Paper Prepared for Presentation at:

 

30th Research Conference on Communication,

Information and Internet Policy

 

 

 

INNOVATION AND CREATIVE

DESTRUCTION IN EMERGING MARKETS:

 

The Impact Of State Commitments

On Privatizing Telecoms

 

 

September 28-30, 2002

Alexandria, Virginia, USA

 

 

 

Lee W. McKnight

Associate Professor

School of Information Studies

Syracuse University

Syracuse, NY 13244

Tel (315) 443-6891

Email lmcknigh@syr.edu

 

Paul M. Vaaler

Associate Professor

&

Burkhard N. Schrage

Doctoral Candidate

The Fletcher School of Law & Diplomacy

Tufts University

Email paul.vaaler@tufts.edu

Email burkhard.schrage@tufts.edu

 

Raul L. Katz

Vice President

Booz-Allen & Hamilton, Inc.

Email katz_raul@bah.com

 

 

 

 

INNOVATION AND CREATIVE DESTRUCTION IN EMERGING MARKETS:

Assessing The Impact Of State Commitments On Privatizing Telecoms

 

Abstract

 

Research on processes of “creative destruction” has characteristically focused on technological innovation and its simultaneously value-enhancing as well as value-destroying implications for firms and markets.  Less attention has been paid to institutional innovation though it may have even more dramatic results for firms and markets.  Transfer of ownership and control from state to private hands induces change in telecom firm incentives and behaviors, but the short- to medium-term performance implications for shareholders are in dispute. 

 

Research on enterprise privatization suggests that less state ownership and control as well as greater exposure to market forces increase enterprise value by aligning more closely its incentives and behaviors with those of profit-maximizing shareholders.  An alternative view suggests a different relationship between states, markets and privatizing enterprises:  Performance may improve when the state retains a substantial equity stake and commits to substantial intervention in relevant markets of privatizing enterprises.  Such state policies signal to shareholders the state commitment to ensure adequate returns on their risky investment, thus, also engendering investor interest in other state assets up for privatization.  These competing views imply different relationships between privatized enterprise performance, on the one hand, and state ownership and market experience –what we call temporal distance from the date of initial privatization-- on the other.  Less state ownership and greater temporal distance improve privatizing enterprise performance according to the mainstream view, but may detract from such performance according to the alternative view.

 

We examine empirical support for these competing views with a sample of 15 privatizing telecoms drawn from both industrialized and emerging-market countries, We collect data on the cumulative abnormal returns (“CARs”) to shareholders associated with 205 major M&A, joint venture and alliance transactions announced between 1986 and 2001.  Results indicated strong support for trends predicted by the alternative view, particularly for privatizing telecoms from emerging-market countries.  In accord with the mainstream view, CARs for announcements by privatizing telecoms from industrialized telecoms are negatively related to the percentage of state ownership.  By contrast and in support of the alternative view, CARs for announcements by privatizing telecoms from emerging-market countries are positive, statistically significant and substantial.  Also consistent with the alternative view, we find that the effect of temporal distance on CARs is negative, and in the case of announcements by privatizing telecoms from emerging-market countries, statistically significant and substantial.

 

Together, these results suggest that the alternative view may merit closer attention by researchers, particularly for privatizing enterprises in emerging-market settings.  For the broader issue of institutional innovation and creative destruction, our results suggest that state policies and practices supporting gradual as well as credible privatization policies may mitigate investor concerns and increase the long-term benefits accruing to firms and markets from the transfer of assets and people from state to private hands.

