Privatization in Western Europe: Stylized Facts, Outcomes, and Open Issues

Privatization has certainly been one of the main events of the economic and financial history of the 20th century. Between 1997 and 2004 more than 4,000 privatization operations were carried out in the world, bringing to governments revenues for over 1,350US$billion. Western Europe emerges as the most important region, having implemented the greatest number of privatizations and raised a half of global revenues. The relevance of Western Europe in the process can be ascribed to several factors. This paper investigates the causes of this process, summarizes the main trends of privatization activity at the country level, analyzes the main privatization drivers and provides an account of the main findings of the effects of privatization at the macro and microeconomic level

Ownership Concentration in Privatized Firms: The Role of Disclosure Standards, Auditor Choice, and Auditing Infrastructure

We rely on a unique data set to estimate the impact of disclosure standards and auditor-related characteristics on ownership concentration in 190 privatized firms from 31 countries. Accounting transparency can help alleviate the agency conflict between minority investors and controlling shareholders, which is evident in the extent of ownership concentration, since the expropriation of corporate resources hinges on these private benefits remaining hidden. After controlling for other country-level and firm-level determinants, we find weak (no) evidence that extensive disclosure standards (auditor choice) reduce ownership concentration. In contrast, we report strong, robust evidence that ownership concentration is lower in countries with securities laws that specify a lower burden of proof in civil and criminal litigation against auditors, consistent with Ball's [2001] predictions. Collectively, our research implies that minority investors worldwide value legal institutions that discipline auditors in the event of financial reporting failure over both the presence of a Big 5 auditor and better disclosure standards. Re-estimating our regressions on a broad sample of western European public firms provides similar evidence on all of our predictions. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2006.

Residual State Ownership, Policy Stability and Financial Performance Following Strategic Decisions by Privatizing Telecoms

We question previous research assuming that privatizing firm performance generally benefits from decreasing state ownership and the passage of time, both of which purportedly align principal–agent incentives promoting organizational decision-making that increases shareholder value. When state ownership shifts from majority and controlling to minority and non-controlling, the performance impact may be positive in the short run, particularly where there is instability in the local investment policy environment. Consistent with this proposition, we develop and test hypotheses derived from a minority and non-controlling or “residual” state ownership framework, grounded in credible privatization and institutional theory. We propose that: (1) residual state ownership positively affects shareholder returns after strategic decisions by privatizing firms because it signals state support for managerial initiatives; (2) the passage of time since initial privatization negatively affects shareholder returns after strategic decisions by privatizing firms because initial undertakings in support of the privatizing firm are reversed; and (3) home-country investment policy stability moderates these two effects – greater stability obviates the need for residual state ownership, and slows policy reversals over time. We find empirical support for our residual state ownership framework in event study analyses of cumulative abnormal returns (“CARs”) associated with 196 major investments announced from 1986 to 2001 by 15 privatizing telecoms from around the world. CARs are positive at 5–25% state ownership levels but turn negative at higher state ownership levels. CARs turn sharply negative within 1–2 years from initial privatization dates. Increasing policy stability diminishes positive ownership and negative time effects on CARs. Results confirm the potential supporting role that residual state ownership can play in enhancing strategic decision-making and financial performance by privatizing firms, particularly where there is instability in the home-country investment policy environment. Journal of International Business Studies (2009) 40, 621–641. doi:10.1057/jibs.2008.104