Staged Privatization: A Market Process with Multi-Stage Lockups

The most recent Chinese reform is in the form of staged privatization with multi-stage lockups and step-by-step unlocking and sales of shares. This paper presents a theory and provides empirical evidence for staged privatization under market forces. Our theory is based on a specification of a lockup effect on demand, where the existence of this lockup effect is shown by our empirical analysis. With such a theory, we can analyze how various factors, such as the lockup effect, demand elasticity, performance growth and business fluctuations, affect a staged privatization process, especially the equilibrium speed of privatization. Our paper is first to analyze a market-oriented multi-stage privatization process, instead of a fully government-controlled process. Interestingly, this reform resembles initial public offerings (IPOs), which sheds light on our understanding of IPOs from a unique angle. Our empirical analysis provides evidence in support of our theoretical findings.