While a large body of literature documents that agency conflicts resulting from the separation between ownership and control affects various firm decisions (e.g., firm restructuring, divestment, and mergers), an issue that remains largely unexplored is the impact of shareholders’ identity on corporate risk taking, a fundamental driver of long-term economic growth (Acemoglu and Zilibotti, 1997; Baumol et al., 2007). Understanding how ownership identity affects risk-taking behavior is important as the recent wave of government bailouts to contain the international financial crisis resulted in an expanding role of the state in troubled firms. In this paper we provide the first evidence on the link between risk-taking behavior and the identity of owners in newly privatized firms (NPFs hereafter), focusing primarily on two types of owners: the government as a residual owner, and foreign share holders.
The privatization context is an opportune setting to investigate the link between ownership identity and corporate risk-taking because of the dramatic change in ownership structure that occurs around divestiture. Also, exploring corporate risk-taking in the privatization context is all the more relevant since privatizations are implemented primarily to foster firm’s growth and productivity, both driven by the managerial risk choices in corporate investment decisions (John et al., 2008).
Privatization can be defined as the deliberate sale by a government of state-owned enterprises (SOEs hereafter) or assets to private economic agents. Such reforms are often implemented to restructure SOEs that tend to underperform privately owned firms. The shift in ownership and control to private owners accompanying privatization changes the organization’s prevailing incentive structure, with greater emphasis placed on profits and efficiency (Boycko et al., 1996; Shleifer and Vishny, 1997). The shift in incentives resulting from privatization is thus likely to affect the risk-taking behavior and subsequent performance of NPFs. The effect of ownership on postprivatization corporate risk-taking is likely to depend on how control is allocated across types of owners during the privatization process.
The purpose of this paper is to answer the call of John et al. (2008) for research that examines the relation between stakeholder governance and corporate growth as driven by risk-taking. While prior research focuses on the institutional determinants of risk-taking (John et al., 2008; Acharya et al., 2009 and Griffen et al., 2009) or on the link between risk-taking and share holder diversification/concentration (Faccio et al., 2009 and Paligirova, 2010) for publicly traded firms, we take an alternative perspective and advance the literature on two fronts: we focus on the impact of shareholder identity on investment policy and we consider the special case of privatized firms. More specifically, in this study we narrow the gap in the literature by examining the risk-taking behavior of the government and foreign owners in NPFs.
