The Relation Between Government Ownership and Firm Performance: Evidence from Cross-Country Datasets

Headnote

ABSTRACT

Based on data from 47 countries, this study makes a significant and original contribution to understanding of the complicated corporate governance issues of government ownership. The major findings are that there is a U-shaped relation between government ownership and firm performance, and that unlike other types of ownership, controlling government ownership is not endogenous. The study on the effect of multiple blockholders when government is the largest shareholder is also the first such study in the academic literature.

JEL classifications: G32, G34, F39

Keywords: government ownership; firm value; blockholder

(ProQuest: ... denotes formulae omitted.)

I.INTRODUCTION: GOVERNMENT OWNERSHIP

Government ownership (or state ownership; "state" and "government" are used interchangeably in this paper) in and of corporations has existed throughout history, but has varied greatly in scale. For example, due to concerns over the market failures of the 1930s, there was a great wave of nationalization across the Western world. Another nationalization wave commenced in newly independent countries in the 1950s. Subsequently the role of government ownership began to be questioned, and starting around the early 1980s, privatization gained worldwide momentum. However, during the Global Financial Crisis, beginning with the subprime mortgage crisis in 2007, renewed concerns about market failures prompted many western governments to renationalize many big firms; when financial markets stabilized, these nationalized firms went through the privatization process again. Nevertheless, academic literature shows that government ownership remains common in both developed and developing countries worldwide (Liu, 2017). Furthermore, government ownership in both emerging and advanced economies has extended their global reach in recent years (The Economist, 2012).

Most previous studies of government ownership focus on comparing corporate performance before and after privatization and the economic development function of government ownership; the role of government ownership in firm performance from the viewpoint of corporate governance is rarely explored. In contrast, this study examines the relations between government ownership and firm performance (the terms "firm performance" and "firm valuation" are used interchangeably below) from the corporate governance perspective, focusing on listed firms with at least one government blockholder.

In the United States (US), the Securities and Exchange Commission requires the disclosure of "control entities" that hold 5% or more of firm equity. Many studies in the US and other countries have focused on blockholders,...