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DOCUMENTO DE TRABAJO DTECONZ 2006-02
Performance and capital structure of privatized firms in the european union
Patricia Bachiller Baroja
Departamento de Contabilidad y Finanzas Universidad de Zaragoza
Mª José Arcas Pellicer
Departamento de Contabilidad y Finanzas Universidad de Zaragoza
Facultad de Ciencias Económicas y Empresariales Universidad de Zaragoza
PERFORMANCE AND CAPITAL STRUCTURE OF PRIVATIZED
FIRMS IN THE EUROPEAN UNION
Patricia Bachiller María José Arcas
ABSTRACT
The objective of this paper is to analyze whether there are differences in performance
between firms that have been privatized and private firms in the EU. We also analyze
whether previous ownership (state-owned versus private) and regulation affect capital
structure. Focusing on economic reasons that justify privatizations, we compare the
differences in the profitability, leverage and labor intensity of privatized firms in the EU
countries with a matched-pairs sample of private firms, during the period 1999-2002.
For the total sample, we have found evidence that privatized firms are more profitable,
less leveraged and more efficient than private firms. With respect to capital structure,
for the total sample, privatization and regulation determine leverage, being the
privatized firms less leveraged and the regulated firms more leveraged. However, we
have found important differences between zones.
Keywords: privatization; efficiency; capital structure; European Union.
JEL Classification: G32; L33; L43
Acknowledgements: This study has been carried out with the financial support of the
Spanish National R&D Plan through research project SEJ2004-00790ECON.
Address: Patricia Bachiller Departamento de Contabilidad y Finanzas Universidad de Zaragoza Gran Vía, 2 50005 Zaragoza e-mail: [email protected]
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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1.- INTRODUCTION
In recent decades, the privatization of state-owned enterprises (SOEs) has been one of
the most common policies carried out in economies worldwide and OECD countries
have also been involved in this phenomenon (OECD, 2003).
Reasons for privatization can be categorised as economic, financial and political
(Vickers and Yarrow, 1988). Economic aims are associated with improvements in
efficiency of the privatized firm. Financial reasons are based on the positive effects on
public finances, specifically the public deficit, because the State obtains an important
source of income from the sale of these enterprises. Finally, political reasons refer to
distributional effects on society because privatization allows increasing the number of
stockholders and facilitates the access of citizens to capital markets.
The economic reasons that justify privatizations are based on microeconomic theory.
With perfect competition, private firms achieve efficiency by maximizing profits. In
principle, SOEs can reach the same levels of financial performance as private firms.
Nevertheless, there are some problems that make it difficult to reach this objective, such
as principal-agent relationships, the non-definition of objectives and the contradiction
between the objectives of the principal and the agent. Many studies have focused on the
differences in performance between SOEs and private enterprises and on the impact of
privatization on the performance of the privatized firms (Megginson et al., 1994;
Dewenter and Malatesta, 2001). In consequence, it is expected that there will not be
differences with private firms, once public companies have been privatized. Also, the
interventionism of government through ownership and regulation is also reflected in the
financial structure of the firm (Titman and Wessels, 1988; Kole and Mulherin, 1997).
The objective of this paper is to analyze whether there are differences in performance
between firms that have been privatized and private firms in the EU. We also analyze
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
3
whether previous ownership (state-owned versus private) and regulation affect capital
structure.
In consequence, we analyze the economic and financial situation of recently privatized
firms in the EU countries compared to a matched-pairs sample of private firms, during
the period 1999-2002, in order to investigate whether privatization means better
business performance. The empirical work consists of analyzing whether there are
differences between the profitability, leverage and efficiency in privatized SOEs and
private firms. We also analyze the determinants of the capital structure of these firms.
To do this, we focus on the impact of the intervention of the Administration on the
leverage of the firms in our sample, distinguishing between privatized and non-
privatized firms, and also between regulated and competitive companies.
With respect to previous research, this paper adds new evidence about the privatization
process and the capital structure of firms in the EU. Previous research focuses either on
the comparison between SOEs and private enterprises or the comparison between before
and after privatization. Here, we compare performance of previous SOEs after
privatization with private companies of similar characteristics. Also, previous research
refers to a specific European country. By contrast, this paper provides an analysis of the
effects of the privatization process on firm performance for all the EU.
The paper is organized as follows. In the next section, we review the theory and
previous literature. Section 3 details the research methodology. Section 4 describes the
data employed. Section 5 presents the empirical results and, finally, Section 6 contains
the conclusions.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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2.- LITERATURE AND THEORY
Previous research shows the differences between the performance of private firms and
SOEs. The agency theory (Jensen and Meckling, 1976) justifies these divergences as a
result of the differences in the principal-agent relationship. In private companies the
principal is the shareholders, whereas in SOEs the principal are voters and government,
who have limited capacity to control the agent (Vickers and Yarrow, 1988). Also, in
SOEs, the objectives are related to the public interest (maintenance of the employment,
etc.), whereas in private firms, the objectives are related to maximising profits and the
firm’s value. In consequence, there are two fundamental problems: the adverse selection
of the agent and the moral hazard because the agent’s behaviours can not be observed at
all times (Cohen, 2001). Boycko et al. (1996) highlight agent problems in the SOEs
using a model that shows the gap between the objectives of politicians and managers.
