Liberalization, Corporate Governance and the Performance of Newly Privatized Firms

Abstract

This paper seeks to provide an answer to the following question: When and how does privatization work? Using a unique sample of 189 firms headquartered in 32 developing countries, we document a significant increase in profitability, efficiency, investment and output. Next, using univariate tests, we show that changes in performance are related to economic reforms and conditions and to corporate governance. For example, we find that privatization yields better results when it is preceded by stock market and trade liberalization. The results of a regression analysis then indicate that macroeconomic and corporate governance variables explain post-privatization performance improvements. In particular, economic growth, control relinquishment by government and foreign ownership are key determinants of profitability changes. We also find higher improvements in efficiency and output for firms from countries with more developed stock markets and where the protection of property rights is better. Finally, our results suggest that trade openness is an important determinant of post-privatization increase in investment.