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Ownership, privatization and banking regulation : four essays in the economics of transition and development

Authors Li, Tao
Issue Date 2003
Summary The dissertation contains four essays. These essays investigate banking regulation around the world, corporate governance in mixed ownership companies, economic reform in transition economies, and state-owned enterprise (SOE) reform, respectively. The first essay is entitled "Banking Regulation around the World: Patterns, Determinants and Impact". In this essay, we empirically investigate the patterns, determinants, and impact of banking regulation in a large cross-section of countries. Different countries deal with their commercial banks in different ways. Major differences are found to be in four dimensions, i.e., the extent of government ownership of banks, the intensity of direct regulation of banks, the measures used to empower outside investors to monitor banks, and the comprehensiveness of explicit deposit insurance. Based on these four dimensions, we identify three major different patterns of banking regulation around the world: the India-China type characterized by dominant government ownership, the South Africa-Philippines-Mexico type characterized by dominant use of government direct regulation, and the Germany-US-Switzerland-France type characterized by dominant use of government empowerment. Further, we test economic, legal, and cultural theories of the determinants of the patterns of banking regulation. Results indicate that the following countries exhibit larger fractions of government ownership of commercial banks: 1) countries with lower levels of initial banking development; 2) countries with Socialist and Civil law in legal origin; 3) countries with larger non-Protestant population. Countries with higher levels of economic or initial banking development, or with English Common law tradition have more independent and flexible regulatory agencies. Moreover, countries with higher levels of economic development or initial banking development impose less direct regulation, while relying more on government empowerment and explicit deposit insurance. Regressions show that the level of overall financial development is negatively correlated with the extent of government ownership and some specific measures of direct regulations of banks. Meanwhile, the level of overall financial development is positively associated with the flexibility of regulatory agencies, the empowerment of non-government stakeholders, and explicit deposit insurance schemes. Our findings imply a "big push" view of reforming banking regulation, i.e., a big push to economic and financial sector development will lead to subsequent improvements in banking regulation, which in turn will promote the country's economic and financial development. The second essay is entitled "Corporate Governance of Mixed Ownership Firms in Transition: Evidence from China's Listed Companies". In this essay, we empirically examine corporate governance of mixed ownership firms where there coexist different ownerships in a company. It addresses the following questions: what is the impact of state ownership on the performance of mixed ownership enterprises in transition economies? Should state ownership be quickly reduced or kept at certain level in these firms? Utilizing a unique data set of mixed ownership firms listed in China's stock exchanges, we find significantly positive effect of state ownership in improving firm performance after initial public offering (IPO) when controlling for the government's downward self-selection bias. Government's downward self-selection bias means that in firms with poor performance before IPO, government as the dominant owner before IPO has to keep large stakes at the beginning of after-IPO period. Simultaneous equation analysis also shows state owners would like to reduce their shareholding fraction in those firms with worse performance after IPO, which confirms our endogenous state ownership assumption. The third essay is entitled "A Public Finance Perspective on State-Owned Enterprise Reform". In this essay, we present a public finance theory to explain the relation between state-owned enterprise (SOE) reform and governments' public goods provision in transition economies. Given that the effective tax rate on the state sector is higher than that on the non-state sector during transition, governments need to rely more on the tax revenue from the state sector to finance their public goods provision at the cost of lower production efficiency of SOEs. We argue that both the optimal speed and intensity of state enterprise reform depend on the level of initial stock of public goods, and the efficiency of taxation on the non-state sector. The model shows that SOE reform will be carried out faster when the initial stock of public goods is larger or the efficiency of taxation on the non-state sector is higher. The theory also indicates that the government should lower tax rates on all enterprises when the initial stock of public goods is larger. Using the regional development disparity among Eastern, Central and Western China and the economic reform experience in the city of Wenzhou as examples, we illustrate the assumptions and findings of the theory. The study sheds light on the importance of the setup of an effective and efficient system of tax collection on the private sector in transition economies. The fourth essay is entitled "Efficiency vs. Revenue: Discovering Governments' Incentives in Dumping State-Owned Enterprises". In this essay, we address the following question: what are the incentives of governments in privatizing or liquidating, i.e., dumping, state-owned enterprises (SOEs)? Existing research on privatization has not paid much attention to this question. The paper focuses on testing two alternative theories of the issue. One theory explains that governments dump SOEs in order to enhance production efficiency. The other theory argues that increasing government revenue or stopping subsidies to profit-losing SOEs is the motivation. Based on a data set from China, our tests reject the efficiency theory while yield support for the revenue theory. In addition, we find evidence that the concerns about unemployment are important obstacles of privatization or liquidation decisions. A simple implication is that it might be sensible to propose second-best privatization or liquidation programs that take government incentives into account and are feasible with the government rather than first-best programs that will never be implemented.
Note Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2003
Language English
Format Thesis
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