Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Introduction
The New State Capitalism (3)
Empirical Studies on State-owned Enterprises, Privatization
and Nationalization
Carsten Sprenger
Higher School of Economics Moscow
Februrary 2017 / CES Lectures, Munich
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
In this third lecture, I try to give a condensed overview of
empirical studies on state ownership – its determinants
and consequences, mostly in terms of firms’ performance
but also for the cost of debt and their acquisition strategies.
The amount of academic work is huge, especially on
privatization, so that I had to make (probably subjective)
choice. I emphasize papers that have made some
methodological innovations or tested new types of
hypotheses.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Overview
1
Cross-sectional comparisons between SOEs and private
firms
2
Studies of privatization
3
Studies of nationalization
4
The internationalization of SOEs
Carsten Sprenger
Lecture 3
Cross-sectional comparisons between SOEs
and private firms
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Boardman and Vining, 1989
Boardman and Vining, 1989 compare the performance of
state-owned, privately owned and mixed enterprises in a
competitive environment.
Previous studies often had problems to disentangle the
effects of ownership and regulation in non-competitive
markets.
They use a sample of 500 large non-US companies and
regress several accounting measures of performance on
dummy variables for mixed and state ownership, and
control for
firm size,
market share,
industry,
the level of competition in each industry and country where
the headquarter is located.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Kole and Mulherin, 1997
Ownership and performance
Cost of debt
Banks
Boardman and Vining, 1989
Mixed and SOEs are found to perform substantially worse
than similar private companies.
Boardman and Vining acknowledge that their results may
potentially suffer from the endogeneity of the ownership
structure : The government could, for example, choose to
nationalize poorly performing companies to prevent
massive layoffs.
In other words, the subsample of state-owned and mixed
firms might not be random.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Dewenter and Malatesta, 2001
This problem is avoided in the study by Kole and Mulherin,
1997 who use a presumably random sample of SOEs,
namely those subsidiaries of ’enemy-owned’ firms that
were seized during second world war and subsequently
held under custodianship by the US government.
The authors find that the government owned companies do
not perform significantly different from the private
companies in the same industry.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Dewenter and Malatesta, 2001 repeat the analysis of
Boardman and Vining, 1989 for a larger sample and their
control variables include firm size, GDP growth and
country dummies.
The authors find that SOEs are less profitable (in terms of
return on sales, return on assets and return on equity),
employ more labour per unit of sales and are more
leveraged.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Bozec et al., 2002
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Bartel and Harrison, 2005
Bartel and Harrison, 2005 go a step further in exploring the
institutional environment of companies in order to provide a
meaningful comparison between companies under public
and private ownership.
For a sample of Indonesian firms, they control for the
access to soft loans from the government, for domestic
and international competition as well as for foreign
investment in the industry.
The authors use Total Factor Productivity (TFP) as a
performance measure and address the issue of possible
endogeneity of ownership and government financing.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Two studies on China
The authors conclude that state ownership alone does not
lower TFP. However, when state ownership interacts with a
soft budget constraint, protection from external competition
and foreign ownership, then it does lower TFP.
In short: The environment where an SOE operates matters
for the performance.
Carsten Sprenger
Ownership and performance
Cost of debt
Banks
Bartel and Harrison, 2005
An important issue in the comparison of performance
between public and private companies is the role of
noncommercial objectives of SOEs that would lower their
profitability in most cases.
Bozec et al., 2002 study Canadian SOEs and distinguish
between those with non-commercial objectives and those
with the explicit objective of profit maximization.
They find that SOEs that maximize profits perform similarly
to their private peers, while only the SOEs with political
and social objectives perform worse.
This is consistent with the finding that performance of
SOEs often improves before their privatization (e.g.,
Dewenter and Malatesta, 2001).
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Both Tian and Estrin, 2008 and Chen et al., 2009 conclude
that state ownership can have a positive effect on
corporate performance in a weak institutional environment
such as in China.
Tian and Estrin, 2008 find a positive effect of state
ownership if it exceeds a certain threshold level (approx.
25 per cent if performance is measured by Tobin’s Q).
Chen et al., 2009 differentiate between different types of
SOEs.
They find that SOEs affiliated to the central and local
governments perform better than private companies, which
in turn outperform state asset management bureaus that
are operated at a regional level.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Cost of debt (1)
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Cost of debt (2)
Borisova and Megginson, 2011 and Borisova et al., 2015
analyze the effect of government ownership on the cost of
debt (bond spreads)
The first paper uses variation in retained government
shares in partially or fully privatized European firms, while
the second looks at increases in government shares in
listed firms around the world.
