Liberalization, Corporate Governance, and the Performance of Newly Privatized Firms

This paper seeks to provide an answer to the following question, namely when and how does privatization work? Using a unique sample of 201 firms headquartered in 32 developing countries, we document a significant increase in profitability, efficiency, investment and output. Next, using univariate tests, we show that corporate governance mechanisms and economic reforms and environment have an effect on the changes in operating performance. For example, we find that privatization yields better results when stock market and trade liberalizations precede it. The results of a regression analysis, across a number of specifications, indicate that economic reforms and environment as well as corporate governance variables explain the post-privatization performance changes. In particular, economic growth, control relinquishment by the government and foreign ownership are key determinants of profitability changes. We also find higher improvements in efficiency and output for firms in countries in which stock markets are more developed and where property rights are better protected and enforced. Finally, our results suggest that trade openness is an important determinant of the post-privatization increase in investment.