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.     

Corporate Performance of Mixed Enterprises

We delineate Hong Kong listed corporations into three levels of privatization: the fully privatized blue chips, semi‐privatized red chips and the least privatized H shares. Both H shares and red chips are mixed enterprises that mimic private ownership with joint government and private stock ownership. We find that mixed enterprises are less profitable and lower valued than the fully privatized blue chips, but red chips are more efficient and perform better than blue chips when market confidence swings to their favor. Regression analysis suggests that increased stock ownership by the government and increased emolument incentives are counterproductive to profitability, especially in bad economic times of the 1997–98 Asian financial crisis.     

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.     

Privatization and bank performance in developing countries

We examine the postprivatization performance of 81 banks from 22 developing countries. Our results suggest that: (i) On average, banks chosen for privatization have a lower economic efficiency, and a lower solvency than banks kept under government ownership. (ii) In the postprivatization period, profitability increases but, depending on the type of owner, efficiency, risk exposure and capitalization may worsen or improve. However, (iii) Over time, privatization yields significant improvements in economic efficiency and credit risk exposure. (iv) We also find that newly privatized banks that are controlled by local industrial groups become more exposed to credit risk and interest rate risk after privatization.     

Bank performance,efficiency and ownership in transition countries

Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency taking account of both time and country effects directly. In second-stage regressions, we use the efficiency measures along with return on assets to investigate the influence of ownership type. With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. The remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition 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.     

Bank privatization and performance: Empirical evidence from Nigeria

We assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990–2001. We find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation. Our results also suggest negative effects of the continuing minority government ownership on the performance of many Nigerian banks. Finally, our results complement aggregate indications of decreasing financial intermediation over the 1990s; banks that focused on investment in government bonds and non-lending activities enjoyed a relatively better performance.     

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.     

Ownership structure and risk-taking: Comparative evidence from private and state-controlled banks in China

This study examines the impact of ownership structure on Chinese banks' risk-taking behaviours. We classify the Chinese commercial banks into three categories based on the types of controlling shareholder, and find that banks controlled by the government (GCBs) tend to take more risks than those controlled by state-owned enterprises (SOECBs) or private investors (PCBs). This is attributed to the severe political intervention and weak incentives to follow prudent bank management practices for GCBs. We also find that the results are more pronounced among banks with concentrated ownership presumably because the large controlling power helps to enhance the monitoring of the management and promotes prudent operating procedures. Our findings have important implications for the ongoing reform in the Chinese banking sector.     

民营化、融资约束与企业创新——来自中国工业企业的证据

本文研究国有企业民营化对企业创新的影响及其影响机制。利用中国工业企业数据库,以民营化企业为实验组、以国有企业为对照组进行双重差分检验,结果发现,国有企业民营化显著抑制了企业创新,而融资约束是抑制民营化企业创新的重要因素。进一步检验发现,融资约束对民营化企业创新的抑制作用主要存在于金融发展水平较低的地区,而在金融发展水平较高的地区,这种抑制作用并不明显。本文的研究结果从融资约束的角度拓展了民营化影响企业创新的相关研究,且从民营化的角度为金融市场如何影响企业创新提供了新的视角。此外,本文有助于澄清有关民营化的争议,为进一步深化混合所有制改革、加强金融对民营企业的支持以促进民营企业的创新和发展提供理论依据和政策参考。     

A game of accounting numbers in asset pricing: Evidence from the privatization of state-owned enterprises

This study examines a public policy issue: whether government officials engage in earnings management to collude with private investors in the privatization of state-owned enterprises (SOEs). We find that the managers of listed Chinese SOEs, who are de facto bureaucrats, employ income-decreasing earnings management to reduce the price of shares to be sold to private investors. We also find that more aggressive income-decreasing earnings management is associated with a lower CEO turnover rate in the year following the privatization. These findings highlight the need to consider the opportunism of government agents when accounting information is used in redistribution of state assets.     

Partial Privatization and Firm Performance

Most privatization programs begin with a period of partial privatization in which only non‐controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state‐owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment.     

Competitive and value effects of bank privatization in developed countries

A special issue of the Journal of Banking and Finance (2005) devoted to the performance of privatized banks in middle- and low-income countries shows mixed results. In this paper, we present evidence that shows that privatized banks in developed countries have experienced significant improvements in operating performance. The improvement in performance remains significant after controlling for persistence in bank performance. A comparison of the performance of privatized banks in developed and developing countries suggests that privatization has encouraged excessive risk taking among privatized banks in developing countries, with the consequence that those banks carry large non-performing assets than their counterparts in the developed countries. We also observe that consistent with the competitive effects hypothesis, investors view privatization announcements as foreshadowing bad news for rival banks.     

