Insider privatization with a tail: the screening contract and performance of privatized firms in rural China

This paper studies insider privatization in rural China and provides an explanation of why some firms have performed well after privatization but others have not. We show theoretically that the underperformance of insider-privatized firms could be due to the manager-cum-owner's lack of incentives after privatization. A screening theory predicts that the buyout price is correlated with the postprivatization incentives, and a firm's postprivatization performance increases with both the buyout price and postprivatization incentives. Drawing on data we collected in China, we find evidence supporting the theory. We also find that the buyout price decreases with the degree of information asymmetry. (c) 2004 Elsevier B.V. All rights reserved.