They show the relative inefficiency of SOEs and the improvements of efficiency after
privatization.
There are several studies that document the effect of privatization on profitability,
leverage and performance. According to property rights theory, private companies are
expected to have higher profits because their objectives are focused on profits, whereas
public companies have other socio-political objectives. In consequence, it is expected
that profitability increases after privatization. Many studies have documented a
significant improvement in profitability following privatization (Dewenter and
Malatesta, 2001; Boardman et al., 2002).
Efficiency measures take into account the resources used to generate the output.
Usually, it is measured as sales per employee or net income per employee1. Previous
research find evidence that efficiency improves following privatization (Dewenter and
Malatesta, 2001; Boardman et al., 2002; Goldstein, 2003; Omran, 2004).
1 There are other types of efficiency as technical efficiency (or X-efficiency).
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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Private companies are also expected to have lower leverage. Public companies have
access to funds from the state in very good conditions of interest rates and repayment
terms. As consequence of the privatization, these conditions disappear. Furthermore,
companies that have been privatized through a public offering can reduce leverage
because they have access to equity in capital markets. Empirical research finds evidence
that leverage decreases after privatization (Megginson et al., 1994; Dewenter and
Malatesta, 2001; Boardman et al., 2002).
In some countries, SOEs were restructured to be more profitable and subsequently to be
sold to private companies and improvement in performance takes place before
privatization. This is the case of France (Berne and Pogorel, 2004) and Spain (Vergés,
2000). Also, in the UK there is evidence that efficiency improved in some companies
three years before the privatization (Boussofiane et al., 1997).
Nevertheless, the privatization itself does not necessarily lead to an increase of the
efficiency without a liberalisation of the competitive environment. Competition affects
efficiency in two ways (Vickers and Yarrow, 1988): first, competition in the market of
products increases efficiency because it eliminates monopolist margins, second,
competition forces to companies to introduce innovations. In Germany, Knieps (2004)
concludes that, after deregulation in German network industries, service quality
increased and industry efficiency improved. Likewise, in Sweden, Springdal and Mador
(2004) assert that privatization increased competition in the information technology
sector and this led to an improvement in service quality and a drop in price. In Spain,
Villalonga (2000) shows that the effect of privatizations has not always led to increases
in efficiency and it is influenced by political and organizational factors.
Finally, in Eastern Europe, Hyclak and Kina (1994) demonstrate that the privatization
experience in this zone is different to any other region, because of the lack of developed
capital markets.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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The interventionism of government is also reflected in the financial structure of the
firm. Titman and Wessels (1988) document the theoretical determinants of the capital
structure. These factors are: competition, regulation, profitability, asset tangibility, size
and institutional environment. According to the pecking order theory, companies that do
not operate in competitive industries achieve higher profit levels and lower debt levels.
Kole and Mulherin (1997) show the existence of competitive markets and control of the
managers of privatized firms are essential requirements to improve the performance.
Newbery (1997) argues that regulation affects capital structure. The greater the
fluctuations in a company’s cash flow, the greater the chance of being unable to meet its
obligations. In consequence, firms with rate regulation have lower cash flow risk and
can support higher debt levels. Also, Parker (1998) asserts that an optimal regulatory
system incentives for management to manage business assets efficiently.
The relationship between leverage and profitability is controversial. Myers and Majluf
(1984) predict a negative relationship between leverage and profitability, because firms
will prefer to finance with internal funds rather than debt. In consequence, more
profitable firms will issue less debt. Titman and Wessels (1988) and Rajan and Zingales
(1995) find evidence of this. However, Jensen (1986) predicts a positive relationship if
the market for corporate control is effective in forcing firms to commit to paying out
cash by levering up. If it is ineffective, managers of profitable firms prefer to avoid the
disciplinary role of the debt, which would lead to a negative relationship between
profitability and leverage.
Another factor that may affect the firm’s debt-equity choice is the tangibility of assets.
According to bankruptcy costs theory, tangible assets keep their value even in
bankruptcy, so firms with more tangible assets can support higher levels of debt at
lower costs because of the ability of firms to collateralize their debt (Jensen et al. 1992;
Rajan and Zingales, 1995). By contrast, Titman and Wessels (1988) assert that firms
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
7
with fewer intangibles may choose higher debt levels to limit their managers’
consumption of perquisites because bondholders or bankers will closely monitor such
firms.
The effect of size on leverage is ambiguous. It is argued that very large firms pay less
than small firms to issue equity, so they would be less levered than small firms (Ryen et
al., 1997; Rajan and Zingales, 1995). However, large firms tend to be more diversified
and fail less often, so size should decrease the probability of bankruptcy and have a
positive impact on leverage (Rajan and Zingales, 1995). Rajan and Zingales (1995), in
an international study for the G-7 countries find evidence that leverage increases with
size in all countries, except Germany.
Finally, La Porta et al. (1997) find that institutional and legal characteristics determine
capital structure because the legal environment has a significant effect on the ability of
firms to raise external finance. Also, Wald (1999) points out that variables associated
with risk, growth, firm size and inventories show different effects across countries.
