the performance of state-owned enterprises and newly ... · as seen from table 1, the privatization...

The Performance of State-Owned Enterprises and Newly Privatized Firms: Empirical Evidence from Egypt

Mohammed Omran

The Arab Academy for Science and Technology, and Arab Monetary Fund, Email: [email protected]

Current Address: Arab Monetary Fund, P.O. Box 2818, Abu Dhabi, United Arab Emirates Tel: + 971 2 6171756 Fax: + 971 2 6326454 Key Word: SOEs, Privatization, and Egypt JEL Classification: G32, L33

2

The Performance of State-Owned Enterprises and Newly Privatized Firms: Empirical Evidence from Egypt?

Abstract

Even though it is well documented that privatization leads to an improvement in the

performance of state-owned enterprises (SOEs) following divestiture, it is argued that most

existing literature do not consider the performance of control firms of similar pre-

privatization situations, i.e. the performance of SOEs. In this study, I use accounting-based

performance measures to evaluate the performance of newly privatized Egyptian firms

against the performance of SOEs. I document significant increase in profitability and

efficiency, and significant decline in leverage and employment, whereas output shows

insignificant change following privatization. Matching sample firms (privatized) to control

firms (SOEs), I document that privatized firms do not exhibit any significant improvement

in their performance compared with SOEs, which questions the benefits of privatization in

Egypt.

3

1. Introduction Privatization has been a major phenomenon over the past few decades, and researchers

continue to target it for both theoretical and empirical work. Given that most socialist and

communist economies from every region in the world -Eastern Europe, the ex-Soviet

Union, China, Latin America, Africa, and the Middle East- have recently started

implementing economic reform programs, the reduction in size of the public sector through

privatization has therefore become an important part of such programs.

Between 1960 and 1990 SOEs handled most of Egypt’s economic activity under the

direction of various ministries. Poor management and weak capitalization of the SOEs

inevitably had a negative effect on their efficiency and financial viability (Road, 1997). In

an effort to improve the Egyptian economy, Egypt launched a privatization program in

1991 as a part of its economic reform program. The first step in Egypt’s privatization

program was to cut off subsidies to SOEs, followed by removing them from direct

ministerial control (Field, 1995). In 1991 Egypt’s three hundred and fourteen SOEs were

grouped under twenty-seven holding firms (reduced to fourteen by 2001) responsible for all

the affiliates in a particular sector.

Under the government’s strategy for divestment of SOEs, three approaches were initially

undertaken: the first was to sell shares through the domestic stock market, the second was

to sell strategic stakes of shares to anchor investors through public auction and another was

to sell firms to employees shareholder associations (ESA) (McKinney, 1996). Besides these

approaches, liquidation of firms took place for those firms that suffered from a huge debt

burden and were not deemed economically viable. The number of the Egyptian privatized

firms, classified according to the privatization method of sale: majority initial public

4

offering (IPO), minority IPO, employee shareholder associations (ESA), and anchor

investors, can be seen in Table 1.

Insert Table 1 near here As seen from Table 1, the privatization program, which actually started in 1994, had a slow

beginning. However, in 1996 a new Cabinet was appointed and the privatization program

was accelerated. The new Cabinet began to spread the message regarding Egypt’s

privatization of SOEs and attracted international interest. To increase the supply of stocks

on the exchange, the government concentrated on full privatization in favor of partial

privatization; in turn, the value of privatized firms accelerated significantly. However, for

many economic reasons such as a shortage in liquidity, a foreign currency crisis, and a

negative performance of the Egyptian stock market, the privatization program has been

postponed until the Egyptian economic climate improves markedly.

Most previous empirical studies focus on comparing pre- and post-privatization financial

and operating performance of former SOEs, and they confirm that privatization, in general,

leads to a significant increase in profitability, efficiency, capital investment spending,

output, and dividend payout. In addition, a significant decrease in leverage is documented,

while there is no consensus as to the impact of privatization on the level of employment

(Megginson, Nash and Randenborgh (1994), Boubakri and Cosset (1998), and D’Souza and

Megginson (1999)). However, the results from such studies, and other related empirical

studies, could not determine how such performance could be attributed to the privatization

process itself since they do not consider a benchmark of control firms matched to their

sample firms. Boubakri and Cosset (1998) try to take into account that some performance

might be related to economy-wide factors; in turn, they use market-adjusted accounting

5

performance measures. Since their paper does not consider an industry performance

benchmark nor does it match privatized firms to control firms because of the limitation of

the data, this might, perhaps, arise the need for using such a methodology to ensure that a

firm’s financial and operating performances is related to privatization and not to other

factors apart from privatization.

My study tests the performance changes of privatized Egyptian firms after adjusting their

performance by using control matching group. . This paper could contribute to the existing

literature in two dimensions:

(i) Firstly, it looks at another part of the world (the Middle East and North Africa region),

which seems to have been neglected in the earlier literature. (ii) Secondly, the paper

evaluates the performance of the newly privatized Egyptian firms by taking into

consideration the performance of the SOEs. Given this fact, the analysis is not limited to

privatized firms only but is extended to measure the performance changes in SOEs versus

privatized firms of the same size and industry in order to better understand the performance

of privatized firms in light of the performance of SOEs.1 As Barber and Lyon (1996)

indicate, matching sample firms to control firms on the basis of industry, size, and past

performance will lead to well-specified test statistics, following their lead, I chose 54 SOEs

to serve as a control group for the privatized firms, based on industry2, size3 and past

1 Since privatization took place as a response to Egypt’s new economic climate (the country adopted a program of economic reform by late 1991), comparing pre- versus post-privatization performance without considering changes in economic policies would generate misleading results. 2 The industry-matched method is based on the fact that all SOEs prior to privatization are grouped in 14 holding companies according to their type of industry. In turn, for each individual privatized firm, a matched SOE is chosen from the same holding company. 3 As for the size-matched method, I measured size based on sales and assets. However, 43 SOEs are found to match privatized firms based on both sales and assets. For the sake of the space, I present only the results of data based on sales as a measure of size. Results from other data sets, based on assets, are found to be similar, but they are not reported here for the sake of space. However, they are available from the author upon request.

