The constraints on full privatization: International evidence

Does Autonomy Matter in State Owned Enterprises? Evidence from Performance Contracts in India

“…Thus, at low levels of privatization, ownership does not matter, whereas it appears to matter beyond a critical level of disinvestment. This result is in contrast with the dominant finding in the literature, both with respect to India (Gupta, , ) and other countries (Boubakri et al., ) that partial privatization unconditionally has a positive effect on SOE performance. At the same time, our finding of a positive effect of partial privatization beyond a critical level of government divestiture is consistent with findings that the magnitude of the performance effect depends on the level of divestiture…”

“… While Boubakri et al. () find for a cross section of countries that the performance effects of full privatization are higher than that of partial privatization, Gupta () finds in the case of Indian SOEs that while partial privatization has a positive effect, the effect is stronger for transfer of majority stakes to private owners. …”

“…Along with an evaluation of the effect of autonomy on SOE performance, a related and equally important exercise that we undertake in our study is to compare the effects of performance contracts vis‐à‐vis partial privatization in improving SOE profitability and efficiency. Partial privatization accounts for a large majority of privatization transactions around the world as governments, on account of various political, regulatory and cultural factors, are reluctant to undertake full privatization that completely transfers ownership and control to private owners (Bortolotti & Faccio, ; Boubakri, Cosset, & Saffar, ). While the key objective of performance contracts has been to improve SOE performance through imparting greater autonomy to managers in exchange for performance commitments, that of partial privatization has been to reduce managerial agency costs by subjecting SOE managers to greater discipline from the capital market and from the market for corporate control, but without relinquishing state control of SOEs and upsetting the voter banks (Gupta, , ; Jones, Megginson, Nash, & Netter, ; Qian, ).…”

State and foreign ownership and the value of working capital management

“…Additionally, it has distributional effects, since it "involves a transfer of wealth from insiders of state-owned enterprises (such as employees) to outsiders, especially shareholders" (Bortolotti and Pinotti, 2008, p. 335). Boubakri et al (2015) provide evidence suggesting that stringent employment laws postpone full privatization. This finding suggests that strong labour protection increases the wealth transfer concerns and the political cost of privatization.…”

“…For instance, Bortolotti and Faccio (2009), using a sample of privatized firms from OECD countries, and Boubakri, Cosset, Guedhami, and Saffar (2011), using a sample of firms from emerging markets, show that governments are reluctant to 1 Governments tend to maintain control in privatized firms and use gradual sales because full privatization is costly. Indeed, full privatization is associated with the loss of the government' influence in the firm's decisions and hence in the country's overall direction (Boubakri, Cosset, and Saffar, 2015). Additionally, it has distributional effects, since it "involves a transfer of wealth from insiders of state-owned enterprises (such as employees) to outsiders, especially shareholders" (Bortolotti and Pinotti, 2008, p. 335).…”