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Performance Differential Between Private and State-Owned Enterprises: An Analysis of Profitability and Leverage

Publication | May 2019
Performance Differential Between Private and State-Owned Enterprises: An Analysis of Profitability and Leverage

Privatization could improve the performance of public firms.

We investigate empirically the relationship between ownership identity and the performance of firms in terms of profitability and solvency. Using cross-sectional data covering over 25,000 firms worldwide and by employing various empirical methods, we find robust support for the inferior performance of government enterprises over privately owned firms. Specifically, state-owned enterprises (SOEs) tend to be less profitable than privately owned enterprises. However, they appear to be more dependent on debt for their financial needs and are, thus, better leveraged. Additionally, SOEs are more labor intensive and have higher labor costs. Thus, evidence from this study could be interpreted to mean that privatization could improve the performance of public firms. However, a study over a longer period is needed before these results can be considered conclusive.

WORKING PAPER NO: 950