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 cor...

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Bibliographic Details
Published in:Journal of law, economics, & organization economics, & organization, 2003-04, Vol.19 (1), p.176-217
Main Authors: Cragg, Michael I., Dyck, I. J. Alexander
Format: Article
Language:English
Subjects:
Annual reports
Boards of directors
Business management
Business structures
Compensation
Corporate governance
Economics
Effects
Enterprises
Executive compensation
Financial incentives
Financial management
Financial performance
Government policy
Incentives
Industrial regulation
Management
Management reports
Managers
Monetary incentives
Options on stocks
Organization theory
Ownership
Ownership incentives
Pay for performance
Privatization
Regulatory agencies
Standard deviation
Studies
United Kingdom
Variable coefficients
Wages & salaries
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Summary: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 £443,000 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.
ISSN:8756-6222
1465-7341
1465-7341
DOI:10.1093/jleo/19.1.176