State ownership reinvented? Explaining performance differences between state‐owned and private firms

• Date: 01 July 2018
• Author: Aldo Musacchio,Sergio G. Lazzarini
• DOI: http://doi.org/10.1111/corg.12239
• Published date: 01 July 2018

ORIGINAL MANUSCRIPT

State ownership reinvented? Explaining performance

differences between state‐owned and private firms

Sergio G. Lazzarini

1

|Aldo Musacchio

2

1

Insper Institute of Education and Research,

R. Quatá, 300, São Paulo, SP 04546‐042,

Brazil

2

Brandeis International Business School, 415

South Street, Waltham, MA 02453, USA

Correspondence

Aldo Musacchio, Brandeis International

Business School, 415 South Street, Waltham,

MA 02453, USA.

Email: aldom@brandeis.edu

Funding information

Conselho Nacional de Desenvolvimento Cien-

tífico e Tecnológico; Harvard Business School;

Insper Institute of Education and Research

Abstract

Manuscript Type: Empirical

Research Question/Issue: This study aims to understand the implications of the

corporate governance arrangements in state‐owned enterprises (SOEs) that are

publicly listed in terms of firm performance relative to that of private firms.

Research Findings/Insights: Using a new database of 477 large, listed SOEs

observed between 1997 and 2012 in 66 developed and emerging countries, we use

matching techniques to show that these firms do not underperform similar private

firms, except when the former face shocks that prioritize their social and political

objectives, such as during severe recessions. These findings demonstrate the need

to revise existing theories of SOE underperformance.

Theoretical/Academic Implications: We expand the traditional agency view of

SOEs by introducing principal–principal conflicts that prevail in publicly traded firms.

We argue that governments try to steer SOEs to pursue social and political objectives,

which can lead to inefficiencies, but they also provide them rents and protection,

factors that should lead them to perform as well or better than similar private firms.

Thus, our theory of state ownership argues that their advantage or disadvantage over

similar private firms cannot be identified from the theory and thus needs an empirical

test.

Practitioner/Policy Implications: We modify the simplistic view that SOEs are inef-

ficient and highlight that SOEs that compete with private firms may have advantages

that give them a competitive edge. This has implications not only for firm‐level

strategy, but also for competition policy worldwide.

KEYWORDS

Corporate Governance, National Privatization, National‐LevelGovernance Outcomes, Ownership

Mechanisms, State‐Owned Enterprise (SOE)

1|INTRODUCTION

In the last three decades, an impressive body of scholarly work has

studied the comparative performance of state‐owned and private

firms. The conclusion from this literature is that state‐owned enter-

prises (SOEs) are, on average, less efficient and profitable than

privately‐owned firms due to several factors. Based on agency logic,

scholars have pointed out that managers of SOEs are poorly

monitored and lack the high‐powered incentives normally found in

private firms (Dharwadkar, George, & Brandes, 2000; La Porta &

Lopez‐de‐Silanes, 1999). Depending on the strategic objectives of

the government, SOEs may also pursue objectives other than

efficiency and profitability (Bai & Xu, 2005; García‐Canal & Guillén,

2008; Shirley & Nellis, 1991; Stan, Peng, & Bruton, 2014). For

Received: 19 October 2017 Revised: 2 March 2018 Accepted: 4 March 2018

DOI: 10.1111/corg.12239

Corp Govern Int Rev. 2018;26:255–272. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 255

instance, governments may require SOEs to avoid layoffs during eco-

nomic crises or to divert their resources to support pet projects that

directly benefit their constituencies (Shleifer & Vishny, 1998; Vickers

& Yarrow, 1988). Consistent with these predictions, empirical work

has detected performance gains in the transition from state to private

ownership (for a review, see Megginson, 2005).

Given these potential liabilities of state ownership, it is surprising

that in more recent years we still see a pervasive presence of SOEs

throughout the world and in a broad range of industries (Bruton, Peng,

Ahlstrom, Stan, & Xu, 2015; Wooldridge, 2012). In 2013, among the

top‐100 Fortune Global 500 companies, 25 were state‐owned multina-

tional firms, directly owned by the state or indirectly through several

state‐related investment vehicles (Musacchio & Lazzarini, 2014). And

this phenomenon is not simply due to the rise of interventionist

emerging economies such as China or Russia; there is vast evidence

that SOEs remain important even in developed countries. A recent

survey of OECD countries, for instance, found that SOEs represented

a total equity value of US$1.4 trillion in 2011, of which 61% involved

firms with minority stakes—that is, firms with private management and

partial state ownership (Christiansen, 2011). Guedhami (2012) docu-

ments how governments increased their investments in firms through

acquisitions to record levels during the Financial Crisis of 2008–2009.