In principle, state ownership can affect bond spreads via
(at least) four channels:
Implicit government guarantee
Performance differences between state-owned and private
companies, threat of government expropriation
Uncertainty surrounding ownership change
Bondholder-shareholder conflicts, especially if preference is
given to new shareholders in privatization.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Borisova and Megginson, 2011 find that a 1 percentage
point decrease in government ownership is associated with
an increase in the credit spread by 0.75 basis points.
However, fully privatized companies exhibit lower credit
spreads than partially privatized firms (indicating costs of a
lengthy privatization process).
Borisova et al., 2015 generally find that cost of debt
increases with higher government ownership, consistent
with state-induced investment distortions.
However, during the financial crisis and for financially
distressed firms, this effect is reversed. This means that
implicit government guarantees become dominant in these
situations.
Carsten Sprenger
Lecture 3
Ownership and performance
Cost of debt
Banks
Banks
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Ownership and performance
Cost of debt
Banks
Sapienza, 2004
Berger et al., 2005 find for Argentinean banks in the 1990s
that state-owned banks have poorer long-term
performance and that privatized banks significantly
improve their performance after privatization.
Dinc, 2005 studies government-owned banks.
The author finds that government-owned banks across
countries engage in politically motivated actions: They
increase lending in election years relative to private banks.
Also, they find that such banks in emerging markets hold a
50 per cent higher share of their assets in government
securities, i.e., instead of financing projects that the private
sector does not want to finance, they finance the
government itself.
Carsten Sprenger
Lecture 3
Sapienza, 2004 uses a detailed database of loans of
Italian banks to investigate how government ownership
affects bank lending.
The sample period is 1991-1995. In 1995, 58% of banking
assets were held by state-owned banks.
The author aims to distinguish between different theories
of state ownership – the social view, agency view and the
political view.
Since the mix of banking activities could change under
state ownership, looking just at overall bank performance
might not allow to shed light on these theories.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Sapienza, 2004
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Ownership and performance
Cost of debt
Banks
Sapienza, 2004
The comparison is made cleaner since all Italian banks
use the same information system that provides banks with
financial and economic information about Italian
companies and computes a credit score to identify the risk
profile of these companies.
It turns out that state banks lend at a lower interest rate
(the difference is 44 basis points) if two sets of companies
with identical scores that borrow either from state- or
privately owned are compared.
Companies in the south benefit more from borrowing from
state-owned companies than companies in the north, even
after controlling for the presence of financial constraints.
State-owned banks are also more inclined to lend to larger
firms.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
While these results are consistent with the social view
(channeling funds to more depressed areas) and the
agency view (channelling funds to larger firms), the third
results points to the presence of patronage (the political
view)
Lending behavior of the state-owned banks is affected by
electoral results of the party affiliated with the bank: the
stronger the political party in the area where the bank is
lending, the lower are the interest rates charged.
This result is robust to the inclusion of bank and firm fixed
effects, which excludes that results are driven by
(time-invariant) omitted bank and firm characteristics.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Studies of privatization
The literature on the effects of privatization, primarily in
Central and Eastern Europe and the former Soviet Union
has been summarized in three excellent surveys by
Megginson and Netter (2001), Djankov and Murrell (2002)
and Estrin et al., (2009).
While in Central and Eastern Europe, privatization typically
brought improvements in technical efficiency (labor
productivity, total factor productivity) and financial
performance, the effects for the countries of the former
Soviet Union are less clear.
Carsten Sprenger
Lecture 3
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Brown and Earle, 2006
Brown and Earle, 2016
Early studies often had small samples and short time
series.
Using a much larger database, Brown and Earle, 2006 find
positive effects of privatization on total factor productivity in
Romania, Hungary and Ukraine.
The effect for Russia is positive or negative depending on
specifications, but in any case smaller than in the other
three countries. In addition, any positive performance
effects of privatization need more time to materialize in
Russia than in the other countries.
Carsten Sprenger
Is this due to different designs of privatization programs,
types of firms privatized, types of data, different outcome
variables, estimation methods?
The authors find evidence that the type of
post-privatization controlling owner matters: Foreign
owners perform better than domestic large shareholders,
which are better than management-employee buyouts and
voucher privatizations.
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Brown and Earle, 2016
Bai et al., 2009
Little evidence that firm characteristics (initial quality,
complexity, capital intensity) matter.
Finally, the economic environment (inflation, GDP growth)
play an important role.
Carsten Sprenger
Brown and Earle, 2016 revisit the evidence of the
performance effects of privatization and ask why the
estimated effects vary so much across countries and time.
Lecture 3
In a study on a large sample of privatization deals in China,
Bai et al., 2009 find that privatization of China’s SOEs had
almost no effect on employment in the medium-run, but it
increased labour productivity and firm profitability.
These changes were more pronounced when state
ownership was reduced to a minority position.
It is not straightforward to reconcile these results with the
results from Tian and Estrin, 2008 and Chen et al., 2009.
