Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies

We investigate determinants of foreign ownership in newly privatized firms. We analyze data on privatized Czech firms to address two related general questions. First, what characteristics distinguish transition firms that attract a foreign investor? Second, how do firm‐specific characteristics influence the size of the foreign equity stake? Our results suggest that foreign investors i) seek safe, profitable firms in which they can exert unchallenged influence on corporate governance and then ii) structure their equity stakes to mitigate agency costs and political risk.     

The political economy of residual state ownership in privatized firms: Evidence from emerging markets

We investigate the political determinants of residual state ownership for a unique database of 221 privatized firms operating in 27 emerging countries over the 1980 to 2001 period. After controlling for firm-level and other country-level characteristics, we find that the political institutions in place, namely, the political system and political constraints, are important determinants of residual state ownership in newly privatized firms. Unlike previous evidence that political ideology is an important determinant of privatization policies in developed countries, we find that right- or left-oriented governments do not behave differently in developing countries. These results confirm that privatization is politically constrained by dynamics that differ between countries.     

Analyst following of privatized firms around the world: The role of institutions and ownership structure

We examine which factors affect the decision of analysts to follow newly privatized firms as well as the factors that determine the extent of that following. Contrary to traditional private firms, privatized firms harbor particular uncertainties related to the government's commitment toward privatization. The first-stage estimation shows that the decision by analysts to initiate coverage of newly privatized firms is positively influenced by lower political risk, better judicial efficiency, better information disclosure, and effective extra-legal institutions in the country. Conditional on the decision to initiate coverage, the second-stage results indicate that the extent of analyst following is more important: (1) when there is control relinquishment by the government, (2) when there is more participation by foreign investors and employees, and (3) for those larger firms in nonstrategic sectors. Finally, analysts' coverage is negatively related to postprivatization ownership concentration and underpricing. This latter result runs counter to the existing evidence on private firms—that is, that underpricing “buys” coverage.     

Why do privatized firms pay higher dividends?

We examine state income and reputation incentives to account for the high dividends of privatized firms. Consistent with these agency-cost based incentives, we show strong and robust evidence that the extent of state ownership is positively related to corporate dividends. We distinguish between the empirical importance of these incentives using variation in the rule of law to protect minority shareholders, the fiscal deficit and the political orientation of the state. Our findings show that an incentive to enhance the state's reputation with minority shareholders can account for the high dividends of privatized firms.     

Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China

The 2013 depoliticization regulation (Rule 18) in China mandates government officials to resign from board positions in public firms, terminating firms' political connections established through these directors. Exploiting this regulation as a quasi-experiment, we document that politically connected firms increase their cash holdings 12.7% more than non-connected firms because of these resignations. This pattern is more pronounced among firms that rely more heavily on the government for external resources. Among state-owned firms, the pattern is more evident in firms that are more deeply privatized. In addition, firms that lose political ties experience a significant decline in obtaining bank loans and government subsidies, and they are also slower to adjust their cash holdings toward the optimal level. These findings underscore the role of corporate political linkages in facilitating firms' access to resources that “soften” firms' budget constraints.     

The performance of privatized firms in the Czech Republic

With the growing importance of privatizations as a part of government policy, most empirical studies of these privatizations conclude that firm performance immediately improves following privatization. Privatization has been the most important part of the transition from the centrally planned economies of Central and Eastern Europe and has a larger impact on those economies than privatizations in other countries. However, few studies have looked at the performance of firms following mass privatization. This study uses 453 separate firms (101 firms privatized in both waves for a total of 554 observations), in the first and second waves of Czech voucher privatization. Using methodology from previous studies, we find that while the overall effects from privatization are positive, the effects vary by privatization wave, size, and industry. Firms privatized in the first wave performed worse (decline in performance following privatization) than firms privatized in the second wave. We also fail to find ownership concentration or debt as an important factor in restructuring the firm.I believe that the results are consistent with two hypotheses. First economic and political structure surrounding the privatization waves plays an important part in the success of privatization. Stable environments, both political and economic, help privatized firms restructure and improve operating performance as well as attract foreign investors and capital even in less developed countries, but in transitional economies undergoing mass privatization in rapidly changing and developing economic and political environments hinder firms from restructuring and improving performance following privatization. Results are also consistent with the hypothesis that firms with a longer preparation period prior to privatization, an “implicit seasoning”, improve performance following privatization.     

The Effect of a Complex Ownership Structure and Judicial Efficiency on Leverage: Evidence from Pakistani Listed Companies

We explore the impact of complex ownership structure and judicial efficiency on firm leverage at Pakistani pyramid firms. Ratio of controlling to ownership rights is much higher at Pakistani firms than in other economies, which motivates us to study its impact on leverage. Our results reveal that complex internal structure at Pakistani pyramid firms is positively related to leverage. We find that the presence of efficient courts weaken the impact of complex ownership structure on leverage at pyramid firms. Contrary to the literature, we find that the political connections of pyramid firms in Pakistan are not related to corporate leverage.     

State Ownership,Political Institutions,and Stock Price Informativeness: Evidence from Privatization

In this paper, we examine the relation between government ownership and stock price informativeness around the world. Using a sample of privatized firms from 41 countries between 1980 and 2012, we find strong and robust evidence that state ownership is associated with lower firm-level stock price variation, i.e., stock price informativeness. Furthermore, we find that the relation between state ownership and stock price informativeness depends on political institutions. In particular, the adverse effects of state ownership on stock price informativeness are more pronounced in countries with lower political rights (i.e., lower political constraints on the government).     

Board connections and crisis performance: Family,state, and political networks

We introduce a novel concept of network interactions in which board connections provide access to external spheres of political influence, state ownership, and family control. We posit this form of indirect access via board association enables connected firms to benefit from information privy to external networks while avoiding their resource-based costs of membership. Board network data are assembled for 1290 East Asian firms and linked to hand-collected data on political connections and corporate ownership around the 2008–09 crisis. Companies with board connections to state-owned firms and family business groups had greater crisis-period accounting performance and stock returns. In countries with weak institutional development, board connections to politically connected firms were also beneficial.     

Risk taking behavior of privatized banks

We examine the risk taking behavior of privatized banks prior to and after privatization and find that privatized banks experience a significant decrease in risk after privatization; however they continue to exhibit higher risk than their rivals. This finding is consistent with the assertion that following privatization and the removal of government guarantees and subsidies, privatized banks become more prudent. Since rival banks do not experience a significant change in risk taking, we attribute the reduction in risk experienced by the privatized banks to changes in the banks' ownership structure rather than to industry factors. Interestingly, we also find that a higher fraction of the privatized banks' shares sold beyond a certain intermediate level induces higher risk taking, as the privatized bank becomes more accountable to shareholders. The finding that the fraction of shares sold is positively related to risk taking, coupled with the result that the privatized banks had higher risk in the pre-privatization period than in the post-privatization period suggests a nonlinear relationship between government/private ownership of banks and risk taking. Results of further analysis are consistent with a somewhat U-shaped relationship between private ownership and risk taking. The risk taking behavior of newly privatized banks is also influenced by the country's level of development and degree of political risk. Our results are robust to different measures of risk.