6

performance. However, I could not consider matching firms based on past performance

because of the limitation of the data, but an advantage of using SOEs is that their pre-

privatization conditions are identical to privatized firms conditions as both samples were

operating under the same polices, regulations, and management. Such a process allows me

to evaluate the relationship between privatization and performance by focusing on

comparing the performance of SOEs and privatized firms operating under identical

economic environment at the same time and of course, in the same market. However, due to

the fact that government continues to control firms in case of partial privatization, which

means that those firms can not realize benefits of privatization, I classify the sample firms

into fully privatized firms and partially privatized firms to show whether the performance

changes of these firms differ from SOEs according to the type of privatization.

By using 54 privatized firms with a matched number of SOEs, I show that, after the date of

privatization, both kinds of firms experience significant improvements in profitability and

efficiency, and significant declines in employment and leverage. However, using adjusted

data and considering the performance of SOEs, the results argue that in all measures apart

from employment, there are no significant differences in performance between privatized

firms and SOEs. These results, however, might question the benefit of privatization and

open the door for researchers to reconsider the previous results in the light of the empirical

findings of this paper.

2. Data Set

The data set for this study was determined by analyzing Egyptian firms that had been

privatized by 1998 and had at least 2 years of both pre- and post-privatization date. As seen

in Table 1, the total number of privatized firms reached 184 firms in February 2001.

7

However, excluding some types of privatization, namely: liquidations, asset sales, and

leases, this left only 111 firms. Since the financial year for SOEs ends on June 30th, firms

that were privatized after June 1998 were excluded because they do not have 2 years post-

privatization data, so at this point the sample contains 76 firms. Since a state owned

enterprise (SOE) is needed to serve as a control firm for each individual privatized firm,

based on industry and size, this process left us with fewer firms eligible for use in the

matching control group, precisely it generates 54 SOEs. So, the final sample size

compromises 108 firms: 54 privatized firms, in which 38 firms experience full privatization

and 16 firms partial privatization, and the other 54 firms represent the SOEs control group.

The Public Sector Information Center was the source of data for firms prior to privatization

as well as for the SOEs matching control group. The Egyptian Capital Market Authority

provided data for the privatized firms as they are listed on the stock exchange and

government regulations require that such firms disclose their annual financial data.

3. Methodology and Empirical Model The methodology of this paper considers many variables to allow for comparison between

pre-and post-privatization performances. It is expected that privatization will increase

profitability, operating efficiency, and output. Moreover, privatization might affect the level

of employment, and leverage. From selected literature, initial checklists of possible

variables, together with hypothesized increases or decreases, as predicted, are given below:

Profitability

Earnings before interest and tax (EBIT): (Increase) EBIT is deflated using the

appropriate consumer price index (CPI) values taken from the IMF’s International Financial

Statistics, and then deflated values are normalized to equal 1.00 in year 0 so other year

8

figures are expressed as a fraction of net income of the year of privatization. Sales

efficiency, net income efficiency, and real sales are computed similarly.

Return on sales (ROS): (Increase) Refers to EBIT divided by sales.

Return on assets (ROA): (Increase) Refers to EBIT divided by assets.

Return on equity (ROE): (Increase) Refers to EBIT divided by equity. Operating Efficiency

Sales efficiency (SALEFF): (Increase) Refers to sales per employee.

Income efficiency (INEFF): (Increase) Refers to EBIT per employee. Output

Real sales (SAL): (Increase) This variable has been calculated using the normalization

method after deflating sales for inflation.

Employment

Total employment (EMPL): (Decrease/Increase?) Refers to total number of employees.

Leverage4

Total debt to total assets (TDTA): (Decrease) Refers to total debt divided by total assets.

I calculate the mean performance for each variable prior to- and after the date of

privatization for each individual privatized firm and its matched SOE as long as I have at

least 2 observation windows prior to- and after the privatization date, excluding the year of

privatization (year 0)5; in turn, the minimum time interval data for each firm is five years

(from at least year –2 to year +2). Then I test for the significant changes in medians using

the Wilcoxon signed-rank test6, and I employ a proportion test to determine whether the

4 I use another proxy for leverage; long-term debt to equity, and I find a similar result. 5 I exclude year 0 because it includes both the public and private ownership phase of privatized firms. 6 In the meantime, I employ the T test for the significant changes in means, but since the test for normality is rejected for most variables, this would violate one of the important assumptions underlying the T test. In turn I

9

proportion (P) of firms experiencing changes in a given direction is greater than what

would be expected by chance, typically testing whether P = 0.5.

