Minority Rules: Credible State Ownership and Investment Project Risk Around the World

Abstract

Research in management and related fields largely assumes that state ownership in firms raises risk for private co-investors. We question that assumption in theorizing that minority state ownership may actually decrease investment risk in countries where state investment policy stability is low. Non-controlling but still substantial equity holdings prompt states to maintain initial investment project terms favorable to private co-investors, yet limit the state’s ability to interfere in project management under the same initial terms. Analyses of more than 900 investment projects announced in 56 countries from 1990-2006 support this contrarian proposition: 1) lower state investment policy stability in a country increases investment risk measured as percentage of equity comprising all capital funding for an investment project on announcement date; but 2) minority state ownership diminishes the risk-increasing impact of low state investment policy stability; and 3) the risk-decreasing effect of minority state ownership is greatest when the state holds from 21-40% of investment project equity. Private investors treat state investment policy stability and equity partnership as risk-reducing substitutes. Our study articulates that substitution process, noting where “minority rules” hold and state ownership provides credible assurance to private co-investors in less stable countries.