In addition, there is also evidence that investors have not shied away

from SOEs. A report by Morgan Stanley in May 2012 claimed that sev-

eral SOEs have outperformed their industry peers in emerging mar-

kets, despite the fact that they may be “targeting development

objectives rather than shareholder returns”(Morgan Stanley, 2012:

1). All in all, these facts raise an important question: given their fla-

grant resilience as top global corporations and potential investment

targets, is it possible that the intrinsic sources of performance disad-

vantage of SOEs have disappeared? If this is the case, which condi-

tions should improve the comparative performance of SOEs?

To shed light on these questions, in this paper we examine firm‐

level performance differences between SOEs and private firms based

on a cross‐industry, cross‐country sample of 477 large, listed SOEs

observed between 1997 and 2012 in 66 developed and emerging

countries. These are all publicly traded SOEs that are not only owned

by governments but also by private investors and funds. Of those firms,

280 have minority state ownership—a form of governmental participa-

tion that has been relatively understudied. For instance, in our database

we have large, global SOEs such as Norway's Telenor (majority),

Russia's Rosneft (majority), France's Renault (minority) and Brazil's Vale

(minority). These SOEs are compared to a group of 431 listed private

firms with no state ownership. We adopt a host of matching techniques

(Imbens, 2004) to guarantee comparability between the observed SOEs

and similar private firms based on key observable traits at the firm,

industry, and country level. In some specifications, we also run differ-

ences‐in‐differences estimations to remove the effect of unobserv-

ables (Heckman, Ichimura, & Todd, 1997), as well as dynamic panel

regressions to control for adjustment processes (Arellano & Bover,

1995; Blundell & Bond, 1998). Given our interest in studying SOEs as

vehicles for investment in equity markets, we focus on two key

profitability indicators: ROA and Tobin's q, which have also been widely

used in previous research examining sources of firm‐level performance

heterogeneity (e.g. McGahan, 1999; Villalonga, 2004).

We contribute to the literature on performance differences

between SOEs and private firms by arguing that these differences

increase subject to environmental factors that expose their inherent

constraints to adjust and optimize. The literature on privatization has

actually found that some of the differences in performance between

pre‐and post‐privatization performance depended on a variety of

conditions such as residual state ownership, the prevailing institutional

and macroeconomic environments at the time of privatization,

whether foreign investors were involved and how much corporate

restructuring there was (Boubakri, Cosset, & Guedhami, 2005). More-

over, there is a literature that finds that post‐privatization residual

ownership affects corporate governance (Borisova, Brockman, Salas,

& Zagorchev, 2012; Guedhami, Pittman, & Saffar, 2009), the cost of

capital (Borisova & Megginson, 2011), valuation (Boubakri, El Ghoul,

Guedhami, & Megginson, 2018), and innovation (Cao, Cumming, Zhou,

& Zhou, 2016; Lazzarini, Mesquita, Monteiro, & Musacchio, 2016;

Zhou, Gao, & Zhao, 2017). Beuselinck, Cao, Deloof, and Xia (2017)

explore the impact that the Financial Crisis of 2008–2009 had on

the valuation and stock returns of European SOEs relative to similar

private firms. They find that SOEs experienced a less severe fall in

stock prices and market‐to‐book value than private firms, but only in

countries with strong investor protections.

In contrast to the existing literature, in this paper we examine the

performance gaps between SOEs and private firms in a large sample of

global firms from 70 countries. We propose and find that performance

gaps between SOEs and private firms are stronger during times of eco-

nomic recession across the board. For instance, while private firms can

downsize and adjust during severe economic downturns, governments

may require SOEs to avoid layoffs and invest in unprofitable projects

as a way to attenuate the political cost of those shocks (Musacchio

& Lazzarini, 2014; Shirley & Nellis, 1991). We also propose that these

increased gaps should be less likely observed in minority‐owned SOEs,

which tend to be less directly influenced by their home governments,

and that their magnitude should be critically influenced by local insti-

tutions. Namely, building on Henisz (2000, 2002), we hypothesize

and find that when governments are more constrained in their ability

to intervene and change policies, SOEs appear to behave more like pri-

vate firms in the way they respond to negative shocks.

Our findings improve our understanding of the firm‐level implica-

tions of state capitalism, a topic that has been relatively understudied

in strategic management (Bruton et al., 2015; Cuervo‐Cazurra, Inkpen,

Musacchio, & Ramaswamy, 2014; Wood & Wright, 2015). We submit

that performance differences between SOEs and private firms are not

static but greatly vary depending on contingencies affecting the likeli-

hood of government intervention. In other words, our study shows

that the key question is not whether SOEs underperform private firms,

but when and where. Thus, instead of looking for generic differences

between SOEs and private firms, scholars should pay more attention

to changes that increase the temptation of governments to intervene,

as well as local institutional constraints on their ability to influence

SOEs. This findings are consistent with those of the recent literature

looking at valuation and stock returns in SOEs in Asia and Europe dur-

ing the financial crisis in that minority SOEs seem to fare better than

private firms during times of crisis, especially in countries with institu-

tions that prevent government intervention in SOEs (Beuselinck et al.,

256 LAZZARINI AND MUSACCHIO