One possibility is that privatized firms are different from
private firms in that the former are receiving preferential
treatment from the government even after privatization,
leading to better performance indicators than in newly
established private firms.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Chernykh, 2011
Huang et al., 2015
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Chernykh, 2011
Huang et al., 2015
Studies of nationalization
Recent nationalizations in Russia, China, Argentina,
Bolivia, Venezuela
Studies of nationalization
They might follow different motivations and patterns, so
one-country studies might be appropriate if a sufficiently
large sample of state takeovers can be found
This seems to be the case in Russia.
As with privatization, it is crucial to correct for selection and
to find an appropriate control group.
So far, there is one study on the choice of targets for
nationalization in Russia by Chernykh, 2011 and Huang et
al., 2015 on re-nationalization in China.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Chernykh, 2011
Huang et al., 2015
Chernykh, 2011
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Chernykh, 2011
Huang et al., 2015
Chernykh, 2011
Chernykh, 2011 focuses on the incentives of the
government to acquire particular firms using a sample of
153 firms that were privately owned in 2003 among the
200 largest Russian companies in that year.
Out of these firms, 26 had been targeted for nationalization
at the end of 2008, and 19 nationalizations actually
occurred by that time.
Sectors include oil and gas, auto-making,
machine-building, aviation, titanium production, media,
banking.
The Russian government did not issue any official
explanations or a nationalization program.
Carsten Sprenger
Lecture 3
The author finds that nationalization in Russia has been
driven by political factors and not by economic factors.
Belonging to one of the strategic sector (according to a list
in a law that came into effect in 2008) increases
considerably the likelihood of privatization. The law
introduced restrictions for foreign takeovers of companies
in such strategic sectors.
Also, the vast majority of these companies had been
owned by domestic owners and had been privatized
previously, so we actually talk about re-nationalizations
here.
Profitability, market share, employment and other
economic factors are not systematically related to the
likelihood of nationalization.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Huang et al., 2015
Local governments were re-possessing controlling
ownership stakes in previously privatized firms.
Among the economic determinants, the authors find that
firms are nationalized to lessen the burden of local
unemployment, a key yardstick for ’social harmony’.
Larger firms whose workforce accounts for a significant
fraction of the local labor market and those located in
regions with higher unemployment rates are more likely to
be taken over by the local government.
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Chernykh, 2011
Huang et al., 2015
Huang et al., 2015
But there is an additional political economy factor at work.
Many secretaries of the Chinese Communist Party in a
province belong to one of three influential factions within
the party – linked to either
1
2
3
Hu Jintao, former Secretary General of the Party coming
from the Youth League of the Party,
his predecessor Jiang Zemin, former Party Secretary of
Shanghai,
and the ’Princelings’, descendants of prominent and
influential older generations of Party officials.
It turns out that provincial party leaders without strong
support and protection from one of these factions initiate
renationalization policies more often. The immediate
’good’ social outcomes such as lower unemployment rates
could help guarding their status.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Chernykh, 2011
Huang et al., 2015
Huang et al., 2015
In the second part, the authors study the impact of
large-scale re-nationalization on firm performance.
Since re-nationalization is not a random event, an
instrumental variable approach is used.
Instruments for re-nationalization are regional variables
(unemployment rate, share of the state sector) and
whether the Party leader is newly appointed and is
affiliated with a particualr political faction by this work
experience (for the first two) or by birth (for the third one).
The initiation of factional relationship has been always
before the leader would eventually become the supreme
leader of the Party.
Carsten Sprenger
Chernykh, 2011
Huang et al., 2015
Huang et al., 2015
Huang et al., 2015, "The Reversal of Privatization:
Determinants and Consequences" documents large-scale
reversal of privatization in China in the period 1999-2007.
Carsten Sprenger
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Chernykh, 2011
Huang et al., 2015
Lecture 3
The authors try to exclude direct channels of influence of
factional affiliation on firm performance or fiscal support of
the province from the central government.
The IV regressions show that re-nationalization leads to a
sharp drop in firms’ profitability and labor productivity.
On the provincial level, unemployment rates indeed go
down initially, but not in the long run.
Provincial GDP growth rates fall after re-nationalization,
suggesting that the cost of temporarily stabilizing the labor
market is lost efficiency and overall economic growth.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Karolyi and Liao, 2016
The internationalization of SOEs
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Number and total deal value of cross-border
acquisitions of government-led acquirers by year
Carsten Sprenger
Karolyi and Liao, 2016, "State capitalism’s global reach:
Evidence from foreign acquisitions by state-owned
companies" examine the motives for and consequences of
cross-border acquisitions led by government-controlled
acquirers over the period from 1990 to 2008.
A government-controlled acquirer is defined as a
government agency, investment fund (e.g., SWF) or SOE
with an ultimate government ownership of at least 50%.
