Private Benefits in IPOs: Evidence from State-Owned Firms
44 Pages Posted: 4 Feb 2008
Date Written: March 15, 2008
Abstract
It is a common notion that a significant conflict of interest exists between the state and the bureaucrats who control state-owned firms because the bureaucrats have essentially all the control rights but negligible cash flow rights in those firms. Yet, there is little systematic evidence on whether and how bureaucrats pursue private benefits at the cost of the state-owned firms. Using data from IPOs of state-owned firms in China, we find strong evidence that CEOs of state firms attempt to get promotions in the bureaucratic hierarchy by underpricing IPOs and allocating IPO shares to parties important to their careers. Specifically, we find that i) executives' chance of promotion is positively correlated with the level of IPO underpricing, and ii) those executives who can benefit more from underpricing, such as younger executives and those with government experience, actually underprice more. We don't find similar effects in private firms. These results point to a source of efficiency gains that privatization may achieve.
Keywords: Corruption, IPO underpricing, Privatization, Government ownership, State-owned enterprise, Agency cost, Private benefits, Asian corporate governance
JEL Classification: G32, D72, D73, L33
Suggested Citation: Suggested Citation
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