Although governments are the majority shareholders in many of the world's largest and most important firms, we know very little about the role of the state as majority shareholder and the potential agency conflicts that exist between the state (as controlling shareholder) and the minority shareholder in state-owned enterprises (SOEs). Our study provides new insights regarding the private benefits that may be captured when the state is dominant shareholder (what we refer to as the “private benefits of state control”). We define the private benefits of state control as the political, social, or personal advantages that the controlling politician may be able to extract from the SOE. We identify firm-level and institution-level factors that may impact the amount of the private benefits of state control and present evidence that the private benefits of state control affect economic decision-making.

This study adds to the empirical evidence that privatization improves the performance of divested firms and offers preliminary evidence as to why these performance improvements occur. Using a sample of 129 share-issue privatizations from 23 developed (OECD) countries, we first document significant increases in profitability, efficiency, output, and capital expenditure following privatization. Our data indicate that ownership (both private and foreign), degree of economic freedom, and level of capital market development significantly affect post-privatization performance. A comparison to the findings of Boubakri et al. (2005) [Boubakri, N., Cosset, J., Guedmani, O., 2005. Liberalization, corporate governance, and the performance of newly privatized firms. Journal of Corporate Finance (this issue)] suggests that several determinants of post-privatization performance improvements differ between developed and developing countries.

This study compares the pre‐ and postprivatization financial and operating performance of 85 companies from 28 industrialized countries that were privatized through public share offerings for the period from 1990 through 1996. We document significant increases in profitability, output, operating efficiency, and dividend payments—and significant decreases in leverage ratios—for our full sample of firms after privatization, and for most subsamples examined. Capital expenditures increase significantly in absolute terms, but not relative to sales. Employment declines, but insignificantly. Combined with results from two previous, directly comparable studies, these findings strongly suggest that privatization yields significant performance improvements.

In this study, we employ the World Bank Enterprise Survey (WBES) data collected in 2002, 2005, and 2009 for 21499 firms from 27 Eastern European and Central Asian countries to examine firm-level growth constraints faced by privatized firms versus those faced by the originally (de novo) private firms. We find that the de novo firms experience significantly higher financial, corruption, and legal obstacles than the privatized firms. We further document that, even though faced with more obstacles in the business environment, the de novo firms outperform the privatized firms. One explanation is that the profit motive of the de novo firms is organic, whereas the profit motive of the privatized firms is acquired. The organic profit motive may be powerful enough for the de novo firms to overcome more difficulties in the business environment and excel. Our study is the first in the privatization literature to go beyond performance comparisons and examine firm-level growth constraints.