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Working Paper

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We test competing theoretical perspectives explaining likely shareholder returns from material investment decisions announced by privatizing telecommunications firms (telecoms) with varying levels of residual state ownership. A principal-agent perspective suggests that decrease in residual state ownership in privatizing telecoms leads to more positive shareholder returns. Over time, this effect increases. An alternative credible privatization perspective suggests that retention of substantial (though not controlling) residual state ownership leads to more positive shareholder returns, but only in the short run. Over time this ownership effect fades quickly. We examine empirical support for these competing perspectives with an event study analyzing cumulative abnormal shareholder returns (CARs) associated with 199 major investments announced from 1986-2001 by 15 privatizing telecoms domiciled in industrialized and emerging-market countries. In line with the principle-agent perspective, we find that residual state ownership is negatively related to CARs for telecoms from industrialized countries. Emerging-market telecoms may, however, may exhibit a negative curvilinear trend between CARs and residual state ownership more in line with the credible perspective. Also in line with the credible perspective, we find a negative relationship between CARs and time since initial privatization for telecoms from emerging markets. The influence of residual state factors on privatizing enterprise performance is significant but sometimes contrasting in industrialized versus emerging-market settings. The credible perspective may merit closer attention among researchers and policy-makers interested in the privatizing enterprise management and investment, particularly in emerging markets.


Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis

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