From the Editor From the Reader - DiscoverArchive Home ...

Research and scholarship roundup
Bright Ideas
Privatized companies where the government was
24
DANIEL DUBOIS
Privatization
Doesn’t Translate
to Increased Profits
wisdom holds that
companies in which
governments relin-
1.Conventional
quish some level of
control through privatization
will out-shine companies in
which government retains a
controlling interest or has substantial
veto powers. But a
study from the Vanderbilt
Owen Graduate School of
Management finds publicly
traded companies remaining
under government control
actually do better in terms of
performance and market value.
Many governments
embarked on privatizations
starting in the 1980s to
enhance performance of lack-
Mara Faccio
S u m m e r 2 0 0 5
“
luster protected industries in
increasingly competitive global
markets. In addition to achieving
competitive gains, privatizations
were undertaken to
generate revenue for strained
national treasuries, to open
monopolistic markets in
response to pressures from
international trade organizations,
and to answer concerns
of lending agencies seeking to
have major state-owned borrowers
broaden their risk
exposure by issuing shares in
public markets.
“The assumption among
many economists, academics
and financial-market participants
has been that government-owned
companies
transferring ownership to public
investors should have better
financial performance and a
higher market value. This is
because they don’t have to
deal with political interference
and bureaucratic
red tape, and overall can
be more innovative, nimble
and competitive,” says
Owen Professor Mara
Faccio, one of the authors
of the study Reluctant
Privatization.
When a sample of
government-controlled
companies was matched
against a sample of companies
of the same size
and in the same industry
and country, the study
found the opposite to be true.
“In the year 2000, for example,
privatized companies where
the government was still the
largest shareholder traded on
average at a price that was 26
percent higher than their
peers,” says Faccio. “For fully
privatized companies, this represented
an average 13-percent
trading discount relative to
their [privately held but publicly
traded] peers.”
The study analyzed 141
publicly traded companies privatized
from the early 1980s
through 2000 that are headquartered
in countries belonging
to the Organization for
Economic Cooperation and
Development (OECD)—Australia,
France, Germany and
Italy among them. Governments
retained a controlling
interest or had substantial veto
powers in some 62 percent of
those companies.
In Italy the government
retained influential stakes in
major companies like Alitalia
and Finmeccanica, which have
seen significant improvements