State Ownership and Debt Choice: Evidence from Privatization

Abstract

Using a large sample of privatized firms, we find that state ownership is significantly positively associated with the use of bank debt financing, suggesting that privatized firms benefit from the soft budget constraint associated with state ownership. We further find that the relation is more pronounced in countries with high government ownership of banks, high corruption in bank lending, a left-oriented government, and a collectivist national culture, which provides additional support for the soft-budget-constraint view. Finally, in external validity tests, we find that state ownership affects other aspects of debt structure, such as debt maturity and debt security.

Non-linear Effects of Ownership Structure, Growth Opportunities and Leverage on Debt Maturity in Chilean Firms

“…State ownership allows companies to access long-term debt, and most likely with less collateral requirements. This result is consistent with the findings of Choi (2015) and Boubakri and Saffar (2017). However, the non-monotonicity of the SO variable suggests that the positive impact only exists when state ownership levels are less than 47 %.…”

“…Choi (2015) showed that State ownership has a positive and significant effect on corporate debt maturity in an empirical analysis of Chinese firms. Boubakri and Saffar (2017) corroborated these results in a study applied to firms from 62 countries, between 2001 and 2014, arguing that State ownership in companies makes requirements for access to debt financing more flexible. In Chile, there are no studies that analyze the effects of State ownership on debt maturity and therefore we established the following hypothesis:…”

“…Other studies have corroborated this view in several countries, such as the United States (Datta et al, 2005;Alcock et al, 2011), the United Kingdom (Antoniou et al, 2006;Dang, 2011) and Italy (Domenichelli, 2015). This view has also been corroborated in international comparisons among various countries (Fan et al, 2010;Chang et al, 2011;Kirch and Soares, 2012;Turk, 2016;Boubakri and Saffar, 2017).…”

“…These types of variables have been suggested by several international studies as a way of measuring the potential effects of aligned interests between managers and owners or managerial entrenchment on debt maturity (Jensen and Meckling, 1976;Ozkan, 2000;Guney and Ozkan, 2005;Datta et al, 2005;Benmelech, 2006;Harford et al, 2008). We also considered the role of State ownership (SO) as a way of verifying whether the State's participation in corporate ownership was synonymous with financial support, allowing companies to access long-term debt (Choi, 2015;Boubakri and Saffar, 2017). The empirical literature has used company growth opportunities as a way to quantify the effects of the trade-off between underinvestment and bankruptcy costs over corporate debt maturity (Myers, 1977;Barclay and Smith, 1995;Arslan and Karan, 2006;García and Martínez, 2010).…”

Political uncertainty and the choice of debt sources

“…We exploit recently available data on debt structure in Capital IQ to analyze the effect of political uncertainty stemming from national elections on the choice between public and bank debt. Most of prior studies on debt choice study the role of characteristics of the firm, like financial characteristics (e.g., Denis and Mihov, 2003), ownership structure (Lin, Ma, Malatesta and Xuan, 2013;Boubaker, et al, 2017;Boubakri and Saffar, 2018) and product market competition (e.g., Boubaker, Rouatbi and Sassi, 2018). We augment these studies by highlighting the importance of political uncertainty stemming from national elections for debt structure.…”