Privatization and firm performance: The effects of private ownership and competition on the post-privatization performance of formerly state-owned enterprises

The privatization of state-owned enterprises is continuing in a rapidly globalizing economy. Most prior studies have examined the effects of privatization without attending to the impact of different methods of privatization on firm performance. One weakness of the earlier literature is the failure to explain the influence of privatization on the performance of formerly state-owned enterprises (SOEs). Also, most previous research failed to investigate the impact of changes in industry competition on post-privatization performance, possibly overestimating the effects of ownership transfer alone. This study extends previous literature by exploring the importance of alternative privatization choices on the post-privatization performance of formerly SOEs.; The empirical study tested the impacts of three independent variables—shares owned by private investors, the degree of concentration of private ownership, and industry competition—on changes in operating profits on sales (ROS) and opening profits on total assets (ROA). This paper focuses on privatization through initial public offerings. The sample includes 68 privatized firms in 25 countries.; Results of this research reveal that the transfer of ownership alone cannot guarantee performance improvement of formerly SOEs. The impact of a change in any one of them on post-privatization performance depends upon another one of them. Ownership majority by private investors (greater than 50% of equity ownership) leads to higher ROS in formerly SOEs than does ownership majority by government. An increase in the number of competitors causes higher ROS and ROA for only government majority-owned firms. More importantly, increased competition enables government majorityowned firms to outperform private majority-owned counterparts. However, the results indicate that interaction between competition and the degree of concentration of private ownership has a negative effect on a change in ROA.; The primary contribution of this research is the theoretical and empirical explanation beyond the privatization-performance relationship. Taken together, organizational theory, the property rights concept, agency theory, and the structure conduct-performance paradigm make a contribution to the examination of the effects of privatization on firm performance. This study also identifies strategic implications for ongoing privatization, especially in emerging markets. Limitations and future directions of this research are also discussed.