Do State and Foreign Ownership Affect Investment Efficiency? Evidence from Privatizations

44 Pages Posted: 28 Nov 2014 Last revised: 29 Nov 2014

See all articles by Ruiyuan (Ryan) Chen

Ruiyuan (Ryan) Chen

West Virginia University

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

He (Helen) Wang

Renmin University of China - School of Business

Date Written: August 2014

Abstract

Using the high-power setting of newly privatized firms from 64 countries, we examine the relationship between ownership type and firm-level capital allocations as captured by the sensitivity of investment expenditure to investment opportunities. Consistent with our predictions that government and foreign institutional owners are associated with different levels of information asymmetry and agency problems, we find strong and robust evidence that government (foreign) ownership weakens (strengthens) investment-Q sensitivity, thereby increasing investment inefficiency (efficiency). Moreover, we find that the relation between foreign ownership and investment efficiency is stronger when governments relinquish control and country-level governance institutions are weaker. Overall, our findings highlight the important role of ownership type in determining firms’ investment behavior and efficiency.

Keywords: privatization, investment efficiency, corporate governance

JEL Classification: G32, G34, L33

Suggested Citation

Chen, Ruiyuan and El Ghoul, Sadok and Guedhami, Omrane and Wang, He, Do State and Foreign Ownership Affect Investment Efficiency? Evidence from Privatizations (August 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2531447

Ruiyuan Chen

West Virginia University ( email )

1601 University Avenue
Morgantown, WV 26505
United States

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

He Wang

Renmin University of China - School of Business ( email )

Beijing
China

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