 

1.         Introduction

 

Research on processes of “creative destruction” has characteristically focused on technological innovation and its simultaneously value-enhancing as well as value-destroying implications for firms and markets .[1]  Less attention has been paid to institutional innovation though it may have even more dramatic results for firms and markets.[2]  In the context of the recent, globally pervasive institutional innovation of telecommunications enterprise (“telecoms”) privatization, transfer of ownership and control from state to private hands induces change in incentives and behaviors, though the short- to medium-term performance implications of that change for shareholders are in dispute.  This paper will challenge the prevailing wisdom, and posit a more damaging relationship between the state and  telecoms firms than had heretofore been anticipated.                                                Research on enterprise privatization suggests that less state ownership and control as well as greater exposure to market forces will increase enterprise value by aligning more closely its incentives and behaviors with those of profit-maximizing shareholders.   An alternative research stream, suggests a different relationship between states, markets and privatizing enterprises:  Performance may improve when the state retains a substantial equity stake and commits to substantial intervention in relevant markets of privatizing enterprises.   Such state policies signal to shareholders the state commitment to ensure adequate returns on their risky investment, thus, also engendering investor interest in other state assets up for privatization.  

 

This paper examines the impact of privatization-related factors on international investment decisions taken in the last 15 years by privatizing telecommunications enterprises (“telecoms”) from industrialized and emerging-market[3] countries worldwide.  As scholars from law (e.g., Coffee, 1999), finance (e.g., Megginson, 1994; 1998; Megginson and Netter, 2001), management and public policy (e.g., Guislain, 1997; Dyck, 2001) and elsewhere point out, the last two decades of the 20^th century witnessed the transfer of approximately one thousands of enterprises, millions of employees and billions of dollars in enterprise value from state to private hands in industrialized and emerging-market countries globally.[4]  It has promoted nothing less than an institutional revolution set on toppling an old telecoms regime characterized by state ownership, integrated services with simple and predictable pricing schemes, predictable returns for shareholders and other organizational stakeholders, and predictable, state-sanctioned protection from competition by would-be rival firms. 

These competing views imply different relationships between privatized enterprise performance, on the one hand, and state ownership and market experience –what we call temporal distance from the date of initial privatization-- on the other.   Less state ownership and greater temporal distance improve privatizing enterprise performance according to the mainstream view, but may detract from such performance according to the alternative view.

Telecoms privatization promises the emergence of a new regime given enterprises wider latitude to rise or fall based on their own strategic choices over which markets to serve, which technologies to adopt, how to price services to different consumer groups, and how to react to entry by competitors.  As more countries embrace this transformative process, the remaining hold-outs come under increasing pressure from peers, international organizations and international capital markets to abandon the old regime and get on the telecoms privatization bandwagon.

We characterize the transformative process of telecoms privatization as a form of “institutional creative destruction” in the spirit of Joseph Schumpeter’s (1934; 1939; 1943) oft-repeated short-hand for describing cycles of technological innovation followed by competitive imitation and their economic implications for firms and economics.  As articulated in the 1930’s and 1940’s by Schumpeter himself, or as revived and re-articulated by neo-Schumpeterians in the 1980’s and 1990’s (e.g., Nelson and Winter, 1982; Heertje and Perlman, 1990; Cohen, 1995; Harris, 1998), the “carrying out of new combinations” of factors and products results in the creative destruction of old products and firms through competition and imitation.  Recent research on the creative destruction process in telecoms (e.g., McKnight and Lehr, 1998; Lehr and McKnight, 2000; McKnight and Boroumand, 2000) has focused on technological innovation and its potentially negative as well as positive implications for incumbent and new-entrant firms.  For example, Internet-based telephony technology allows a new class of domestic and foreign computer equipment and software, as well as start-up telecoms, to invade incumbents’ traditional voice communications market segments and destroy incumbent enterprise value. At the same time, however, growth of Internet-based data traffic along the existing backbone of incumbent enterprises provides new avenues for revenue growth.

Like transformative processes wrought by the emergence of Internet-based technologies, institutional transformation wrought by telecoms privatization worldwide also promises both value-creating and value destroying opportunities.  But the nature of technological shifts is surely not instantaneous:  Incumbent telecoms like AT&T in the US have experienced substantial problems in profitably transforming their businesses to a digital wireless, broadband Internet and cable media technologies.  Institutional innovations related to privatization also raise questions of how quickly telecoms can be transformed and how telecom performance for shareholders and others is likely to be affected during the transformation.