However, it is of interest to understand what would have been the performance of SOEs

following privatization had they not been divested and to determine whether all changes in

privatized firms are attributed to privatization or to other exogenous variables. To answer

this question, an approach of matching sample firms to control firms on the basis industry

and size is utilized. Fifty-four SOEs have been chosen to serve as a control group for

privatized firms. To overcome the problem of different past performance between

privatized firms and SOEs, I specify the following methods to measure the variables7:

1- Absolute Performance Change

To test for the significant difference in performance between privatized firms and SOEs, I

adjust the data to allow for making such comparisons so as not to be misleading. In this

method, I calculate the absolute change in mean performance for each firm; privatized and

SOE, as follows8:

1,, −−= titi PPAPC Equation (1)

Where

APC is the absolute performance change,

tiP , is the mean performance post-privatization period, and

report the non-parametric results only, given that Barber and Lyon, among others (1996) document that the non-parametric Wilcoxon test statistics are uniformly more powerful than parametric t-statistics. However, results from the parametric test are available from the author upon request but they should be treated with caution. 7 As a check on the robustness of these methods, I further employee two rigorous methods for additional adjustment to the data and find similar results. Details about these methods are given in the appendix. However, for the sake of space, I did not present the statistical tests and the findings from these methods, but they are available from the author upon request. 8 The same equation is applied to calculate the absolute performance change for SOEs by considering year 0 for each SOE as the year of privatization of the sample matched privatized firm, so we will have mean performance prior to the date of this year and the mean performance after the date of the same year.

10

1, −tiP is the mean performance pre-privatization period.

After completing this process, I employee the Mann-Whitney test for the significant

difference in medians9.

2-Relative Performance Change

Since the absolute change as a measure of performance is problematic if the measure of

performance itself is an absolute measure, I also calculate the post-privatization

performance relative to the pre-privatization for each firm, privatized and SOE, as follows:

1,1,, /)( −−−= tititi PPPRPC Equation (2)

Where

RPC is the relative performance change.

After calculating the RPC for each variable and each individual firm, I use the same

statistical techniques mentioned in the absolute performance change method.

4. Empirical Findings and Analysis

In this section, I report the empirical findings of the statistical analysis for the performance

changes in variables described in the previous section. The analysis considers both

privatized firms and SOEs (Table 2)10. The year 0 of a given control firm (SOE) would be

the year of privatization of its sample firm (privatized). I also utilize the Mann-Whitney test

to find out whether the performance change in privatized firms differs from that of SOEs.

9 Results reported for Mann-Whitney test are corrected for ties. 10 For some variables, the number of eligible firms is less than (54) because some variables of SOEs have negative signs. For instance, if equity of a given firm is negative, the return on equity would be insensible. Consequently, the variable for this firm is discarded; in turn, the matched sample firm has to be excluded as well to allow a more accurate comparison between privatized firms and SOEs. However, I employ statistical tests for all 54 privatized firms, and the results are similar for all variables apart from return on equity as this variable is significant at the 5 per cent level. Nevertheless, the author argues that such differences will not affect the final conclusion. Results of all privatized firms are not presented here but they are available from the author upon request.

11

However, this comparison was performed based on both absolute and relative performance

change methods (Table 3). Since the performance of privatized firms might differ according

to whether these firms experience full or partial privatization, I test for this proposition and

report the results in Tables 4 and 5.

Insert Tables 2 to 5 near here A. Profitability Changes

It is well documented theoretically and empirically that transferring the ownership from the

public to private sector should lead to an increase in profitability, as private management

would show a greater concern for profits compared to government. I measure profitability

by several proxies: earnings before interest and tax (EBIT), return on sales (ROS), return on

assets (ROA), and return on equity (ROE)11. Results from Table 2 reveal that all

profitability ratios, apart from ROE, increase significantly after divestiture for privatized

firms. For instance, the mean (median) EBIT, ROS, and ROA, increase from 0.73 (0.65),

0.15 (0.09), and 0.07 (0.06) to 1.07 (1.06), 0.18 (0.12), and 0.10 (0.09), respectively. All

statistical tests pass the critical values of significance at the 1 per cent for most cases. The

increase in the above-mentioned profitability measures is equally significant as low as 67

per cent and as high as 73 per cent of the sample firms. Such findings are consistent with

what Megginson et al. (1994), Boubakri and Cosset (1998) and D’Souza and Megginson

(1999) have documented. However, I find similar results for SOEs as EBIT, ROS and ROA

11 Net income might be affected by several variables: taking tax credits or carryforwards that do not relate to the current year’s performance; selling some assets prior to privatization and then reporting capital gains in income statements that would reflect an increase in net income but in an artificial way, and effects of levels of debt in the post-privatization. For these reasons, I consider calculating the above profitability ratios using profit before interest, taxes and extraordinary items to reflect the operating income of the firm, instead of using net income. However, results using net income are found to be similar with results using earnings before interest, tax, and extraordinary items. I do not report the statistical results here for the sake of space, but they are available from the author upon request.

12

exhibit significant increase in medians at the 10 per cent level for the first two ratios and at

the 1 per cent level for the latter one. The mean (median) EBIT, ROS and ROA of these

variables increases from –0.68 (0.78), -0.06 (0.02) and -0.033 (0.012) to 0.97 (0.96), -0.024

(0.032) and 0.014 (0.028), respectively. Such increases in these ratios are achieved by 60,

61 and 67 per cent of the sample firms, respectively. Nevertheless, ROE does not show any

significant change in their performance for both privatized firms and SOEs.

