Privatization,the New Performance Appraisals And Corporate Innovation

There are two different views about whether it is essential for state-owned enterprises(SOEs)to be privatized.One view argues that only privatization can thoroughly solve efficiency problem of SOEs.Another view insists that privatization not only cannot solve the existing problems of SOEs,but also may lead serious loss of state-owned property.This paper may clarify the controversy of privatization of SOEs base on the perspective of corporate innovation.The view which support privatization suggest that shareholders in SOE are difficult to incentive and supervise managers,which may lead to managers' opportunistic behavior.After privatization,the control right and cash flow right transfer from SOEs to private firms.New shareholders do these jobs under the target of realizing maximization of enterprise value which more Ilikely to establish an effective corporate governance and establish better supervision and incentive mechanism.Based on this,we analyses two kinds of SOE reform,one is full privatization,another is performance appraisals.The former can provide direct evidence for clarify the controversy of privatization,the later matters executive compensation and promotion,can be a supervision and incentive mechanism aimed directly at managers of SOEs.If this performance appraisals which does not involve property changes of SOEs can promote corporate innovation and performance,we could prove that privatization is not the key to improve efficiency of SOEs.In view of managers'tenure are not long in SOEs,but innovation need long time to put into effect,therefore SOE managers may prefer to merge innovative targets to get innovation.This paper further test whether performance appraisals motivate managers to merge more innovative targets and continue to support the innovation projects in targets after M&A.We will answer the following three questions:First,whether can the privatization promote corporate innovation?Second,if the performance evaluation does promote corporate innovation.Third,whether can the performance evaluation motivate managers to merge more innovative targets and continue to support the innovation projects in targets after M&A.The main conclusion is as follows:First,Using Difference-in-Differences method(DID)and the panel data ofChinese unlisted industrial enterprises over the period of 2005-2011,this paper find that privatization has a negative effect on firm innovation and financial constraints is one of the important factors impairing privatized firm innovation.Further research shows that the negative effect of financial constrains is more significant in the provinces with less developed financial market,but is not evident in the provinces with more developed financial market.These researches expands recent literature about privatization and corporate innovation,and provides new explanations for how financial development would affect corporate innovation from the perspective of privatization.The results clarify the controversy about privatization of the State-Owned Enterprises and provides a theoretical basis and policy reference to further promote and deepen the reform of mixed ownership in China.Then,based on the new performance appraisal(EVA)of top management in The Revision of Interim Measures for Business Performance Appraisals of Persons-in-Charge at Central Government-Owned Enterprises in 2009,this paper tests the impact of the new EVA performance appraisal on CGOEs innovation.Using difference-in-differences approach,we find a significant increase of CGOEs patents after the implementation of the new EVA appraisal.We use a rich set of tests to show that the baseline results are robust to endogeneity and reverse causality.We further examine how EVA appraisal affects CGOEs Tobin's Q and find that the increase of patents improves CGOEs value.These researches clarifies the controversy of privatization of SOEs,and enriches literature about top management incentive mechanisms and corporate innovation.Finally,this paper test the effect of performance appraisal on M&A and innovation.Based on the new performance appraisal in 2009,this paper find that the new performance appraisal can motivate managers in CGOEs merge the targets have more patents and and the results are more pronounced for firms which hedging and proliferating ratio or EVA is lower and firms which CEO has longer tenure.This findings suggest that M&A is one of the channels to promote innovation in CGOEs and reasonable performance appraisal can play an efficient role in this channel.