Abstract
Despite an apparent consensus in the literature that privatisation universally leads to an increase in firm performance, the problem of endogeneity bias is profound and has been emphasised in a number of meta-analyses. We propose a new instrument to address the endogeneity bias and apply it to Polish medium-sized and large firms in the period of 1995 to 2008. We find that improvements in firm performance are not universal; in particular, we find no improvement among manufacturing firms privatised to domestic investors.
Highlights
If privatisation fosters firm performance, it would be a universally recommendable policy instrument
We study firm performance, which we operationalise as TFP change before and after privatisation
We propose to use variables which are plausibly exogenous to firm performance and which are readily available to many economies
Summary
If privatisation fosters firm performance, it would be a universally recommendable policy instrument. DeWenter and Malatesta [2001] show empirically that the performance of state-owned firms improves already before privatisation. Since investors choose which firms to purchase and state authorities choose which firms to sell, the selectivity bias is a paramount issue in empirical studies of the causal effects of privatisation on firm performance. In the most cited meta-analyses, Djankov and Murrell [2002] as well as Estrin et al [2009] emphasise that ordinary least squares (OLS) yield biased estimates of the effect of privatisation on firm performance. They demonstrate that attempts to address this problem have been identified in only a few studies
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