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Determinants of Performance Improvements in Privatized Firms: The Role of Restructuring and Corporate Governance

During the second half of 1999, the cumulative value of privatization sales proceeds received by governments around the world topped $1 trillion. While it has thus significantly reduced the global fiscal burden, and has significantly altered the world's economic landscape, privatization has also raised important questions. While there is now ample empirical evidence that privatization improves the performance of divested firms, to date there has been very little study of why these performance improvements occur. We use a sample of 119 firms (from 29 countries and 28 industries), privatized via public share offering between 1961 and 1995, to address this important issue. We first contribute to the existing empirical literature by documenting significant increases in profitability, efficiency, output, and capital expenditures, and significant decreases in leverage following privatization. Unlike any other large-sample empirical study of share-issue privatization, we then study the determinants of these performance improvements using six proxies for performance changes. Prior to privatization, governments may choose to restructure firms through ownership changes (i.e., establish relation with strategic foreign investors, implement employee share ownership plan) and/or acquisitions and divestitures and/or financial restructuring (i.e., debt write-offs). Our results confirm that both restructuring and changes in corporate governance are important determinants of post-privatization performance. Therefore, our data identify both "micro" and "macro" sources of post-privatization performance improvement. Following privatization, firms significantly increase profitability, output per employee, and real sales. These results add to the growing empirical evidence that, following privatization firms become more profitable and efficient. Our data provide evidence of stronger profitability gains for firms with lower employee ownership and higher state ownership, stronger output gains for firms in competitive industries and for firms in countries with growing economies. Stronger efficiency gains are observed when foreign ownership is high, for firms that restructured, for firms in developing nations and when the share offer size is relatively small compared to total national market capitalization. We find that higher levels of employee ownership are associated with greater increases in capital expenditure after privatization. Finally, our results indicate that leverage increases more for firms with higher foreign ownership, those located in developing economies and those in countries with rapidly growing economies.