We characterize the research on privatization in law, economics, management and public policy as offering two quite different answers to the questions posed directly above.  According to what we call a “mainstream” view espoused by Shleifer and Vishny (1998) and others, two privatization-related factors are important to follow.  First, enterprise transformation from state-run and oriented to privately-run and oriented enterprise is directly related to the extent of residual state ownership and control over the enterprise as well as to the length of time the enterprise has operated in the market as a privatizing concern.  State divestment allows the organization to focus on profit maximization rather than a panoply of private profit goals preferred by shareholders and public welfare goals preferred by state owners.  It also permits the development of corporate governance structural links to ensure the efficient use of enterprise assets by management, directors, shareholders and, ultimately other capital market participants willing to wrest control of the enterprise in the “market for corporate control.”  State ownership is, therefore, negatively related to privatizing enterprise performance.  Second, length of time since initial enterprise privatization –what we call “temporal distance”[5]— should be positively related to privatizing enterprise performance.  With temporal distance, the privatizing enterprise can solidify governance links, attract investment and other skills necessary to transform corporate behaviors consistent with its new goals, thus, again serving shareholder interests.

A less often raised “alternative” view on privatization articulated primarily by Perotti (1995, 2002) suggests different effects on the performance of privatizing telecoms related to state ownership and temporal distance.  First, rather than speedily decreasing the state’s ownership stake in the privatizing enterprise, this alternative view suggests a gradual decrease in the longer term, perhaps, even high levels of continued state ownership in the short to medium term.  From this alterative view, state ownership signals, perhaps, skeptical investors that the state is committed to some minimal level of privatizing enterprise performance lest the state, too, suffer along with private shareholders.  The percentage of state ownership in a privatizing enterprise may tend, therefore, to be positively related, or at least, less negatively related to enterprise performance compared to the mainstream view.  Second, and also in contrast with the mainstream view, the alternative view suggests that temporal distance from the initial date of telecoms privatization is likely to have a negative impact on performance.  No matter what the state may be willing to do on behalf of a privatizing enterprise in order to signal favorably to investors, it is difficult to bind the state’s will to following through with its commitments over the long term.  State policies intervening in the market on behalf of the enterprise may last only as long as the next change in government, or the next budget shortfall.  Thus, the temporal distance of a privatizing enterprise should be associated with the steady pull-back of initial state support, with shareholders increasingly anxious about the loss of the state’s performance guarantee, and, perhaps, with more volatile enterprise performance.  This alternative view clearly contrasts with the mainstream view regarding the nature and performance impact of state-related factors on privatizing enterprises.

Our study examines the evidence supporting these competing views in context of 15 privatizing telecoms from industrialized and emerging-market countries, and their shareholder reactions to 205 announcements of major international M&A, joint venture and alliance transactions taking place between 1986 and 2001.  While recent reviews of the privatization literature note a well-developed empirical research on the operating performance of privatizing enterprises in industrialized and emerging-market countries (e.g., Megginson and Netter, 2001), there is surprising little empirical research based on financial (shareholder) performance measures[6] and none to date examining shareholder returns linked to specific transactions taken by privatizing telecoms in particular.  Using descriptive and regression analyses, we assess relationships between the abnormal returns associated with these announcements and the state ownership and temporal distance attributes of these privatizing telecoms. 

In brief, we find rather weak support for mainstream view linking shareholder returns to lower levels of state ownership and greater temporal distance.  By contrast, we find strong support for the alternative view linking shareholder returns to higher levels of state ownership and less temporal distance, particularly in case of shareholder returns following announcements by privatizing telecoms from emerging-market countries.  These findings and others have important implications for academic research, professional practice and public policy formulation related to enterprise privatization generally and to the ongoing privatization of telecoms in emerging-markets particularly. 

