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 performance of newly privatized firms in selected MENA countries: The role of ownership structure, governance and liberalization policies

The paper analyzes 95 newly privatized firms (NPFs) in four Middle Eastern and North African countries (Egypt, Morocco, Tunisia, and Turkey). We find that these firms experienced significant increases in profitability and operating efficiency, and significant declines in employment and leverage. We also document strong performance improvements for firms that did remain state-owned, that were not sold to foreigners, and that came from Egypt. Job losses are higher in Egypt and in firms where the state is no longer in control. Also, the results indicate that revenue firms and NPFs in Morocco display significantly less leverage than control firms and those from other countries. We find that profitability changes are negatively related to state control and positively related to foreign ownership. Trade openness, change in real GDP over the privatization window, index of investor protection, and foreign ownership are important determinants of the changes in sales efficiency and output. These findings suggest that NPFs become more productive in environments where property rights are better protected and enforced and that foreign investors influence firms' productivity through their monitoring role.     

FOREIGN INVESTOR PARTICIPATION IN PRIVATIZATIONS: DOES THE INSTITUTIONAL ENVIRONMENT MATTER?

We examine the determinants of foreign investors' participation in the privatization process of developing countries. First, we estimate the probability that foreign investors target privatized firms in a given country. We show that a favorable legal environment where investor protection is higher enhances foreign investors' participation. Foreigners also prefer large, strategic firms from high‐growth economies and socially stable countries with low political risk. Second, we restrict our analysis to privatized firms that foreign investors actually choose and show that the stakes foreigners hold are larger if the firms are privatized by private sales as opposed to public offerings.     

The Decision to Privatize: Finance and Politics

We investigate the influence of political and financial factors on the decision to privatize government‐owned firms. The results show that profitable firms and firms with a lower wage bill are likely to be privatized early. We find that the government delays privatization in regions where the governing party faces more competition from opposition parties. The results also suggest that political patronage is important as no firm located in the home state of the minister in charge is ever privatized. Using political variables as an instrument for the privatization decision, we find that privatization has a positive impact on firm performance.     

From state to private ownership: Issues from strategic industries

This paper investigates the effects of privatization for a panel of 189 firms from strategic industries headquartered in 39 countries, and privatized between 1984 and 2002. Strategic firms can hardly be compared to manufacturing or competitive industries as they are generally under state monopoly, and involve specific issues such as regulation, political and institutional constraints. We examine the change in ownership and postprivatization means of control by the government, and assess whether positive changes in performance obtain in these particular industries that include firms from the financial, mining, steel, telecommunications, transportation, utilities, and oil sectors. We document that governments continue to exert influence on former state-owned firms after three years by retaining golden shares and/or appointing politicians to key positions in the firm. Our multivariate results reveal a negative effect of state ownership on profitability and operating efficiency, which the presence of a sound institutional and political environment moderates.     

Does the response of competitors to privatization announcements reflect competitive or industry-wide information effects? International evidence

We examine the stock price reaction of rival firms to the announcement of the privatization of their industry counterparts to infer information about the intra-industry effects of privatization. We find that the rival firms reacted negatively to the privatization announcements, suggesting that the announcement effects reflect competitive rather than positive industry effects. The reaction is stronger for industry counterparts in low economic freedom countries than those in high economic freedom countries. Interestingly, we also find that full privatization announcements generate larger negative abnormal returns for rival firms than partial privatization announcements where the privatized firm gains only partial autonomy from the government. In this regard, we find that, as the proportion of government ownership reduces, subsequent partial privatization announcement elicits stronger market reaction from rival firms. The negative abnormal returns earned by shareholders of rival firms are not due to price pressure and portfolio rebalancing effects resulting from index composition changes. We conclude that the negative effects documented for the rival firms reflect investors' concern about the potential competitive effects resulting from privatization of the state enterprise.     

