Residual State Factors, Policy Stability and Financial Performance Following Strategic Decisions by Privatizing Telecoms

We question previous research assuming that privatizing firm performance benefits from decreasing state ownership and the passage of time, both of which purportedly align principle-agent incentives promoting organizational decision-making that increases shareholder value. In response, we develop and test an alternative "credible" privatization framework proposing that: 1) residual state ownership positively affects shareholder response to strategic decisions by privatizing firms as it signals state support for managerial initiatives; 2) the passage of time since initial privatization negatively affects shareholder response to strategic decisions by privatizing firms as initial undertakings in support of the privatizing firm are reversed; and 3) that institutional policy stability moderates these two affects -greater stability obviates the need for residual state ownership and slows policy reversals over time. We find empirical support for our framework in event study analyses of cumulative abnormal returns ("CARs") associated with 196 major investments announced from 1986-2001 by 15 privatizing telecoms from around the world. State ownership effects on CARs are positive at 5-25% state equity levels but turn negative at higher ownership levels. CARs turn sharply negative within 1-2 years from initial privatization date. Increasing policy stability decreases positive residual state ownership effects, and reverses the precipitous drop in CARs over time. Results suggest support for our alternative credible privatization framework and the potentially positive role that residual state ownership can play in enhancing strategic decision-making and financial performance by privatizing firms, particularly in institutionally unstable environments.