Even though it appears that privatized firms perform better compared with SOEs, as the

levels of significance are higher, I could not confirm whether such difference in

performance is significant or not; hence, I adjusted the data to test for this proposition.

I report equality of performance change results for privatized firms and SOEs in Table 3

using the absolute and the relative performance change methods, and I document

insignificant differences in performance between privatized firms and SOEs for all

profitability ratios, using the non-parametric Mann-Whitney test. As a check on the

robustness of these findings, I further test for the significant difference in performance

between fully privatized firms and their matched SOEs (Table 4) and partially privatized

firms and their matched SOEs (Table 5). The results from both tables confirm the above

findings, as there are no significant differences in performance between these sub-samples

at any level. The concern here is that privatized firms, whether they experience full or

partial privatization, tend to perform similar to SOEs, which makes the effect of

privatization upon firm performance hard to identify. .

B. Changes in Operating Efficiency

Since it is expected that privatization will provide the best allocation of resources, whether

financial, human, or technological, an improvement in operating efficiency is predicted

13

after divestiture. To control for this dimension, I use two ratios: inflation-adjusted sales per

employee (SALEFF) and inflation-adjusted income per employee (INEFF)12.

With regard to privatized firms, results in Table 2 show that there is no statistical significant

difference in SALEFF performance. However the mean (median) of INEFF increases from

0.71 (0.59) for the year 0 level during the pre-privatization period to 1.16 (1.1) for the year

0 level during the post-privatization period, which is significant at the 1 per cent level. This

improvement is achieved by 73 per cent of sample firms. The results tend to be partially

consistent with the literature, as Megginson, et al. (1994), Boubakri and Cosset (1998), and

D’Souza and Megginson (1999) document significant increases, not only, in INEFF but

also in SALEFF.

As far as SOEs are concerned, results indicate that both SALEFF and INEFF increase

significantly at different levels, and such increases are achieved by 65 per cent of sample

firms for both ratios. Such results might raise two issues: (i) the first is that SOEs seem to

perform equal to or better than privatized firms. (ii) The second point is related to the

performance changes of privatized firms, given the fact that the denominator for the above-

mentioned two ratios is the same (number of employees). Since the performance change in

SALEFF is not statistically significant, while it is highly significant for INEFF, an

interesting point here is that the differences between the performance changes in both ratios

would be due to the success of new management in controlling and reducing expenses more

than increasing sales as INEFF grows more compared to SALEFF.

Extending the analysis to show whether there is any significant difference between the

performance change of privatized firms and SOEs, the findings given in Tables 3, 4 and 5

12 I use EBIT to refer to income for the reasons mentioned in the previous footnote.

14

seem to be consistent with the above results. For both absolute and relative performance

change methods, significant differences in performance changes have been documented for

SALEFF. More precisely, the results suggest that SOEs perform better compared with

privatized firms as a whole at the 10 per cent level and at the 5 per cent level compared with

partially privatized firms, whereas no significant difference is observed compared with fully

privatized firms. Theses results imply that fully privatized firms perform better compared

with partially privatized firms in terms of SALEFF, and the significant difference in

performance between SOEs and privatized firms, for the full sample, is mainly due to the

significant difference in performance between SOEs and partially privatized firms.

However, no significant difference in performance change between the sub-samples has

been documented for INEFF.

C. Changes in Output

On important objective of privatization is to increase output of firms; hence, I test this

proposition by computing the average-inflation adjusted sales level for the pre-and-post-

privatization period as a proxy for output. The results show that there is no significant

difference in performance changes in output for either privatized firms or SOEs.

Surprisingly, just 43 per cent of privatized firms exhibit an increase in output and the rest

(57 per cent) show a decrease. Such results, in particular for privatized firms, tend to

contrast the expectation of an increase in output following privatization. However, this

result seems to be consistent with Boycko, Shleifer and Vishny’s (1996) argument, which

states that effective privatization will lead to a reduction in output since the government can

no longer entice management (through subsides) to maintain inefficiently high output

levels. Since I document a statistically insignificant change in SALEFF for privatized firms,

15

the insignificant change in output might be logically understandable. However, for SOEs,

previous results indicate a significant increase in SALEFF and an insignificant change in

output, so a remarkable point here is that the significant increase in SALEFF would be

entirely due to the reduction in the level of employment rather than to an increase in output.

Extending the analysis to compare the performance changes of privatized firms and SOEs

and using the absolute and relative performance change methods, insignificant differences

are found for the full sample as well as for the sub-samples.

D. Changes in Employment

One crucial issue in privatization is its effect on the level of employment after firms move

from government control to the private sector. Before discussing the statistical results of

this variable, it is worth mentioning that there is neither a theoretical or empirical consensus

with regard to the impact of privatization on the level of employment. On one hand,

privatization might lead to an increase in the level of employment since privatized firms

probably would target growth and expand their investment spending; they, in turn would be

able to produce more job openings. On the other hand, it is confirmed that most SOEs tend

to be over-staffed for many social reasons; hence, extensive layoffs would be expected

because of the new management style, since social aspects would not be considered in favor

of business objectives. I test for this variable by computing the average level of

employment prior to- and after-privatization. For both privatized firms and SOEs, I

document significant decrease in the level of employment at the 1 per cent level and this is

achieved by 72 and 87 per cent of the sample privatized firms and SOEs, respectively.