Political connections of newly privatized firms

We investigate the extent of political connections in newly privatized firms. Using a sample of 245 privatized firms headquartered in 27 developing and 14 developed countries over the period 1980 to 2002, we find that 87 firms have a politician or an ex-politician on their board of directors. Politically-connected firms are generally incorporated in major cities, are highly leveraged, and operate in regulated sectors. The likelihood of observing political connections in these firms is positively related to government residual ownership, and negatively related to foreign ownership. Political fractionalization and tenure, as well as judicial independence are also key explanatory variables. Finally, politically-connected firms exhibit a poor accounting performance compared to their non-connected counterparts.     

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).     

The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms

In this paper, we investigate the political determinants of the cost of equity using a unique data set of 236 firms privatized between 1987 and 2006 in 38 countries. We find robust evidence that the cost of equity is increasing in government ownership. We also show that the cost of equity is significantly related to political orientation and the extent of government expropriation. Furthermore, we report a less pronounced effect of state ownership on the cost of equity in more populist governments and in more financially developed countries, in addition to a more pronounced effect of state ownership on the cost of equity when the risk of government expropriation is higher. Results from an event study examining the replacement of left‐wing governments by right‐wing governments suggest a lower cost of equity in more financially developed countries and a higher cost of equity in more autocratic countries and in countries with a high risk of government expropriation. Finally, we find that chief executive turnover is associated with a higher cost of equity in more autocratic countries.     

Post-privatization state ownership and bank risk-taking: Cross-country evidence

We examine the relation between state residual ownership and bank risk-taking for privatized banks from 45 countries. Applying propensity score matching, we find that privatized banks tend to exhibit higher levels of risk-taking post-privatization than their publicly listed non-privatized counterparts. Moreover, partially privatized banks exhibit higher levels of risk-taking than fully privatized banks. We also observe a positive and significant relation between the level of residual state ownership and risk-taking. These findings are consistent with the distorted objectives associated with government control, as suggested by the political benefits of control, and with the soft budget constraint views of state ownership. The distortion can be mitigated by the quality of a country's institutional and regulatory environments. Finally, our results show that the effect of state ownership on risk-taking is more pronounced in countries with a higher dominance of state-owned enterprises, and it was more prevalent during the global financial crisis.     

Determinants of state equity ownership,and its effect on value/performance: China's privatized firms

Evidence on the relationship between state ownership and performance in China's privatized firms is convex, concave and linear. Hence, the nature of this relationship is not resolved. This study examines this relationship for a larger, more recent sample of 4315 firm year observations of privatized Chinese firms during 1996–2003. Results support the hypothesis of a convex relationship between state ownership and performance showing benefits from strong privatization and state control. Not only is ownership structure found to affect performance, but also ownership concentration and balance of power jointly affect performance. Chinese firms with mixed control show significantly poorer performance than state or private controlled firms affirming the problem of ambiguity of ownership control, property rights, agency issues, profits and welfare objectives. New determinants of state ownership in China's firms are strategic importance, legal ownership, profitability, and market performance. Privatization benefits because there is a causal relation between ownership and performance.     

The role of state and foreign owners in corporate risk-taking: Evidence from privatization

Using a unique database of 381 newly privatized firms from 57 countries, we investigate the impact of shareholders' identity on corporate risk-taking behavior. We find strong and robust evidence that state (foreign) ownership is negatively (positively) related to corporate risk-taking. Moreover, we find that high risk-taking by foreign owners depends on the strength of country-level governance institutions. Our results suggest that relinquishment of government control, openness to foreign investment, and improvement of country-level governance institutions are key determining factors of corporate risk-taking in newly privatized firms.     

From Social to Private Ownership: Multiple Blockholders in Slovenian Unlisted Firms

This paper studies the ownership structures of unlisted privatized firms in Slovenia. On the basis of official ownership records for all nonfinancial firms over a six-year period (1999-2004), we explore the factors responsible for the concentration of ownership and for the dissolution of the multiple blockholder structures that these firms were assigned at privatization. We observe significant path dependence: patterns of ownership and control are in part determined by the persistence of the initial privatization owners (state funds, privatization investment funds, employees, and managers) as firm blockholders. We also find that ownership concentrates less in larger, riskier, and better-performing firms. Multiple blockholders remain present in the firms in which the two largest owners are of the same type, which presumably makes it easier for them to control in coalition.     