However, Rajan and Zingales (1995) show that, at aggregate level, differences between
the leverage of firms are not explained by institutional differences.
Focusing on Europe, Hall et al. (1999) carry out an analysis of small and medium sized
enterprises. They conclude that variations in the determinants of capital structure
between countries are due to the financing requirements of firms, their relationship with
banks, taxation and other national economic, social and cultural differences. In the
United Kingdom, Ozkan (2001) concludes that profitability, liquidity and growth
opportunities have a negative effect on the leverage ratios. In Spain, Arrondo and
Gómez-Ansón (2003) find that the agency model is determinant in the firm’s security
issue choice. Likewise, De Miguel and Pindado (2001) compare the determining factors
of capital structure in Spanish and US firms, finding that transaction costs in Spain are
lower than those for US firms due to the higher percentage of private debt in Spain.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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3.- METHODOLOGY
Firstly, we compare the economic-financial characteristics of privatized firms and the
control group (private firms) by carrying out the Wilcoxon two-sample paired signed
rank test, which does not require normality. In accordance with the previous section, the
factors to be compared are profitability, leverage and efficiency.
Because of the potential differences between countries, we also compare these groups
for different geographical zones. Following La Porta et al. (1997), we have classified
the companies between the French, German, Scandinavian or British zones2.
As in Dewenter and Malatesta (2001), profitability is measured using the return on sales
(ROS), return on assets (ROA) and return on equity (ROE). With respect to leverage,
there are several measures in the literature. Following to Bevan and Danbolt (2002), we
have chosen the following ratios:
LEV1 = AssetsTotalDebtTotal
LEV2 = AssetsTotal
DebtTermLong
LEV3 = AssetsTotal
EquivalentandCreditTradeDebtTotal −
These authors define two variants of measures using the book value or the market value;
however, we only use book value measures because not all firms are quoted on the
Stock Exchange.
2 In the French zone we include Belgium, Holland, Italy, France, Portugal and Spain; in the German zone
Germany and Austria; in the Scandinavian zone Denmark, Sweden; in the British zone Ireland and United
Kingdom and in the Eastern zone Slovakia, Hungary, Latvia, Poland and Malta, which does not belong to
this zone but entered the EU at the same time.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
9
Finally, we measure efficiency as labour intensity. Following Dewenter and Malatesta
(2001), we use two different measures of labour intensity:
LAB1 = )( dollarsofmillioninSales
Employees
LAB2 = )( dollarsofmillioninAssets
Employees
In order to analyze leverage determinants, we carry out a multivariate panel data
analysis. As we have mentioned, the uniqueness of privatized firms means, according to
pecking order theory, less leverage. Therefore, we introduce the variable PRIV that
indicates whether company has been involved in a privatization process. It is a dummy
variable that has value one in the affirmative case and zero otherwise. Another factor is
regulation, so the REG variable shows whether the firm operates in a regulated industry;
this is also a dummy variable with value one for the energy, tobacco,
telecommunications and transport sectors. To study the effect of size on leverage, we
use the SIZE variable, measured by the total assets in million of dollars3.
Following Titman and Wessels (1988), we define tangibility (TAN) as the proportion of
tangible assets over total assets and we measure profitability as ROA.
Finally, to correct for endogeneity we introduce one-period lagged dependent variable.
Accordingly, we estimate the following model:
Leveragei = α + β1 PRIV + β2 REG + β3 SIZE + β4 TAN + β5 ROA + β6 Leveragei, t-a +
εi (1)
where Leverage is the LEV3 ratio aforementioned.
3 We express in millions so that the coefficients of regression are not practically zero because there are
differences of size between leverage and total assets.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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4.- DATA
The list of privatized firms in Europe has been obtained from the Web
www.privatizationbarometer.net. This link provides information about the enterprises
that have been involved in a privatization process since 1995 and the percentage that has
been privatized. However, there is no information about the percentage that is not
privatized. In consequence, in our sample, we cannot distinguish between completely
privatized and partially privatized companies.
From the firms privatized in recent years, we selected the companies whose
privatization or final phase of privatization (if there were several phases) took place
after 1995, because the 2001 OECD report establishes this year as the most significant
in Europe, except for the United Kingdom.
The economic-financial data was derived from Amadeus Bureau van Dijk Electronic
Publishing. From the 1449 privatized firms in Europe, we have selected those that
report consolidated balance sheets. Furthermore, we excluded financial firms and those
for which data could not be obtained for 2002. Consequently, the sample is comprised
of 133 privatized firms and 451 firms-year observations.
Having selected the privatized firms, the control group was constructed with private
firms. For this, for every privatized company we chose a private firm belonging to the
same geographical zone (La Porta et al., 1997), and to the same industry. In this way,
we control for differences in accounting rules and firms are paired up with other firms
which operate in the same sector.