However, these results, for privatized firms, contrast Megginson et al. (1994) and Boubakri

16

and Cosset (1998), but they are consistent with LaPorta and Lo′pez-de-Silanes (1997) and

Ramamurti (1997), who document a significant decrease in the level of employment.

It might be understandable that privatized firms might decrease the level of employment for

economic reasons, but for SOEs it is not expected that the government would reduce the

number of employees since as it is more concerned about the social aspects than economics

reasons. To confirm whether such a significant decrease in the employment level is

identical for subsamples, results - using absolute and relative performance change

measures- show that there is a significantly larger decline in the number of employees in

SOEs compared to privatized firms. Again, these results would add further proof to the

previous findings that the significant difference in performance between privatized firms

and SOEs in terms of SALEFF is, mainly, due to the fact that SOEs cut the level of

employment more compared with privatized firms, but not to any differences in output.

However, it is quite interesting and unexpected to find that the level of employment in

SOEs drops significantly more compared to privatized firms. One explanation behind this is

that privatized firms are able to create more job opportunities compared to SOEs.

Additionally, since Egypt’s economic system is moving towards a market-oriented model,

the government is no longer willing to give priority to social concerns by recruiting more

people, given that SOEs are already over-staffed. Furthermore, the Egyptian government

offers a generous early retirement program to employees, who in turn take advantage of the

plan by establishing their own small businesses after retiring early from SOEs.

E. Changes in Leverage

A firm’s capital structure might change significantly in response to moving from the public

to private sector. It is argued that after privatization, firms will no longer have the

17

advantage of borrowing funds at a lower rate, but they will have the opportunity to access

the equity markets, domestically and internationally (Bradley, Jarrell, and Kim, (1984)). In

the light of that, debt ratio is expected to decline following privatization. To test for this

proposition, I measure changes in leverage by total debt to total assets (TDTA). For both

privatized firms and SOEs, I document significant decline at the 10 per cent level for the

first sample and at the 1 per cent level for the latter one.

It is also obvious that there is no significant difference in leverage changes between

privatized firms and SOEs for the full sample as well as for subsamples. . The results are

understandable for privatized firms, but the question here is how to explain the significant

decline in leverage ratio for SOEs. An argument is that the government would like to

prepare its SOEs for sale to investors; hence improving some accounting measures, such as

leverage, which would make firms more attractive for investors and would bring higher

selling prices to the government.

5. Summary and Conclusion

This study documents the critical performance changes of Egyptian firms that experienced

full or partial privatization from 1994 to 1998. Due to the fact that Egypt had adopted a

program of economic reform by late 1991, it is important to consider the possibility that

some of the performance changes of privatized firms might be attributed to economy-wide

factors, as a structural break in the economic environment, indeed, exists between the pre-

and the post-privatization period. To account for such a dramatic change in the Egyptian

economy, I do not rely only on unadjusted accounting performance measures, but I extend

the study and utilize adjusted account performance measures by matching sample

18

(privatized) firms (54 firms) to control (SOEs) firms (54 firms) with similar pre-

privatization situations.

As far as privatized firms are concerned, I document significant increases in profitability,

and operating efficiency, and significant declines in leverage and employment, whereas no

significant change in output is observed. For the same time period, I find that SOEs show a

similar trend in most performance measures as privatized firms. To less extent, I document

significant increases in profitability, but to greater extent, results show significant increases

in operating efficiency.

Most of my findings for privatized firms seem to be consistent with benchmark studies in

terms of changes in profitability, operating efficiency, and leverage. However, some other

results tend to contrast previous empirical findings in terms of employment and output, as I

document significant decreases for the first one and insignificant changes in the latter one.

Contrary to previous empirical studies, I extend my analysis by matching privatized firms

to control firms based on industry, size, and past performance. After adjusting the data to

allow for comparison of subsamples, I document no significant differences in performance

between privatized firms and SOEs in most accounting performance measures. However

some surprising results have been observed: SOEs show a significantly larger decline in the

level of employment compared with privatized firms; in the mean time, they show

significantly larger increase in sales efficiency.

Furthermore, as a check on the robustness of the above-mentioned results, I classify

privatized firms into two groups: fully privatized firms and partially privatized firms, and I

document that the difference in performance changes between fully privatized firms and

their SOE control group, and partially privatized firms and their matching group of SOEs

19

does not exist for most accounting measures. In fact, the results are similar to what is

documented for the full sample comparison, which means that the performance of both

types of privatized firms, regardless whether they experience full or partial privatization, is

similar

My empirical findings question the role of privatization since the adjusted data reveals that

privatized firms show an insignificant improvement in most accounting performance

measures compared with SOEs. Such results are very important since they make us re-think

previous empirical findings in the literature, as most of these studies employ unadjusted

data. However, the results of this paper might be inconclusive for many reasons: (i) The

control group (SOE) is usually less profitable and less efficient than privatized firms as

better firms used to be privatized firstly; in turn, SOEs can improve profitability and

efficiency more rapidly, so the deck might be stacked against privatized firms. (ii) My

second concern is the power of the statistical test as the non-parametric test has less power

compared to the parametric one. Hence, the findings of no significant difference in

performance between privatized firms and SOEs could simply be due to the low power of

the test and /or a small sample size. (iii) Thirdly, it might be argued that the evidence of this

study could be attributed to the fact that the Egyptian government efficiently restructures its

SOEs or manipulates their accounting data before selling them, and this is why these firms

show the same performance trend as privatized firms. If this is the case, a longer period of

time is needed before determining the specific impact of privatization on firm performance

and to show whether such improvements in SOEs would be sustainable and whether they

would match the performance of privatized firms. Nevertheless, with respect to these

findings and to the role of privatization in improving the economic situation of privatized

20

firms, at least privatization as a policy will assist in creating the motivation for private and

public firms to face future changes in the economic system.

