STRUCTURAL REFORM AND FIRM PROFITABILITY IN DEVELOPING COUNTRIES

Alvaro Cuervo-Cazurra () and Luis Alfonso Dau ()

No wp940, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: We extend agency theory to propose that structural reform positively impacts firm profitability in developing countries because the improvements in external monitoring that accompany structural reform decrease the agency costs faced by firms. However, we also argue that not all firms benefit equally from structural reform because their agency problems are impacted differently. Hence, we propose that structural reform results in higher improvements in profitability for domestic state-owned and domestic private firms than it does for subsidiaries of foreign firms. Results of the analyses of the largest 500 firms in Latin America support the arguments, suggesting that, contrary to the views of many critics of globalization, domestic firms are the main beneficiaries of structural reform in developing countries.

Keywords: agency theory; structural reform; firm profitability; state-owned firms; private firms; subsidiaries of foreign firms; developing countries; globalization (search for similar items in EconPapers)
JEL-codes: F23 G34 L33 M21 (search for similar items in EconPapers)
Pages: pages
Date: 2008-07-01
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