Table 1 presents the distribution of the companies in the sample by industry and
geographical zone.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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Table 1: Sample Distribution of privatized firms by industry and geographical zone
Panel A: Industry (NACE code)
Sector Number of Companies % Companies Construction 6 4.51% Energy 26 19.55% Holding 18 13.53% Manufacture of food and tobacco products 6 4.51% Manufacture of basic metals 7 5.26% Transport 12 9.02% Computer and related activities 4 3.01% Manufacture of chemical products 6 4.51% Manufacture of petroleum 5 3.76% Telecommunications 14 10.53% Wholesale trade 6 4.51% Other sectors 23 17.29% Total 133 100%
Panel B: Geographical zones
Zone Number of Companies % Companies French 58 43,61% German 13 9,77% Scandinavian 9 6,77% British 13 9,77% Eastern 40 30,08% Total 133 100%
It can be seen that the number of French firms is greater than those in the other zones
studied. In the British zone the number of pairs is lower because the privatization
process began before 19954.
Table 2: Summary statistics
Panel A: Statistics of privatized firms
Mean Median SD Minimum Maximum N Total Assets (million dollars) 10,33 0,78 24,98 0,01 170,57 445 ROS 9,28 6,42 62,29 -170,39 862,71 360 ROA 3,46 3,96 9,89 -64,71 39,16 402 4 As the OECD (2001) report points out, the greatest global amount raised from privatization in United
Kingdom during the nineties was in 1991.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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ROE 7,90 10,00 32,69 -228,50 135,79 393 LEV1 20,65 0,60 423,69 0,06 8948,38 446 LEV2 60,05 0,18 1193,45 0,00 23809,52 398 LEV3 0,24 0,19 0,21 0,00 1,05 446 LAB1 9856,34 5026,48 23576,22 0,19 261244,60 322 LAB2 6732,02 3067,48 11530,15 0,25 100000,00 361 Panel B: Statistics of control pairs
Mean Median SD Minimum Maximum N Total Assets (million dollars) 4,37 0,44 24,24 0,00 257,93 416 ROS 2,09 2,22 33,59 -364,40 223,41 368 ROA 3,22 3,48 10,25 -59,28 47,25 420 ROE 7,80 10,63 46,92 -395,39 151,27 409 LEV1 0,64 0,68 0,23 0,00 2,08 416 LEV2 0,25 0,22 0,24 0,00 2,11 386 LEV3 0,63 0,68 0,23 0,00 1,39 425 LAB1 27713,05 5236,92 174469,41 7,97 2263281,00 331 LAB2 8015,17 4926,11 10744,49 120,42 83333,33 383
Panel C: Size of privatized firms
Zone Mean Total Assets (million dollars) N French 10.51 195 German 27.66 41 Scandinavian 17.07 34 British 2.89 39 Eastern 5.29 136 Total 10,33 445
Table 2 provides summary statistics (mean, median, standard deviation, minimum,
maximum and number of observations) of the variables from pooled data used in the
study and the size of the firms by zones.
The mean size of the privatized firms (Table 2, Panel A) is greater than that of the
private firms (Table 2, Panel B). This is due to the fact that most privatized companies
have been in a monopolistic situation before its privatization. As Table 2 Panel C
shows, British firms are the smallest in the sample because this zone began its
privatizations before the other zones and the most important companies were privatized
previously and are not included in the sample.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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5.- RESULTS
In this section, the results obtained in the study are presented. Firstly, we carry out a
comparative analysis between the cited variables to study whether there are differences
in the economic-financial characteristics of privatized and private firms and, secondly
we study the capital structure of the firms in the sample.
5.1.- Univariate analysis
We examine the differences in the profitability, leverage and labour intensity of the
firms using matched pairs as we explained in Section 3.
Table 3: Kolmogorov-Smirnov test
Privatized firms Non-Privatized firms
Z Kolmogorov-Smirnov Sig. Z Kolmogorov-
Smirnov Sig.
ROE 7.50 0.000 6.14 0.000 ROA 3.77 0.000 3.84 0.000 ROE 4.92 0.000 5.14 0.000 LEV1 10.90 0.000 8.07 0.000 LEV2 10.34 0.000 4.50 0.000 LEV3 3.71 0.000 2.27 0.000 LAB1 6.36 0.000 10.38 0.000 LAB2 5.55 0.000 10.76 0.000
Table 3 presents the Kolmogorov-Smirnov normality test for the data in both groups, as
we have already said. We can see that the variables do not follow a normal distribution,
which justifies the Wilcoxon test.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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Table 4: Wilcoxon test results Wilcoxon Test ROS ROA ROE LEV1 LEV2 LEV3 LAB1 LAB2
Total sample Z -6.048*** -2.851*** -0.998 -2.410** -2.549** -1.567 -0.691 -4.471*** p-value 0.000 0.004 0.318 0.016 0.011 0.117 0.499 0.000 Positive ranks (Varc>Varp) 114 156 197 197 176 194 138 190 Negative ranks (Varc<Varp) 209 223 188 167 129 169 138 132 Zones classificationa French Z -5.567*** -4.268*** -2.371*** -5.193*** -1.928** -3.788*** -1.600 -5.288*** p-value 0.000 0.000 0.018 0.000 0.054 0.000 0.109 0.000 Positive ranks (Varc>Varp) 51 59 68 106 83 104 76 103 Negative ranks (Varc<Varp) 116 116 98 56 61 58 79 55
German Z -1.366 -0.173 -0.776 -1.500 -0.294 -2.458** -0.744 -2.214** p-value 0.172 0.862 0.437 0.133 0.769 0.014 0.456 0.027 Positive ranks (Varc>Varp) 13 21 22 21 22 27 12 18 Negative ranks (Varc<Varp) 20 16 15 17 15 11 15 13
Scandinavian Z -1.754* -2.159** -1.194 -2.743*** -1.755* -2.386** -1.045 -1.704* p-value 0.079 0.031 0.232 0.006 0.079 0.017 0.296 0.088 Positive ranks (Varc>Varp) 6 6 9 15 15 14 10 13 Negative ranks (Varc<Varp) 14 17 11 7 6 8 10 9