21

References

Barber, B., and Lyon, J., (1996), "Detecting Abnormal Operating Performance: The Empirical

Power and Specification of Test Statistics", Journal of Financial Economics, 41 (3), 359-99.

Boubakri, N., and Cosset, J., (1998), "The Financial and Operating Performance of Newly-

Privatized Firms: Evidence from Developing Countries", Journal of Finance, 53 1081-1110.

Boycko, M., Shleifer, A., and Vishny, R., (1996), "A Theory of Privatization", Economic

Journal, 106, 309-19.

Bradley, M., Jarrel, G., and Kim, H., (1984), "On the Existence of Optimal Capital Structure;

Theory and Evidence", Journal of Finance, 39 (3) 857-78.

D’Souza, J., and Megginson, W., (1999), "The Financial and Operating Performance of

Privatized Firms During the 1990s", Journal of Finance, 54 (4), 1397-1424.

Field, M., (1995), "The Slow Road to Privatization", Euromoney, November 12-13.

LaPorta, R., and Lo′pez-de-Silanes, F., (1997), "Benefits of Privatization-Evidence from

Mexico", Private Sector, 10, 21-24.

McKinney, B. M., (1996), "Recent Development in Egyptian Investment Policies and

Programs, and Pending Reform Legislation" Middle East Executive Reports, 19 (7), 9-12.

Megginson, W., Nash, R.C., and Randenborgh, M., (1994), "The Financial and Operating

Performance of Newly Privatized Firms: An International Empirical Analysis", Journal of

Finance, 49 (2), 403-52.

., and J. Netter, (2001), "From State to Market: A Survey on Empirical Studies on

Privatization", Journal of Economics Literature, 39, 321-89.

Road, S., (1997), Investing in Egypt, (London: Committee for Middle East Trade, June).

Ramamurti, R., (1997), "Testing the Limits of Privatization: Argentine Railroads", World

Development, 25, 1973-93.

22

Appendix

Real performance and Relative Performance of Privatized Firms to SOEs:

Since I have a matched control SOE for each privatized firm (54), I calculate the real

performance of privatized firms using two methods as follows:

1- Using this method, I add the performance of each benchmark firm (SOE) to the pre-

privatization performance of its matching privatized firm, or deduct such performance from

the post-privatization performance as follows:

Firstly, I compute the expected performance of a given privatized firm and then deduct that

from its actual performance, and then I add the difference to the pre-privatization

performance to get the real post-privatization performance. The expected performance of a

given privatized firm is set to be equal to its past performance multiplied by one plus the

relative change in benchmark performance:

]/)(1[)( 1,1,,1,, −−− −+= tititititi PSPSPSPPE

Where:

)( ,tiPE is the expected performance of a given privatized firm,

1, −tiP is the mean performance for the pre-privatization period, and

1,, −titi PSandPS are the mean benchmark performances for SOEs prior to- and after the date

of privatization, respectively.

Then I calculate the real post-privatization performance as follows:

1,,,, )]()([)( −+−= titititi PPEPAPR

Where:

)( ,tiPR is the real post-privatization performance, and

23

)( ,tiPA is the actual post-privatization performance.

However, another formula could be applied by considering that the real post-privatization

performance should be set to equal the difference in relative performance change between a

given privatized firm and its benchmark SOE plus one multiplied by the pre-privatization

performance; as follows:

]}/)(/)[(1{)( 1,1,,1,1,,1,, −−−−− −−−+= titititititititi PSPSPSPPPPPR 2- The second method is to compare the performance of privatized firms relative to \ their

benchmarks performance (SOEs) prior to- and after privatization as follows:

1,1,1, /)( −−− −= tititi PSPSPRPPRD

Where:

RPPRD is the relative pre-privatization difference between a privatized firm and its control

firm, and

tititi PSPSPRPOPRD ,,, /)( −=

Where:

RPOPRD is the relative post-privatization difference between a privatized firm and its

control firm.

Since I calculate )( ,tiPR in method (1) or RPPRD and RPOPRD in method (2), the

significant difference in medians using the Wilcoxon signed-rank test and the proportion

test could be employed.

24

Table 1 Number of Privatized Firms in Egypt

The table shows the number of privatized firms classified by the method of sale, and year-by-year. I also present the value of privatized firms for each year and the total until February 2001.

