Privatization and management incentives: Evidence from the United Kingdom

This article examines whether privatization affects management incentives and provides an estimate of the magnitude of the change. Using data from large firms in the United Kingdom, we find no relationship between compensation and financial performance in state-owned firms, both before and after corporate governance reforms. In contrast, we find a strong sensitivity in privatized firms both immediately and in more mature privatized firms driven largely by stock options and shareholding. For more mature privatized firms, compensation and dismissal sensitivities are complementary with our estimates, suggesting a pound443,000 increase in management returns for a one standard deviation improvement in firm performance. This estimated incentive intensity is higher than in established publicly traded firms. Our results support the theoretical focus on incentives in the dominant theories of state and private ownership.