British Z - -2.051** -1.329 -2.037** -1.455 -2.646*** - -0.229 p-value - 0.040 0.184 0.042 0.145 0.008 - 0.819 Positive ranks (Varc>Varp) - 23 16 12 20 11 - 15 Negative ranks (Varc<Varp) - 16 13 26 17 27 - 20
Eastern Z -2.059** -0.698 -0.379 -1.906* -0.099 -2.684*** -0.816 -0.077 p-value 0.039 0.485 0.704 0.057 0.921 0.007 0.414 0.938 Positive ranks (Varc>Varp) 44 47 52 43 36 38 40 41 Negative ranks (Varc<Varp) 59 58 51 61 30 65 34 35 Notes: (a) La Porta et al. (1997) classification. Varc: Variable of the control firm. Varp: variable of the privatized firm. * Statistically significant at the 10% level. ** Statistically significant at the 5% level. *** Statistically significant at the 1% level. (-) Indicates insufficient observations to estimate.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
15
The first line in Table 4 shows the differences between the profitability, leverage and
labour intensity of the privatized firms and the control group. The ROS and ROA are
significantly larger for privatized than for private firms; although there are no
significant differences in the ROE ratio. As for leverage, using both total leverage
(LEV1) and long-term leverage (LEV2), we observe that the control group firms use
more leverage than the privatized firms. The differences between both groups are not
significant for ratio LEV3. Private firms have a significantly higher employment to
assets ratio (LAB2) than privatized firms but there are no significant differences in the
employees to sales ratio (LAB1).
Because the privatization process has not been homogeneous throughout the countries
analyzed, we divide them into several geographical zones following La Porta et al.
(1997). We find that the profitability, measured by ROS, ROA or ROE, is significantly
greater in firms in the process of privatization than in private firms in the French zone.
This result is repeated in the Scandinavian zone with the ROS and ROA ratios and in
the Eastern zone where only the ROS ratio is significant. In the British zone, the results
are the opposite, that is, private firms have a significantly greater ROA than privatized
firms. The ROE ratio does not show significant differences between the two groups and
the lack of observations does not allow the estimation of the ROS variable or any
conclusions. In the German countries, profitability measured by the three ratios does not
show significant differences between the two groups.
As for leverage, in both the French and Scandinavian zones the three ratios show that
private firms tend to use more leverage than privatized firms do. Nevertheless, in the
German zone, this result is only valid for the leverage calculated by subtracting the
trade credit and equivalent (LEV3), so we cannot say anything about the other ratios. In
the British and Eastern zones, LEV1 and LEV2 indicate that privatized companies are
characterized by a higher leverage compared to private firms. With respect to labour
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
16
intensity, LAB1 (employees to sales) is not significant in any zone. LAB2 (employees
to assets) indicates higher labor intensity in private companies in the French, German
and Scandinavian zones. In the British and Eastern zones there are no differences
between the two groups.
From these results, we can see that there are important differences between zones. The
differences between private and privatized companies are similar in the French and in
the Scandinavian zone: higher profitability for privatized firms and higher leverage and
employment intensity for private firms. In the German zone, differences in profitability
are not significant, but leverage and labor intensity have the same behavior as in the
French and Scandinavian zones. In the British and Eastern zones the characteristics of
the firms are very different to the other zones. With regard to profitability, in the
Eastern zone the evidence is weaker but similar to the other zones (the privatized firms
are more profitable). In the British zone the opposite occurs, privatized companies
generate less ROA than control firms. Leverage in the two zones is significantly less in
private firms5. Finally, there are no differences in labour intensity in the firms of these
countries.
These zonal differences in the results may be due to the different processes and aims of
privatization in the countries of the sample. Gonzalo et al. (2003) show that the
objectives pursued by the governments in the privatization process vary between
countries. Their results reveal that privatization in developed countries (French,
German, British and Scandinavian zones) can be viewed as a way to reduce the public
deficit or indebtedness, while in the Eastern zone the aim is to reduce the State’s weight
in the economy.
Also, the privatization process has been different in each country. In the Eastern
countries and the British zone the privatized firms during the years of our study are
5 For a detailed study of the debt in developing countries, see Correia Da Silva, Estache y Järvelä (2004)
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
17
smaller than in the rest of Europe. In the UK, the main companies were privatized
before 1995. In the Eastern countries privatization has started recently. Moreover, in the
Eastern countries, unlike other OECD countries, the government did not give subsidies
to SOEs before privatization, whereas in other OECD countries SOEs were restructured
before being sold (Vergés, 2000; Berne and Pogorel, 2004; Boussofiane et al., 1997).
