Privatization and Restructuring : Friends or Enemies

This paper analyzes decisions of managers on restructuring before privatization. After privatization, the new owner decides on manager's future based on his/her beliefs on manager's quality. Manager and owner are playing a signaling game, in which restructuring is a signal of manager's quality. The model has two important sets of equilibria: one in which signaling does not persuade the owner to keep the manager who restructures, and the other in which signaling offsets the counter-restructuring effect of privatization caused by manager's uncertainty on after-privatization future. Under the assumption that the new owners acquire the privatized firm in a competitive environment, it is demonstrated that the former, socially inferior equilibria, will be eliminated