Government Stakes as an Insurance Policy: Evidence from Seasoned Equity Offerings of Chinese Firms

While privatization has attracted much more attention in the literature, one type of reverse privatization, a privately-controlled firm inviting government ownership as its minority shareholders, is neglected in the literature. Using large-scale census firm data from China, we investigate the determinants of this kind of reverse privatization and its impact on firm performance. We find that (1) the decision of reverse privatization by Chinese private firms is affected by local political risk, firm-level financial characteristics, and industry-level characteristics, (2) the reverse privatization significantly affects the firm’s performance, which is measured in different proxies but the effects are not consistent, and (3) moreover, we find that the benefit of reverse privatization decreases as government ownership increases. Our results suggest that the prevalence of reverse privatization in China is a political outcome, which is affected by the trade-off of political risk and political privilege. Our work suggests that political risk and political considerations are the main driving factors of privatization, or its opposite, reverse privatization. Reverse privatization, to some extent, is a rational choice in some transition economies. Our findings offer clear policy implications to the nationalization phenomenon taking place around the world recently.     

The Coordination Role of Stress Tests in Bank Risk‐Taking

We examine whether stress tests distort banks' risk‐taking decisions. We study a model in which a regulator may choose to rescue banks in the event of concurrent bank failures. Our analysis reveals a novel coordination role of stress tests. Disclosure of stress‐test results informs banks of the failure likelihood of other banks, which can reduce welfare by facilitating banks' coordination in risk‐taking. However, conducting stress tests also enables the regulator to more effectively intervene banks, coordinating them preemptively into taking lower risks. We find that, if the regulator has a strong incentive to bail out, stress tests improve welfare, whereas if the regulator's incentive to bail out is weak, stress tests impair welfare.     

The Impact of Supervisory Stress Tests on Bank Ex-Ante Risk-Taking Behaviour: Empirical Evidence from a Quasi-Natural Experiment

We use the Federal Reserve's stress-testing regime as a quasi-natural experiment to examine the impact of supervisory stress tests on bank ex-ante risk taking behaviour. Using a sample comprising large U.S. bank holding companies over the period from 2003Q1 to 2016Q4, we find that banks which are subjected to annual supervisory stress tests tend to reduce their overall risk by choosing asset portfolios of lower risk exposures. Nevertheless, this risk reduction happens mainly because stress-tested banks reduce the holding of low-risk assets rather than risky assets. We also find that stress-tested banks tend to reduce their on-balance sheet exposures rather than off-balance sheet exposures. Overall, our finding implies that, while supervisory stress tests can help to reduce the banks' overall risks, policy makers should also have a closer look at the mechanisms in which banks allocate risk to mitigate moral hazard and regulatory arbitrage behaviour.     

Investment Bank Reputation,Information Production,and Financial Intermediation

We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.     

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.     

How mixed ownership affects decision making in turbulent times: Evidence from the digital revolution in telecommunications

This study examines how the ownership structure of corporations shapes their responses to discontinuous technological change. We analyze whether mixed ownership, a situation where following privatization a company's shares are held both privately and by the government, is associated with less innovation in response to discontinuous technological change. We argue that mixed ownership is associated with governance conflicts that affect a company's ability to respond to the challenges posed by discontinuous technological change. Our empirical analysis uses data on European telecommunications operators for the period 2000–2016 when they faced sweeping technological change due to the advent of Internet-based communication services. Our baseline result suggests that operators with mixed ownership file around 70% fewer patents in relevant digital technologies than companies that are fully private or where the government owns a majority of shares. We find that mixed ownership also affects negatively the acquisition of externally developed technology.     

Does privatization reform alleviate ownership discrimination? Evidence from the Split-share structure reform in China

This paper investigates the institutional origins of ownership discrimination in bank lending through a staggered quasi-natural experiment: China's Split-share Structure Reform. State-Owned Enterprises (SOEs) have an advantage over non-SOEs in securing external financing to protect investment opportunities from cash flow fluctuations. This financing privilege declined significantly after the reform, which mandatorily converted SOEs' non-tradable state-owned shares into tradable shares, sharply increasing the likelihood of further privatization. Consistent evidence also exists in terms of bank lending behaviors. Further, we show both direct and indirect evidence that the effects were more pronounced among SOEs under higher threats of privatization (e.g., firms with larger increases in tradable shares, smaller workforce, and in industries peripheral to national strategy). The evidence suggests that banks proactively prefer SOEs for the perceived safety of loans under implicit government guarantee; when this privilege disappeared after the reform, banks reacted by allocating credits more fairly. This paper provides new evidence on the bright side of share structure reforms in mitigating credit misallocation and enlightens policy makers to practical resolutions to the financing inefficiency in emerging capital markets.