The Financial and Operating Performance of Newly Privatized Firms: an International Empirical Analysis

Abstract

This study compares the pre- and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990. Our results document strong performance improvements, achieved surprisingly without sacrificing employment security. Specifically, after being privatized, firms increase real sales, become more profitable, increase their capital investment spending, improve their operating efficiency, and increase their work forces. Furthermore, these companies significantly lower their debt levels and increase dividend payout. Finally, we document significant changes in the size and composition of corporate boards of directors after privatization.

State Ownership and Corporate Cash Holdings

“…A term commonly used in the privatization literature, NPFs may have a zero or a positive level of residual state ownership. Consistent with the findings of Megginson, Nash, and Van Randenborgh (1994) and Boubakri and Cosset (1998), a majority of our sample NPFs retains residual state ownership.…”

“…In line with these arguments, empirical evidence shows that when the state retains a majority share of a privatized firm, the performance and governance improvements from privatization are less pronounced. For instance, Cosset (1998), D'Souza andMegginson (1999), Guedhami et al (2009), and Megginson et al (1994) document that state residual control undermines postprivatization restructuring and hinders improvements in profitability, efficiency, and investment. Similarly, Borisova et al (2012) find that higher state ownership is associated with lower quality corporate governance.…”

State Ownership and Debt Choice: Evidence from Privatization

“…Our study contributes to the privatization literature by providing new evidence on the cost of state ownership. Prior studies show that state ownership is costly in terms of firm-level performance (Megginson et al (1994), Boubakri, Cosset, Fischer, and Guedhami (2005), and Gupta (2005)), financial reporting quality (Guedhami, Pittman, and Saffar (2009)), cost of capital (Borisova and Megginson (2011), Ben-Nasr, Boubakri, and Cosset (2012)), and risk taking (Boubakri et al (2013)). Our results extend this work by showing that state ownership distorts resource allocation at the firm level.…”

State ownership and stock liquidity: Evidence from privatization

“… 29 These findings are especially important because a primary objective of privatization programs in many countries is the development of stock markets by promoting an “equity culture” or “people's capitalism” among investors (e.g., Megginson and Netter, 2001 ; Boutchkova and Megginson, 2000 ; Megginson et al, 1994 ). In turn, this equity culture is conducive to a change in the trading behavior of investors, thus affecting stock liquidity.…”