Ownership and control in Central and Eastern Europe

The unique natural experiment of the fall of the iron curtain led to large institutional and governance differences across countries. This allows us to observe the evolution of ownership and control after an initial shock. We utilize this cross-time/cross-country variation in institutions and privatization methods to analyze the determinants and effects of individual investor control in a large sample of firms in 11 CEE countries over the period 2000–2007. Controlling for possible endogeneity and firm effects, we find that large individual investors add value to the firms they control. They do so predominantly compared to state controlled firms but also compared to other privately controlled firms. If large individual investor firms employ professional managers and (only) supervise them actively, they achieve the better performance improvements in Tobin's q than the firms managed by their controlling shareholders. Concerning the determinants of ownership, large individual shareholders substitute for missing good country governance institutions, and ownership is very sticky, since initial conditions (privatization methods) still matter. It appears that secondary markets do not converge on the same ownership equilibria as primary markets do.     

Do privatized banks in middle- and low-income countries perform better than rival banks? An intra-industry analysis of bank privatization

This paper presents a comprehensive analysis of the pre- and post-privatization operating performance and stock market performance of privatized banks and their rivals in middle- and low-income countries. First, we find that privatization announcements elicit negative abnormal returns for rival banks. The effects are more pronounced for subsequent tranche sales where the proportion of government ownership in the privatized bank is reduced. Second, we observe that the privatized banks underperformed the benchmark index in the long run. Investors who bought shares of the privatized banks on the first day of trading and held them for 5 years (instead of investing in the market index) lost 24% of their wealth. The underperformance is consistent with the negative long run returns that have been documented for initial public offerings. Third, we document marginal improvements in the post-privatization operating performance of the privatized banks. Though the privatized banks in middle- and low-income countries are better capitalized than rival banks, they carry higher problem loans and are overstaffed relative to other private banks in the post-privatization period. Since most of the sample firms are partially privatized, we submit that perhaps the continued government ownership of the privatized banks might have hindered managers’ ability to restructure the firms.     

Ownership change,institutional development and performance

This paper conducts a cross-country empirical study of the impact of institutions and agency conflicts on ownership reforms and their implications for changes in performance and efficiency. We examine two main questions. First, we evaluate the effects of certain property rights and institutional quality measures on performance and efficiency. We find that property rights and contracting rights protections contribute to stronger post-privatization performance. Second, we ask whether sectors undergoing changes from state to private ownership exhibit better or worse performance than sectors remaining public. We find an insignificant effect of privatization in ordinary least squares estimates and a negative short-term effect after correcting for endogeneity of privatization decisions that disappears in the long run, consistent with recently privatized enterprises facing short-run costs of restructuring and the challenges of mitigating agency and expropriation concerns.     

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.     

Privatization,financial development,property rights and growth

This study analyzes how prevailing institutional arrangements i.e., property rights, contracting rights, political institutions, and corporate governance practices affect privatized firms’ performance, capital markets development, and economic growth. Most of the studies surveyed show that privatization enhances privatized firms performance, efficiency, and profitability, which percolates to economic growth. Privatized firms performed better in countries with better regulatory and legal frameworks. Partial privatization may be beneficial in countries with weak institutions, namely, the French civil law countries. The stronger the economic and the governing institutions, the easier it is for privatized firms to thrive and contribute to economic growth. Overall, privatization allows firms to achieve improved efficiency while driving the development of the financial sector.     

Postprivatization corporate governance: The role of ownership structure and investor protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.     

BANK PRIVATIZATION AND CONVERGENCE OF PERFORMANCE: INTERNATIONAL EVIDENCE

We trace the extent of performance deviation of privatized banks from established private banks in 30 countries from 1994 to 2005 and investigate the role of bank regulatory and supervisory norms, market competition, ownership structure, deposit insurance scheme, and governance structure affecting the deviation. Evidence shows that privatization does improve the performance of banks in the first year of being privatized, but performance gradually declines, which is consistent with the government restructuring argument before the privatization. Governance, foreign ownership, banking freedom (regulations), and the deposit insurance scheme in respective economies are found to affect performance deviation significantly.