Margaret Thatcher started the process; and, since her first government began the wholesale sell-down of state owned assets, the rest of the world has enthusiastically followed suit.
In nearly all cases liberated state owned companies, and their stock prices, do either well or very well following privatization. China’s experience though has been different.
China’s SOE privatizations differ from the rest of the world in that they usually involve the selling of their own shares to the public and in nearly all cases their performance (business but often stock as well) appears worse after these sales than before. So is the Chinese government getting a double bilking by a) receiving no money in this process and b) suffering an ongoing revenue dis-benefit via a lower tax take?
Researchers Bo Li, William L. Megginson, Zhe Shen and Qian Sun from the universities of Shantou, Oklahoma, Xiamen and Fudan respectively, in the paper highlighted this week, decided to look at the question by disaggregating ‘listing’ and ‘privatization’ effects.
It’s been noted in China that (nearly all) newly listed companies suffer a drop in performance after listing. The main reason seems to be pump-priming ahead of the IPO (and one of many reasons I won’t buy stock in a Chinese company listed for less than 5-years). This is the listing effect.
The researchers though have tried to take this effect out of the data, look at a slightly longer time scale than previous studies and try to drill in to the true underlying performance of the company. This is the privatization effect.
They find that the listing effect masks the privatization effect so there’s an optics problem. In fact privatized companies in China do do better after listing than before so the process is having the desired effect; but it takes time for this to be stand-alone visible.
This may be small comfort to investors who often have to put up with rotten post-IPO stock performance until the full benefits of the process emerge. If there’s bilking going on then it’s China Inc. taking Mr. and Mrs. Wang for a ride and not Ms. Market failing to fairly serve the interests of China Inc.
As interesting as the paper is from an academic perspective the real-world message for investors is clear; avoid IPOs from Chinese companies, especially SOEs.
You can access the paper in full via the following link Do Share Issue Privatizations Really Improve Firm Performance in China?.
Happy Sunday.