Our results are not consistent with those of Megginson et al. (1994) and Dewenter and
Malatesta (2001) where, at international level, it is observed that profitability and
efficiency increases and leverage decreases after privatization. However, we find that
privatized companies are more profitable, more efficient and less levered than privatized
companies. These differences may be due to the fact that in our sample the control
group includes smaller firms than the privatized group (see Table 2, Panels A and B).
Most of the latter have operated in a natural monopoly where, consequently, new firms
must overcome barriers to entry and so are less profitable than privatized firms.
5.2.- Multivariate Analysis
To study the factors that determine the leverage of the firms, we carry out a multivariate
regression which includes the following determinants: privatized or non-privatized firm,
regulated or non-regulated firm, total assets, tangibility and ROA6, as can be seen in
equation 1. Also, to correct for endogeneity we introduce the one-period lagged
dependent variable.
To avoid the effect of outliers on the results, observations whose standardized absolute
value for leverage is greater than three have been eliminated. In consequence, we have
545 observations.
6 We have replicated this analysis to the total sample with other leverage measures and the results
obtained have been similar but with less statistical significance.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
18
Table 5: Multivariate regression results
Regression PRIV REG SIZE TAN ROA LEV 3 (-1) F-statistic R2 R2 corrected Total sample -0.315 0.183 0.004 0.146 -0.001 -0.095 19.207 0.935 0.886
(n = 545) (-5.001)*** (3.711)*** (6.636)*** (2.253)** (-0.462) (-1.897)*
French -0.413 0.430 -0.003 0.060 -0.001 0.253 21.678 0.941 0.898 (n = 251) (-5.336)*** (5.865)*** (-0.706) (0.505) (-0.404) (3.221)*
German -0.186 0.137 0.003 0.692 -0.006 0.463 9.342 0.483 0.431 (n = 56) (-3.038)*** (2.205)** (3.550)*** (6.194)*** (-1.107) (6.252)***
Scandinavian 0.047 0.002 -0.001 0.077 0.001 0.964 59.279 0.897 0.882 (n = 40) (1.617) (0.079) (-1.70)* (1.785)* (0.345)* (20.531)***
British 0.001 0.021 9.30E-05 0.064 -0.002 0.892 64.369 0.867 0.854 (n = 55) (0.008) (0.609) (0.333) (1.068) (-1.228) (21.565)***
Eastern 0.003 -0.033 0.001 0.053 0.001 0.942 168.791 0.860 0.855 (n = 143) (0.201) (-1.523) (0.823) (1.717)* (0.295) (32.886)***
The Table shows estimated coefficients of the regression. The t-statistic in brackets. * Statistically significant at the 10% level. ** Statistically significant at the 5% level. *** Statistically significant at the 1% level.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
19
As can be seen in the first line of Table 5, the results in the total sample show a negative
and significant coefficient for PRIV. This means that this variable is inversely
correlated with leverage and that privatized firms are less leveraged than private firms.
On the other hand, the coefficient for REG is positive and significant, so, according to
Newbery (1997) we find that regulated companies use more leverage than non-regulated
firms. The coefficient of size is positive and significant; in consequence, this is
consistent with the argument that larger firms use more leverage than smaller firms
because they have less probability of bankruptcy. These results are the same as those
found by Rajan and Zingales (1995) and Wald (1999).
The tangibility variable is significant and positive, implying that a firm with more
tangible assets will use more debt. This result is supported by the bankruptcy costs
theory and it is consistent with Rajan and Zingales (1995). The coefficient for ROA is
not significant, that means that, for our sample, profitability does not determine
leverage. Finally, the one-period lagged dependent variable, included to control for
endogeneity, is statistically significant.
When we carry out the study by zones, in the French zone regulation and privatization
coefficients are significant and with the same sign that the total sample. However, size,
tangibility and profitability coefficients are not significant, that means that for this zone
these variables do not determine leverage.
The results for the German zone are similar than for the total sample. The PRIV and
REG variables have the same meaning than in the French zone and total sample. The
size variable is positive and significant, which coincides with Wald (1999) in the case of
German companies but disagrees with Rajan and Zingales (1995) results for the German
sample. The tangibility variable is directly correlated with the leverage. This result
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
20
agrees with Rajan and Zingales (1995) in the G-7 study, in which Germany shows a
direct relationship between tangibility and leverage.
In the Scandinavian zone, there is a significant relationship between leverage and size,
tangibility and profitability. The coefficient for size is negative, different from that of
the total sample, supporting the argument that large firms should issue equity rather
than debt (Ryen et al., 1997). The coefficient for tangibility is positive, as that for the
total sample. The coefficient for profitability is positive and shows a direct relationship
between profitability and leverage. This is consistent with the argument from Jensen
(1986) that if the market for corporate control can force firms to commit to paying out
cash by levering up, it is expected a positive relationship. Finally, there is no significant
relationship privatization and regulation with leverage in this zone.
In the Eastern zone, after controlling for endogeneity, only the TAN variable is
significant, showing a direct relationship between leverage and tangibility.
Finally, for the British zone, after controlling for endogeneity, no variable is significant.
