Management Buyouts: The Incentives Of Operators A Choice

The reform of China's state owned enterprises (SOEs) started with the adjustmentof interest relationship among different economic entities, especially the interestrelationship between the owner and the management. One of the objectives of theadjustment is to establish a scientific and effective management incentive mechanism,facilitating the interest alignment between the owner and the management. Thehistory of SOE reform in China is actually the evolution of management incentivemechanism of property rights provided by the owner. In the early stage of the reform,the owner gave more powers and profits to the management, namely, the managementgot the incentive of control rights and material wealth. Under the contracting andleading system, the policy of power delegation and profit granting was followed andthe enterprises were becoming more independent by establishing a contractualrelationship between the owner and the management. Not only was the managementinspired by more control rights and material wealth, but by part of the enterprise'sresidual claims as well. In line with the establishment and perfection of moderncorporate system, the interest relationship between the owner and the managementshould be specified and constrained through property right. It is required that theowner should provide the management property right as an incentive, granting themanagement some residual control rights and residual claims and sharing thecorporate profits. The major forms of property right incentives carried out in China'sSOEs are stock options, employee shares ownership plan (ESOP) and managementbuyout (MBO). In practice, stock options and ESOP were proved to be effective inactivating the management but failed to solve the long lasting problems of theobscurity and omission of property right owner and insider control due to the currentinstitutional background and market environment. By contrast, MBO can meet thedemands of property right reform externally and management incentive internally.Therefore, it is an effective form of property right incentive. The management being owner of the enterprise through buyout clarifies theownership of enterprise's properties and offers a practical way for the withdrawal ofstate assets from the enterprises in the industries with full competition. Themanagement's taking over the state assets helps compensate the incumbentmanagement with their historical contributions and guarantee the employment ofexisting employees and the stability of assets restructuring. Meanwhile, MBO is a iiimust of the incentive of human capital of the management. The property right ofhuman capital requires the owner to acknowledge and accept the abilities tomanagement control as production factor and enjoy the right to share corporate profits.In other word, the owner should offer part of property right as an incentive to humancapital of the management, encouraging the management to make more efforts inmanagement control. The specificity of human capital can usually lead to holdupproblem in an enterprise, that is, the shareholders and other people at stake will holdup the quasi-rent of the specific human capital of the management, resulting in toomuch sunk cost for the management. In order to get all the profits of their investmentin human capital and to avoid too much sunk cost caused by holdup of shareholdersand others at stake, the management tends to become owner of the enterprise throughbuyout, entitling the management residual control rights and residual claims.Furthermore, MBO unifies entrepreneurial functions of management control and risktaking, promoting the managers to entrepreneurs and contributing to the formationand development of corporate entrepreneurship. The dissertation consists of six chapters. Chapter One introduces background andsignificance of the writing, research objects and methods, the structure of writing,new ideas put forward in the dissert...