Privatization, Efficiency and Intra‐industry Effects: Analysis of China’s Privatization

In this study, we use both accounting and stock market data to examine the performance of privatized firms in China and that of their rivals. Consistent with our conjecture, we find that competitors reacted negatively to the privatization announcements. However, the magnitude of the abnormal returns, together with the significance level, increases as the event window widens. For example, while the rivals marginally lost 0.5% of their value on the announcement date, they lost 1.3% (3.3%) of their value during the five‐day (21‐day) period surrounding the privatization announcement date. The results suggest that privatization of state owned enterprises in China signalled a change in the competitive balance in the industries, since most of the rivals reacted negatively to the announcements. Analysis of the operating performance measures also shows that the privatized firms outperformed their industry counterparts in the post‐privatization period. Furthermore, we examine the long‐term stock market performance of the privatized firms relative to that of the industry rivals and find that the privatized firms outperformed their industry rivals only by the end of the third year after privatization. Although most of the sample firms are partially privatized, and may probably be required to meet some social objectives during the post partial privatization period, we did not find any evidence that the proportion of government ownership explains the returns of the privatized firms.