Can monitoring improve the performance of state-owned firms? Evidence from privatization in a large emerging market

Sharon Poczter

Industrial and Corporate Change, 2016, vol. 25, issue 6, 903-921

Abstract: While privatization has long been a central pro-market strategy for promoting competitiveness, little is known about which aspects of this multilevel process impact firm performance. Agency theory predicts that privatization will improve firm performance due to changes in monitoring by shareholders, the incentives of management, and the political control of the government. Measuring how each of these three pathways impact firm performance separately is difficult, however, as most privatizations result in the transfer of both ownership and control to private investors, influencing several of these pathways at once. This article is able to circumvent this limitation by examining changes to firm performance from the minority privatization of Indonesian state-owned firms during whic\h firms experience only changes in monitoring, as majority state ownership and control remain the same. Difference-in-differences analyses suggest that changes to monitoring improve firm performance by 9–13%, controlling for cross-sectional, time-invariant, and time-varying firm characteristics, macroeconomic issues affecting all firms, selection issues, and considering several alternative hypotheses. Altogether, this article suggests that firm performance via privatization can improve through changes to monitoring alone, without implementing the costly organizational changes required by complete privatization or requiring that the state relinquish control of socially important firms.

JEL-codes: L33 L6 M21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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