As Bevan and Danbolt (2002) find for UK firms, that capital structure determinants are
sensitive to leverage definitions, we have repeated the analysis for the total sample with
the total debt (LEV1) and long-term debt (LEV2) variables. For these dependent
variables, the most important difference with the reported results is that ROA
coefficient is negative and significant, in accordance with Titman and Wessels (1988)
and Rajan and Zingales (1995). Tangibility is not significant for the LEV1 regression
and regulation is not significant for the LEV2 regression. However, the other
coefficients obtained for the LEV1 and LEV2 regressions agree with those of the LEV3
regression.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
21
6.- CONCLUSIONS
The objective of this paper is to analyze whether there are differences in performance
between firms that have been privatized and private firms in the EU. We also analyze
whether previous ownership (state-owned versus private) and regulation affect capital
structure.
To fulfil these objectives, we compare the differences in the profitability, leverage and
labor intensity of privatized firms in the EU countries with a matched-pairs sample of
private firms, during the period 1999-2002.
For the total sample, we have found evidence that privatized firms are more profitable,
less leveraged and more efficient than private firms. Our results for the EU are not
consistent with those of Megginson et al. (1994) and Dewenter and Malatesta (2001)
where, at international level, it is observed that profitability and efficiency increases and
leverage decreases after privatization. These differences may be due to the fact that in
our sample the control group includes smaller firms than the privatized group. Most of
the latter have operated in a natural monopoly where, consequently, new firms must
overcome barriers to entry and, in consequence, are less profitable than privatized firms.
Nevertheless, results differ for each geographical zone.
With respect to capital structure, for the total sample, privatization, regulation and size
determine leverage independently of leverage measurement. The influence of regulation
and tangibility on leverage depends on leverage measurement.
However, we have found important differences between zones. This may be for
different reasons. First, because of different economic and legal environments.
Although our study refers only to the EU, there are legal and economic differences
between countries. Also, the different privatization process, especially for the Eastern
zone, where there are not developed capital markets (Hyclak and Kina, 1994) and the
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
22
UK, were privatizations started earlier than in other countries. Another reason may be
the different expected goals in each country (Gonzalo et al., 2003). And finally, the
small number of observation in some zones, particularly, the German, the Scandinavian
and the British zones, that make our results by zones to be quite week.
One limitation to this research is that we have not been able to distinguish between
firms that have been fully privatized from those that are still in process of privatization,
because in the databases there is not information about ownership for each year. In
consequence, our sample may include firms that are still controlled by the state.
Another difficulty in carrying out our study has been to find companies of the same size
than privatized ones. In many cases, privatized companies, before privatization,
operated in a monopoly or had a dominant position in the market. In consequence, the
companies that are available for the control group are usually smaller companies,
because either they had not a dominant position in the market or they have entered into
the market after industry liberalization.
With respect to previous research, this paper adds new evidence about the privatization
process and firms’ capital structure in the EU. Furthermore, this paper provides an
analysis of the effects of the privatization process on firm performance for all the EU
countries by analyzing the differences between privatized and private firms using a
matched-pairs sample which allows for comparisons between companies of similar
characteristics.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
23
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Documentos de Trabajo
Facultad de Ciencias Económicas y Empresariales. Universidad de Zaragoza.
2002-01: “Evolution of Spanish Urban Structure During the Twentieth Century”. Luis Lanaspa, Fernando Pueyo y Fernando Sanz. Department of Economic Analysis, University of Zaragoza.
2002-02: “Una Nueva Perspectiva en la Medición del Capital Humano”. Gregorio Giménez y Blanca Simón. Departamento de Estructura, Historia Económica y Economía Pública, Universidad de Zaragoza.
2002-03: “A Practical Evaluation of Employee Productivity Using a Professional Data Base”. Raquel Ortega. Department of Business, University of Zaragoza.
2002-04: “La Información Financiera de las Entidades No Lucrativas: Una Perspectiva Internacional”. Isabel Brusca y Caridad Martí. Departamento de Contabilidad y Finanzas, Universidad de Zaragoza.
2003-01: “Las Opciones Reales y su Influencia en la Valoración de Empresas”. Manuel Espitia y Gema Pastor. Departamento de Economía y Dirección de Empresas, Universidad de Zaragoza.
2003-02: “The Valuation of Earnings Components by the Capital Markets. An International Comparison”. Susana Callao, Beatriz Cuellar, José Ignacio Jarne and José Antonio Laínez. Department of Accounting and Finance, University of Zaragoza.
2003-03: “Selection of the Informative Base in ARMA-GARCH Models”. Laura Muñoz, Pilar Olave and Manuel Salvador. Department of Statistics Methods, University of Zaragoza.
2003-04: “Structural Change and Productive Blocks in the Spanish Economy: An Imput-Output Analysis for 1980-1994”. Julio Sánchez Chóliz and Rosa Duarte. Department of Economic Analysis, University of Zaragoza.
2003-05: “Automatic Monitoring and Intervention in Linear Gaussian State-Space Models: A Bayesian Approach”. Manuel Salvador and Pilar Gargallo. Department of Statistics Methods, University of Zaragoza.