Year Full Privatization Partial Privatization Yearly Total

Anchor Investor

Majority IPO* ESA** Liquidation Minority

IPO* Asset Sales Leases Number Value***

1990 – – – 1 – – - 1 n.a. 1991 – – – 3 – – – 3 n.a. 1992 – – – 1 – – – 1 n.a. 1993 – – – 6 – – – 6 n.a. 1994 3 - 7 2 2 – – 14 664 1995 1 1 3 2 7 – – 14 1215 1996 3 13 – 1 6 1 - 24 2791 1997 3 14 3 3 2 1 2 28 3396 1998 2 8 12 6 1 3 - 32 2361 1999 8 – 5 7 – 2 6 28 2784 2000 5 1 0 3 0 6 10 25 2476 Until Feb.2001 1 0 0 2 – 3 2 8 n.a. Total 26 37 30 37 18 16 20 184 15687

Source: - The Egyptian Ministry of Public Enterprise Sector, (1998), Privatization Program Performance from the Start to February 2001, (Cairo: MPES). * Initial Public Offering ** Employees shareholders association. *** Millions of Egyptian pound (Current rate 1 L.E.=0.26 US$)

Table 2 Test for Significance Change in Performance for Privatized Firms and State-Owned Enterprises (SOEs)

The table shows results for the whole sample. I employ two techniques to test for the significant changes in performance of privatized firms and SOEs after the date of privatization. The Wilcoxon signed-rank test is employed to test for the significant change in median values. The proportion test is employed to determine whether the proportion of firms experiencing changes in a given direction is greater than what would be expected by chance. I provide the mean (median) values of each variable for the pre and post-privatization period, the mean (median) change for each variable after versus before privatization, and Z statistics with their P-values. The number of useable firms is provided with the number of firms that experience an increase or decrease after privatization. I also provide the percentage of firms that changed as predicted with Z statistics and their P-values. For the Wilcoxon signed-rank test, I list the results under the null hypothesis that the median = 0.0 and the alternative hypothesis is that the median is greater than 0.0, and this is valid for all variables except for employment and leverage where the null hypothesis is that the median = 0.0, and the alternative hypothesis is that median is less than 0.0. Privatized Firms State-Owned Enterprises (SOEs)

No. Firms Mean Mean Mean Z-Statistic for

Difference Percentage

of Firms that Z-Statistic for Significance No. Firms Mean Mean Mean

Z-Statistic for Difference

Percentage of Firms that

Z-Statistic for Significance

Variables "Increased" Before After Change in Median Changes as of Proportion "Increased" Before After Change in Median Changes as of Proportion (Decreased) (Median) (Median) (Median) (P-Value) Predicted (P-Value) (Decreased) (Median) (Median) (Median) (P-Value) Predicted (P-Value) Profitability Earnings before interest and tax ( 40 0.727 1.07 0.343 2.57 0.73 2.69 40 -0.68 0.97 1.65 1.46 0.60 1.31 (EBIT) "29" (0.645) (1.06) (0.40) (0.005) (0.004) "24" (0.78) (0.96) (0.19) (0.07) (0.096) (11) (16) Earnings before interest and tax 54 0.149 0.183 0.034 1.71 0.67 2.31 54 -0.06 -0.024 0.036 1.61 0.61 1.80 to sales (ROS) "36" (0.09) (0.117) (0.028) (0.04) (0.01) "33" (0.02) (0.032) (0.014) (0.06) (0.036) (18) (21) Earnings before interest and tax 54 0.07 0.10 0.03 3.13 0.67 2.31 54 -0.033 0.014 0.047 2.4 0.67 2.31 to assets (ROA) "36" (0.06) (0.092) (0.025) (0.0009) (0.01) "36" (0.012) (0.028) (0.017) (0.008) (0.01) (18) (18) Earnings before interest and tax 34 0.305 0.33 0.025 0.60 0.56 0.51 34 0.12 0.06 -0.06 -0.51 0.44 0.51 to equity (ROE) "19" (0.303) (0.317) (0.031) (0.25) (0.30) "15" (0.141) (0.154) (-0.006) (0.70) (0.70) (15) (19) Operating Efficiency Sales efficiency (SALEFF) 54 0.927 1.06 0.133 0.66 0.54 0.41 54 1.04 1.46 0.42 2.87 0.65 2.04 "29" (0.97) (1.01) (-0.016) (0.25) (0.66) "35" (0.97) (1.12) (0.11) (0.002) (0.021) (25) (19) Income efficiency "before 40 0.71 1.16 0.45 3.00 0.73 2.69 40 -0.60 0.26 0.86 1.76 0.65 1.65 interest and tax" (INEFF) "29" (0.59) (1.1) (0.505) (0.001) (0.004) "26" (0.80) (1.06) (0.53) (0.046) (0.052) (11) (14) Output Real sales (SAL) 54 0.962 0.94 -0.022 -0.67 0.43 0.95 54 1.06 1.11 0.05 -0.46 0.46 0.68 "23" (0.998) (0.95) (-0.05) (0.75) (0.83) "25" (1.03) (0.96) (-0.06) (0.62) (0.75) (31) (29) Employment Total employment (EMPL) 54 3337 3136 -201 -3.80 0.76 3.85 54 3486 2798 -688 -6.11 0.87 5.31 "13" (2632) (2226) (-166) (0.0001) (0.0001) "7" (2616) (2152) (-461) (0.0000) (0.0000) (41) (47) Leverage Total debt to total assets (TDTA) 54 0.235 0.195 -0.04 -1.33 0.61 1.80 54 0.44 0.37 -0.07 -2.69 0.65 2.04 "19" (0.208) (0.138) (-0.03) (0.09) (0.036) "19" (0.41) (0.20) (-0.08) (0.00) (0.021) (33) (35)

26

Table 3 Comparison of Performance Changes Between Privatized Firms and SOEs (Absolute and Relative Performance Change Methods)

