Does Government Ownership Affect the Cost of Debt? Evidence from Privatization
42 Pages Posted: 25 Jun 2007 Last revised: 8 Mar 2011
Date Written: March 13, 2010
We explore whether retained government ownership affects the cost of debt for fully and partially privatized companies during 2001-2005 using 811 observations of bond-specific and firm-specific panel data. On average, a one percentage point decrease in government ownership is associated with an increase in the credit spread, used as a proxy for the cost of debt, by one-half of a basis point, suggesting the importance of implicit government guarantees. However, post-privatization firm improvements allow fully privatized companies to enjoy lower credit spreads than partially privatized firms. These results indicate the cost of a lengthy privatization process where ownership uncertainty and bondholder-shareholder conflicts force debt pricing upwards. The presence of a golden share serves to delineate the state’s role in partially privatized firms, resulting in a lower cost of debt. In fully privatized companies, however, this remnant of government control is associated with higher spreads. Credit ratings, firm profitability, and euro-denominated bonds exhibit consistent negative associations with the rate at which companies can borrow funds from the capital markets. A treatment effects model accounting for characteristics that drive governments’ ownership retention corroborates our results. Among other factors governments seem more likely to retain stakes when the unemployment rate is higher and when the national GDP is growing.
Keywords: Privatization, Government Ownership, Bonds, Cost of Debt
JEL Classification: G32
Suggested Citation: Suggested Citation