2003-06: “An Application of the Data Envelopment Analysis Methodology in the Performance Assessment of the Zaragoza University Departments”. Emilio Martín. Department of Accounting and Finance, University of Zaragoza.
2003-07: “Harmonisation at the European Union: a difficult but needed task”. Ana Yetano Sánchez. Department of Accounting and Finance, University of Zaragoza.
2003-08: “The investment activity of spanish firms with tangible and intangible assets”. Manuel Espitia and Gema Pastor. Department of Business, University of Zaragoza.
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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2004-01: “Persistencia en la performance de los fondos de inversión españoles de renta variable nacional (1994-2002)”. Luis Ferruz y María S. Vargas. Departamento de Contabilidad y Finanzas, Universidad de Zaragoza.
2004-02: “Calidad institucional y factores político-culturales: un panorama inter.-nacional por niveles de renta”. José Aixalá, Gema Fabro y Blanca Simón. Departamento de Estructura, Historia Económica y Economía Pública, Universidad de Zaragoza.
2004-03: “La utilización de las nuevas tecnologías en la contratación pública”. José Mª Gimeno Feliú. Departamento de Derecho Público, Universidad de Zaragoza.
2004-04: “Valoración económica y financiera de los trasvases previstos en el Plan Hidrológico Nacional español”. Pedro Arrojo Agudo. Departamento de Análisis Económico, Universidad de Zaragoza. Laura Sánchez Gallardo. Fundación Nueva Cultura del Agua.
2004-05: “Impacto de las tecnologías de la información en la productividad de las empresas españolas”. Carmen Galve Gorriz y Ana Gargallo Castel. Departamento de Economía y Dirección de Empresas. Universidad de Zaragoza.
2004-06: “National and International Income Dispersión and Aggregate Expenditures”. Carmen Fillat. Department of Applied Economics and Economic History, University of Zaragoza. Joseph Francois. Tinbergen Institute Rotterdam and Center for Economic Policy Resarch-CEPR.
2004-07: “Targeted Advertising with Vertically Differentiated Products”. Lola Esteban and José M. Hernández. Department of Economic Analysis. University of Zaragoza.
2004-08: “Returns to education and to experience within the EU: are there differences between wage earners and the self-employed?”. Inmaculada García Mainar. Department of Economic Analysis. University of Zaragoza. Víctor M. Montuenga Gómez. Department of Business. University of La Rioja
2005-01: “E-government and the transformation of public administrations in EU countries: Beyond NPM or just a second wave of reforms?”. Lourdes Torres, Vicente Pina and Sonia Royo. Department of Accounting and Finance.University of Zaragoza
2005-02: “Externalidades tecnológicas internacionales y productividad de la manufactura: un análisis sectorial”. Carmen López Pueyo, Jaime Sanau y Sara Barcenilla. Departamento de Economía Aplicada. Universidad de Zaragoza.
2005-03: “Detecting Determinism Using Recurrence Quantification Analysis: Three Test Procedures”. María Teresa Aparicio, Eduardo Fernández Pozo and Dulce Saura. Department of Economic Analysis. University of Zaragoza.
2005-04: “Evaluating Organizational Design Through Efficiency Values: An Application To The Spanish First Division Soccer Teams”. Manuel Espitia Escuer and Lucía Isabel García Cebrián. Department of Business. University of Zaragoza.
2005-05: “From Locational Fundamentals to Increasing Returns: The Spatial Concentration of Population in Spain, 1787-2000”. María Isabel Ayuda. Department of
DTECONZ 2006-02: P. Bachiller y M. J. Arcas
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Economic Analysis. University of Zaragoza. Fernando Collantes and Vicente Pinilla. Department of Applied Economics and Economic History. University of Zaragoza.
2005-06: “Model selection strategies in a spatial context”. Jesús Mur and Ana Angulo. Department of Economic Analysis. University of Zaragoza.
2005-07: “Conciertos educativos y selección académica y social del alumnado”. María Jesús Mancebón Torrubia. Departamento de Estructura e Historia Económica y Economía Pública. Universidad de Zaragoza. Domingo Pérez Ximénez de Embún. Departamento de Análisis Económico. Universidad de Zaragoza. 2005-08: “Product differentiation in a mixed duopoly”. Agustín Gil. Department of Economic Analysis. University of Zaragoza. 2005-09: “Migration dynamics, growth and convergence”. Gemma Larramona and Marcos Sanso. Department of Economic Analysis. University of Zaragoza. 2005-10: “Endogenous longevity, biological deterioration and economic growth”. Marcos Sanso and Rosa María Aísa. Department of Economic Analysis. University of Zaragoza. 2006-01: “Good or bad? - The influence of FDI on output growth. An industry-level analysis“. Carmen Fillat Castejón. Department of Applied Economics and Economic History. University of Zaragoza. Julia Woerz. The Vienna Institute for International Economic Studies and Tinbergen Institute, Erasmus University Rotterdam. 2006-02: “Performance and capital structure of privatized firms in the European Union”. Patricia Bachiller. Departamento de Contabilidad y Finanzas. Universidad de Zaragoza. Mª José Arcas. . Departamento de Contabilidad y Finanzas. Universidad de Zaragoza.