This paper seeks to provide an answer to the following question: when and how does privatization work? Using a sample of 230 firms headquartered in 32 developing countries, we document a significant increase in profitability, efficiency, investment and output. Our analysis shows that the changes in performance vary with the extent of macro-economic reforms and environment, and the effectiveness of corporate governance. In particular, economic growth is associated with higher profitability and efficiency gains, trade liberalization is associated with higher levels of investment and output, while financial liberalization is associated with higher output changes. Further, control relinquishment by the government is a key determinant of profitability, efficiency gains and output increases. Finally, we find higher improvements in efficiency for firms in countries in which stock markets are more developed and where property rights are better protected and enforced. These results for a sample of developing countries differ from those reported in a contemporaneous study by D'Souza et al. [D'Souza, J., Megginson, W.L., Nash, R.C., 2001. Why do privatized firms improve performance? Evidence from developed countries. Unpublished working paper. University of Oklahoma] which focuses on developed countries. These diverging findings suggest that privatization in developing countries indeed obeys to particular constraints and has a dynamic of its own.

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.

We examine the postprivatization performance of 81 banks from 22 developing countries. Our results suggest that: (i) On average, banks chosen for privatization have a lower economic efficiency, and a lower solvency than banks kept under government ownership. (ii) In the postprivatization period, profitability increases but, depending on the type of owner, efficiency, risk exposure and capitalization may worsen or improve. However, (iii) Over time, privatization yields significant improvements in economic efficiency and credit risk exposure. (iv) We also find that newly privatized banks that are controlled by local industrial groups become more exposed to credit risk and interest rate risk after privatization.