Ownership change , institutional development and performance

This paper conducts a crosscountry empirical study of the impact of institutions and agency conflicts on ownership reforms and their implications for changes in performance and efficiency. We examine two main questions. First, we evaluate the effects of certain property rights and institutional quality measures on performance and efficiency. We find that property rights and contracting rights protections contribute to stronger post-privatization performance. Second, we ask whether sectors undergoing changes from state to private ownership exhibit better or worse performance than sectors remaining public. We find an insignificant effect of privatization in ordinary least squares estimates and a negative short-term effect after correcting for endogeneity of privatization decisions that disappears in the long run, consistent with recently privatized enterprises facing short-run costs of restructuring and the challenges of mitigating agency and expropriation concerns. In the eighties and early nineties policy makers and academics endorsed privatization reforms that have since been conducted in many developed and emerging market countries. More recently attention has shifted to the varying outcomes of privatization programs, some of which were implemented with little to moderate success and enveloped in accusations of nepotism and expropriation of property rights. Separately, law and finance research has highlighted the role of institutions for capital market development and firm performance (for example, La Por-ta et al. (1998) and subsequent work). In an earlier paper, we have examined the effects of access to capital on the performance of privatized enterprises (see Knyazeva et al., 2009). In this paper we focus on the performance and efficiency implications of property rights in the context of the outcomes of privatization reforms. Our methodology addresses crucial selection concerns inherent in the analysis privatization decisions. In addition , we conduct a telecom industry study to evaluate alternative dimensions of operating efficiency and analyze the effects of property rights on the attributes of the actual privatization. We conclude with a discussion of policy implications for the design of privatization reforms. First, we examine the determinants of post-privatization performance focusing on the role of institutions and accounting for self-selection into the privatization group. We hypothesize that property rights protections are instrumental to post-privatization performance as they both protect recently privatized firms against government expropriation and enhance new owners' incentives to restructure the firm and create strong intra-firm monitoring mechanisms. We find significant positive property rights effects on operating performance. A one standard deviation increase in the index of property …