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Title: The effect of share issue privatisation (or Initial Public Offering) on firm performance in China
Author: Rosner, Wei Angela
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 2003
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This thesis examines the effect of partial share issue privatisation (or Initial Public Offering - IPO) on financial performance of Chinese state-owned enterprises (SOEs hereafter). Theoretically, studies of privatisation suggest that private firms perform better than comparable SOEs do, or privatisation improves financial performance of SOEs privatised through public share offering, and full privatisation has been widely advocated. Prior to going public, Chinese SOEs stand at very different starting points compared to their counterparts in the West in that sound corporate management systems, corporate governance mechanisms and an efficient capital market are either not in place or underdeveloped. As a result of going public, new corporate management styles and corporate governance mechanisms are introduced into newly privatised firms. Therefore the performance of Chinese SOEs after IPO might not be merely the result of privatisation or ownership change as elsewhere, but also be the result of effect of IPO on corporate management and corporate governance. There are several empirical and conceptual gaps in understanding Chinese SOEs' financial performance after going public. Firstly, the results of performance changes of an early study on Chinese share issue privatisation may not be accurate due to poor data quality before the introduction of the new accounting regulation based on International Accounting Standards. Secondly, there is a need to clarify the causes of firms' performance changes between three years post-privatisation (or post-IPO) and three years preprivatisation (or pre-lPO) periods. Finally, there is a need to investigate the effect of IPO on corporate management and corporate governance practice that may contribute directly towards firms' financial performance after going public in the Chinese context. A methodology developed by Megginson et al (1994) in their study of global share issue privatisation through comparing firms' post-privatisation versus pre-privatisation performance proxies is employed in this thesis. Empirical research includes examination of accounting data over 6 years (3 years post- IPO versus 3 years pre-lPO) of 127 firms going public in 1997 and 1998 at the Shanghai Stock Exchange; three years post-IPO share price return of the above firms; one survey of 238 listed firms and 16 case studies of listed firms. Findings show that in terms of accounting performance, firms experience significant performance deterioration in profitability and efficiency, but significant reduction in leverage and improvement in liquidity and output after going public. The fact that deterioration of all profitability and efficiency performance measures may indicate that share issue privatisation or IPO has not worked properly to improve firm performance, and financial market is weak in monitoring firms since share price return reflects real sales and short-term liquidity instead of profitability measures. Further findings show that key determinants in firms' performance changes are pronounced by private ownership, the presence of employee ownership, share issue size, board size and asset size of the firms. Evidence from 16 listed firms confirms that key factors in firms' financial performance changes include not only ownership change, but also poor corporate management and corporate governance practice. After going public, firms' poor strategic, financial and human resource management is accompanied by poor corporate governance and legal enforcement mechanisms. The results suggest that IPO cannot be expected to solve all aspects of corporate issues, and it may be difficult to achieve performance improvement if corporate infrastructures have not been well developed in the first place. Furthermore, current Chinese corporate governance mechanisms are insufficient and inefficient to monitor firms, and this thesis recommends reforming legal systems, building sound corporate governance mechanisms and promoting institutional investors through various proposed means (e.g. setting up tribunals, introducing strategic foreign investors and specifying governance mechanisms etc.) are prerequisites to performance improvement after privatisation.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available