The total number of announced deals in the data is
127,786, of which 4,759 (3.7%) are government-led.
Only in about 40% of the cases, deal values are reported.
Total (reported) deal value is 9,040 billion (constant 2000)
US$, of which 593 billion (6.6%) are for government-led
deals.
Lecture 3
Total deal value of government-led acquisitions by
country of acquirer
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Total deal value of government-led acquisitions by
country of target firms
Karolyi and Liao, 2016
First set of estimations is at the country level.
The authors construct a variable "acquisition intensity" for
any country pair i (home) – j (host) for government-led
deals, AG
ijt , defined as the number of government-led deals
with acquirer from i and target in j, normalized by all
government-led deals in target country j in a given year t.
The same variable is computed for corporate (private)-led
deals, AC
ijt .
C
The dependent variable is then the difference AG
ijt − Aijt ,
i.e., the excess fraction of the number of deals between
government-controlled acquirers and corporate acquirers.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Karolyi and Liao, 2016
Karolyi and Liao, 2016
Government-led acquirers are
more active when their home currency appreciates,
are more likely to come from emerging market economies,
countries with worse governance and transparency
indicators, and more autocratic countries
... countries with higher levels of foreign currency reserves,
larger domestic acquisition programs and a more dissimilar
industry structure (higher potential to diversify).
These results speak to the possible objectives of
governments in their foreign acquisitions.
Carsten Sprenger
Carsten Sprenger
Lecture 3
Results are mostly confirmed in deal-level estimations –
logistic regressions of the probability that a firm is targeted
by a government-controlled acquirer in a given year.
In addition, government-led acquirers are more likely to
acquire larger firms, with higher market-to-book ratios and
sales growth (two measures of growth opportunities).
When evaluating the consequences of the presence of
government-led acquirers, the author control for the
selection bias by applying a Heckman two-stage
procedure.
Instruments are the economic and political determinants of
government presence in cross-border acquisitions just
described.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Karolyi and Liao, 2016
Karolyi and Liao, 2016
The authors concentrate on capital market outcomes:
cumulative abnormal returns (CARs) for different event
windows – (-10,+10), (-5,+5) and (-1,+1), completion rates
and likelihood of 100% control change transactions.
In univariate comparisons, government-led acquirers have
lower CARs, lower deal completion rates, are less likely to
engage in a 100% control change transaction.
When controlling for country, firm and deal-specific factors,
the differences in CARs and deal completion rates become
insignificant, complete control is still less likely.
Results change drastically when controlling for selection:
Government acquirers have now higher 11-day
accouncement-window CARs and higher likelihood of
complete control.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Thus, it can be argued that government-controlled
acquirers strategically identify acquisition deals that offer
less value added for target shareholders than what would
accrue if they chose targets with the same attributes as
corporate cross-border acquirers.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Internationalization of SOEs
There has been increased regulatory concern about
foreign acquisitions with government-controlled acquirers.
The equal failure rates and higher announcement returns
after correcting for selection seem to indicate that such
investments are evaluated positively by stock markets,
which might mitigate such concerns.
In the Karolyi and Liao paper, there is also a short
discussion of the role of sovereign wealth funds (SWFs)
who are a subset of their government-led acquirers and
have been caught more attention in the literature.
Carsten Sprenger
Certain observed and unobserved attributes that increase
the likelihood that a cross-border deal is led by a
government-controlled acquirer (the political, economic, or
social objectives of governments) are also associated with
lower target CARs.
Lecture 3
Internationalization of SOEs
Still, many questions are unanswered, for example
the role of politically connected managers or boards in both
SOEs and private firms and the effect on their acquisitions,
the role of different types of government agencies,
long-term operational and financial performance,
the role of restrictions to foreign investment in host
countries, in particular with respect to SOEs.
Carsten Sprenger
Lecture 3
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Cross-sectional studies
Studies of privatization
Studies of nationalization
The internationalization of SOEs
Conclusion (1)
Conclusion (2)
In general, the concept of state capitalism could be even
generalized from state ownership to a wider range of
political influence (as in the broad definition of Mussaccio
and Lazzarini in Lecture 1).
This would include a variety of mixed ownership forms
such as combinations of local government and private
ownership in China, politically connected managers and
board members, revolving doors between business and
politics, limited power of the government on SOEs (e.g.,
SOEs sometimes refuse to pay dividends to the
government), government support through preferential
treatment or subsidies.
Carsten Sprenger
Lecture 3
Also, we know little about corporate governance within
SOEs – managerial compensation, the composition of
boards of directors, especially when private investors hold
equity stakes in these firms as well as about many
decisions in these firms (investment, employment, wages,
capital structure, dividends etc.)
In short, both on the theoretical and empirical side, there is
ample scope for future research!
Carsten Sprenger
Lecture 3