The effect of public involvement on firm inefficiency: evidence using Japanese private firms

Abstract

The purpose of this paper is to investigate the effect of public involvement on firm inefficiency. Public involvement is defined as the actions taken by governments to control firm management, as expressed in regulation and public ownership. We make the following three contributions. First, we show public involvement is an important determinant of the inefficiency of private firms. Although public involvement has been shown to influence firm behavior in public or regulated sectors, existing studies in the private sector tend to ignore its effects. Second, we analyze firm inefficiency rather than firm performance by focusing on cost factors. Previous work tends to use performance measures such as return on assets or return on equity rather than inefficiency measures to judge a firm's management level. Performance measures are problematic, however, in that they are affected by not only cost factors but also demand factors. Therefore, we must separate these factors when we analyze a firm's management. Third, we use a stochastic cost frontier model for the estimation. Although this is a suitable approach for estimating firm inefficiency, it is rarely used for private firms. Our results suggest that public ownership increases firm inefficiency while regulation decreases firm inefficiency. It is also clear that the effect of public ownership is not significant in the manufacturing industry, while it is strongly significant in the nonmanufacturing industry. This shows the importance of studying the effect of public involvement in the private sector.

Firm performance and ownership structure: Dynamic network data envelopment analysis approach

“…For them, this has become an ongoing debate on theoretical and empirical corporate finance studies, and a variety of academic made an effort in this field (Ahmadi, Nakaa, & Bouri, 2018;Paniagua, Rivelles, & Sapena, 2018;Sánchez-Ballesta & García-Meca, 2007;Shailer & Wang, 2015;Vu, Phan, & Le, 2018). Nakamura (2010) mentions to two approaches in measuring performance, including profitability measures such as return on asset, return on equity, and cost inefficiency measures. Apart from these researches, our paper employs the efficiency scores calculated by DEA method to reexamine relationship between ownership structure and decomposing financial performance.…”

How do governance factors affect inefficiency? Stochastic frontier analysis of public utility firms in Japan

“…According to Berger et al (2005), since the goals of the government and the firm are different, agency problems occur and thus inefficiency increases. Similarly, Nakamura (2010) shows that, as public ownership brings direct government involvement in a firm's management, it is not unusual for a firm to be steered in a direction desirable for the government.…”

“…Previous studies such as Nakamura (2010) show that holding shares of the firms works as an incentive for top management to improve efficiency. However, our result suggests that this is not the case for public utilities.…”

“…Cabral and Riordan 1989;Kleit and Tecrell 2001;Ai and Sappington 2002;TerMartirosyan and Kwoka 2010;Nakamura 2010 andBuranabunyut andPeoples (2012), and other studies showing that governmental intervention increases productivity (e.g. Dufour et al 1998;Berman and Bui 2001;Majumdar and Marcus 2001;Alpay et al 2002;Knittel 2002).…”

“…Moreover, firm owners can judge the performance of their company by comparing it to rival firms when the industry is competitive, which results in appropriate pressure on the firm. On the other hand, Nakamura (2010) shows that competition sometimes worsens internal efficiency, since competitive pressures can drive firm managers to reduce necessary investment and costs. Sari (2003) integrates these conflicting results by pointing out that the relationship between cost inefficiency and competition is U-shaped, indicating that while a certain degree of competition improves cost efficiency, too much competition creates the opposite effect.…”