sales by 3.8%. After adjusting for this negative listing effect, however, we show that China’s SIP program yields significantly improved profitability (ROS and EBIT/Sales), and find this result is robust to alternative specifications. Our study highlights the need to account for the listing effect in analyzing performance improvements following share issue privatizations–which have accounted for the bulk of China’s listed companies and market capitalization.
Do Share Issue Privatizations Really Improve Firm Performance In China? – Introduction
The privatization of state-owned enterprises (SOEs) by governments has become a global phenomenon since its introduction by Margaret Thatcher’s British government during the 1980s. The cumulative proceeds raised through privatization sales by governments selling their SOE shareholdings to private investors or by SOEs themselves selling new primary share issues reached $3.0 trillion (Megginson, 2014) in 2014, and over two-thirds of this total was raised through share issue privatizations (SIPs) rather than asset sales. Over the past five years, China has become the world’s leading privatizing nation–overtaking the United States, Italy, and Great Britain–with $566 billion in cumulative privatization proceeds coming from SIPs (Gao and Megginson, 2015). Besides being larger than any other country’s privatization program, China’s also differs in that the vast majority of its SIPs have been primary, capital-raising share offerings by SOEs themselves, rather than secondary share offerings where sale proceeds flowed to the divesting government.
An even more distinctive feature of China’s privatization program is the fact that existing empirical research examining Chinese SIPs finds either no performance improvements or even outright declines in profitability for privatized firms, whereas privatization empirical studies examining other national experiences (surveyed in Megginson and Netter, 2001; Djankov and Murrell, 2002; and Estrin, Hanousek, Kòcenda and Svejnar 2009) typically document highly significant performance improvements after privatization. Sun and Tong (2003) find that several profitability measures do not improve after 634 SOEs list their shares on domestic stock exchanges during the 1994-1998 period. Subsequent studies that confirm this findings include Wei, Varela, D’Souza and Hassan (2003), Wang, Xu and Zhu (2004), Wang (2005), Chen, Firth and Rui (2006), Jiang, Yue and Zhao (2009), and Jia, Sun and Tong (2005) find that there is no improvement in ROS for 53 SOEs listing their shares overseas over the 1993-2002 period. Despite this ambiguous evidence, the Chinese government decided to accelerate the national privatization program in the third plenum of the 18th Communist Party Congress in November 2013, making explicit the expectation that share issue privatization (SIP) will improve both the profitability and efficiency of divested companies. Why then does the Chinese government continue to privatize SOEs if privatization seemingly does not improve their performance?
We provide an explanation for this puzzling phenomenon by documenting that SIP does in fact significantly improve divested firm operating and financial performance, but that the act of listing shares for trading induces declining firm performance that partially offsets the benefits of privatization. In other words, we argue that there are two separate effects on firm performance when firms are privatized through share issuing: “the pure privatization effect” which arises from privatization and “the listing effect” that is associated with going public. We use a triple difference (difference-in-differences-in-differences, or DDD hereafter) approach to separate the pure privatization effect from the listing effect. DDD is the difference between two double differences (DD or difference-in-differences). The first double-difference compares the performance change of SIP firms before and after listing with the performance change of a control group of SOEs which remain fully state-owned and unlisted for the same period. This DD captures the SIP effect, which is a combined effect of going public and privatizing. The second double-difference compares the performance change of privately-owned (PO hereafter) firms before and after their listing with the performance change of a control group of PO firms that remain unlisted. The characteristics and listing years of these PO firms are closely matched to the SIP firms included in the computation of first DD. This gives the pure listing effect. Finally, we take a difference between the two double differences to take away the listing effect from the SIP effect. This yields our estimate for the pure privatization effect.
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