Privatizing Telecoms and Residual State Influence on Financial Performance

Singapore Management University Research Paper Series

39 Pages Posted: 6 Dec 2004

See all articles by Burkhard N. Schrage

Burkhard N. Schrage

Singapore Management University

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Date Written: August 31, 2004

Abstract

We test competing theoretical perspectives explaining likely shareholder returns from material investment decisions announced by privatizing telecommunications firms ("telecoms") with varying levels of residual state ownership. A "principal-agent" perspective suggests that decrease in residual state ownership in privatizing telecoms leads to more positive shareholder returns. Over time, this effect increases. An alternative "credible" privatization perspective suggests that retention of substantial (though not controlling) residual state ownership leads to more positive shareholder returns, but only in the short run. Over time, this ownership effect fades quickly. We examine empirical support for these competing perspectives with an event study analyzing cumulative abnormal shareholder returns ("CARs") associated with 199 major investments announced from 1986-2001 by 15 privatizing telecoms domiciled in industrialized and emerging-market countries. In line with the principle-agent perspective, we find that residual state ownership is negatively related to CARs for telecoms from industrialized countries. Emerging-market telecoms may, however, exhibit a negative curvilinear trend between CARs and residual state ownership more in line with the credible perspective. Also in line with the credible perspective, we find a negative relationship between CARs and time since initial privatization for telecoms from emerging markets. The influence of residual state factors on privatizing enterprise performance is significant but sometimes contrasting in industrialized versus emerging-market settings. The credible perspective may merit closer attention among researchers and policy-makers interested in the privatizing enterprise management and investment, particularly in emerging markets.

Keywords: Privatization, ownership, performance, emerging markets

JEL Classification: L32, L33, L96, L21

Suggested Citation

Schrage, Burkhard N. and Vaaler, Paul M., Privatizing Telecoms and Residual State Influence on Financial Performance (August 31, 2004). Singapore Management University Research Paper Series. Available at SSRN: https://ssrn.com/abstract=626803 or http://dx.doi.org/10.2139/ssrn.626803

Burkhard N. Schrage (Contact Author)

Singapore Management University ( email )

50 Stamford Rd
Singapore, 178899
Singapore
+65 6828 0755 (Phone)
+65 6828 0777 (Fax)

HOME PAGE: http://www.business.smu.edu.sg/Faculty/management/burkhad_schrage.asp

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

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