The table shows the result of comparison of performance changes between privatized firms and their control firms (SOEs) using the non-parametric Mann-Whitney test. However, for the relative

performance change method, I calculate the absolute performance change for each firm; privatized and SOE as follows: 1,, −−= titi PPAPC where APC is the absolute performance change, tiP ,

is the mean performance post-privatization period, and 1, −tiP is the mean performance pre-privatization period. The relative performance change for each firm is calculated as follows:

1,1,, /)( −−−= tititi PPPRPC where RPC = Relative Performance Change, tiP , = Mean performance post-privatization period, 1, −tiP = Mean performance pre-privatization period. The non-

parametric Mann-Whitney test compares the medians of each sample by combining the two samples, sorting the date from smallest to the largest, and then comparing the average ranks of the two samples

in the combined data. The null hypothesis is that the median of sample one equals the median of sample two versus the alternative hypothesis that the median of sample one does not equal the median of

sample two. I provide the average rank for each sample and the P-value to show whether there is a statistically significant difference between medians of each sample.

Absolute Performance Change Method Relative Performance Change Method

Median Median

Categories

Proxies Number of firms Privatized Firms SOEs

Av-Rank (P-Value)

Number of firms Privatized Firms SOEs

Av-Rank (P-Value)

Earnings before interest and tax (EBIT)

40

0.40

0.15

41-40 (0.81)

33

0.29

-0.13

36-31 (0.24)

Earnings before interest and tax to sales (ROS)

54

0.03

0.014

55-54 (0.97)

33

0.19

-0.002

35-32 (0.47)

Earnings before interest and tax to assets (ROA)

54

0.025

0.016

55-53 (0.78)

33

0.25

0.13

35-31 (0.43)

Profitability

Earnings before interest and tax to equity (ROE)

34

0.03

-0.006

36-33 (0.47)

32

0.10

-0.25

34-31 (0.65)

Sales efficiency (SALEFF)

54

-0.016

0.11 49-60 (0.09)

54

-0.014

0.11

50-61 (0.09)

Operating Efficiency Income efficiency "before

interest and tax" (INEFF)

40

0.51

0.51 40-41 (0.85)

30

0.32

0.16

35-32 (0.58)

Output Real sales (SAL)

54

-0.05

-0.11 55-54 (0.92)

54

-0.055

-0.10

56-53 (0.65)

Employment Employment (EMPL)

54

-166

-459 65-44 (0.00)

54

-0.076

-0.16

63-45 (0.003)

Leverage Total debt to total assets (TDTA)

54

-0.033

-0.068 58-51 (0.23)

49

-0.25

-0.24

50-49 (0.94)

27

Table 4 Comparison of Performance Changes Between Fully Privatized Firms and SOEs (Absolute and Relative Performance Change Methods)

The table shows the result of comparison of performance changes between fully privatized firms and their control firms (SOEs) using the non-parametric Mann-Whitney test. However, for the relative








Median Median

Categories

Proxies Number of firms Full Privatization SOEs

Av-Rank (P-Value)

Number of firms Full Privatization SOEs

Av-Rank (P-Value)


30

0.41

0.08

32-30 (0.63)

23

0.28

-0.14

26-21 (0.25)


38

0.03

0.002

41-37 (0.45)

23

0.05

-0.04

25-21 (0.38)


38

0.02

0.01

40-38 (0.70)

23

0.25

0.11

25-22 (0.35)

Profitability


24

0.03

-0.006

25-24 (0.72)

22

0.025

-0.12

23-22 (0.79)


38

0.001

0.44 37-40 (0.52)

38

001

0.46

37-40 (0.53)

Operating Efficiency Income efficiency "before


30

0.53

0.56 31-30 (0.89)

23

0.32

0.06

26-22 (0.34)


38

-0.05

-0.14 40-37 (0.57)

38

-0.055

-0.13

40-36 (0.45)


38

-214

-532 44-34 (0.04)

38

-0.13

-0.19

43-34 (0.08)


38

-0.033

-0.068 41-36 (0.36)

34

-0.21

-0.20

36-33 (0.52)

28

Table 5 Comparison of Performance Changes Between Partially Privatized Firms and SOEs (Absolute and Relative Performance Change Methods)

The table shows the result of comparison of performance changes between partially privatized firms and their control firms (SOEs) using the non-parametric Mann-Whitney test. However, for the relative








Median Median

Categories

Proxies Number of firms Partial Privatization SOEs

Av-Rank (P-Value)

Number of firms Partial Privatization SOEs

Av-Rank (P-Value)


10

0.40

0.36

10-11 (0.79)

10

0.41

0.16

10-10 (0.97)


16

0.03

0.07

15-18 (0.32)

10

0.30

0.78

10-11 (0.62)


16

0.03

0.04

16-17 (0.90)

10

0.41

0.35

10-11 (0.91)

Profitability


10

0.04

-0.008

11-10 (0.52)

10

0.20

-0.38

11-10 (0.73)


16

-0.08

0.30 12-20

(0.012)

38

-0.07

0.32 37-40

(0.017) Operating Efficiency Income efficiency "before


10

0.49

0.40 10-11 (0.62)

10

0.49

0.87

10-11 (0.68)


16

-0.05

0.12 14-18 (0.22)

16

-0.05

0.12

15-19 (0.27)


16

-123

-385 22-11 (0.00)

16

-0.02

-0.11

22-11 (0.00)


16

-0.077

-0.18 18-15 (0.40)

15

-0.21

-0.20

13-17 (0.23)

the performance of state-owned enterprises and newly ... · as seen from table 1, the privatization...

Documents