We discuss these implications and future research in the conclusion of this study.  The remainder of this study is organized into five additional sections.  Section 2 immediately below summarizes background on previous privatization practice and research, and provides more detailed exposition of mainstream and alternative views on enterprise privatization and performance.  Section 3 articulates the alternative mainstream and alternative hypotheses for empirical investigation.  Section 4 details the methods used to implement the investigation including the empirical models, specific test statistics for assessing support for mainstream and alternative views, model estimation approaches, data sources and sampling approach.  Section 5 reports the results from descriptive, regression and related analyses of the sample.  Section 6 concludes the study with discussion of the central results, their various implications, study limitations and future research directions.

1.         Privatization Background:  Previous Practice and Empirical Research

The application of privatization policies during the last two decades has enjoyed global scope both in industrialized and emerging-market countries.  Several researchers have chronicled the progress of these policies on a country-by-country basis including Guislain (1997) and Megginson (1998; 2002).  In the industrialized world, for example, French governments in the mid-1980s and again in the mid-990s privatized more than 30 companies including such state-controlled icons as auto-maker Renault and France Telecom.  The Japanese experience with privatization since the 1980s saw the largest enterprise sell-off in the world to date when NTT was sold to shareholders in 1987 and 1988.  The subsequent spin-off of NTT’s cellular division, NTT Do-Co-Mo, in late 1998 instantly created the third largest company in terms of market capitalization on the Nikkei; NTT without Do-Co-Mo remained the largest (Fox et al., 2002).  The US experience with privatization in the 1980s also saw a substantial transfer of assets to private hands though many of these transfers involved state and local government-owned or controlled rather than federal government-owned or controlled assets (Vernon, 1988).  While not a formal privatization, the break-up of the regulated private telephone giant, ATT, in 1984 represented a fundamental change in US telecoms industry structure, and spurred a wave of new entries in local and long-distance voice, data and cable media segments previously thought to be better-served by a single dominant supplier.  Research on the privatization experience in smaller developed countries such as Belgium (Vincent, 1995), Sweden (Prokopenko, 1995) and New Zealand (Duncan and Bollard, 1992) suggests that the movement from state- to market-oriented principles was no less dramatic.

The privatization phenomenon found its way to emerging-market countries starting in the late-1980s, and became more widespread in the 1990s.  In Latin America, Chile, Argentina and Mexico embarked on privatization programs earliest and perhaps most ambitiously in terms of the number of enterprises and dollar-value sold (Guislain, 1997; LaPorta and Lopez-de-Silanes, 1997).  In Central and Eastern Europe, privatization efforts in the Czech Republic, Hungary and Poland (Borish and Noël, 1996) and Russia (Boycko et al., 1995) have received substantial attention while policies undertaken in Bulgaria, Romania (Lhomel, 1993) and countries of the former Soviet Union (Rozenfelds, 1993; Joskow et al., 1994; OECD, 1995) have, perhaps, received less coverage.  Megginson and Netter (2001) hold that the privatization phenomenon in Sub-Saharan Africa is particularly under-reported, even though research by Kerf and Smith (1996) and others note substantial progress and future potential. Here again, we see that early privatization of state-owned telecoms in developing countries have at least two important effects.  They deepen local capital markets by providing additional share or voucher market liquidity.  They also signal a commitment by the state to carry through future privatizations in other infrastructural industries such as electricity, transportation and water (Guislain, 1997).

Stanbury (1994) suggests that emerging-market countries should have led rather than followed the lead of industrialized countries in implementing privatization programs in the 1980s and 1990s.  Fiscal concerns were more acute in emerging-market countries compared to industrialized countries and the burdening of maintaining state-owned or controlled enterprises more onerous.  Ramamurti (1992) echoes this point by showing that countries running higher budget deficits, accruing more foreign debt, and experiencing greater productive inefficiency in the administration of state-owned enterprises—a description of many emerging-market countries in the 1980s and 1990s—are more likely to implement privatization policies.  Despite their predisposition to embrace privatization policies, emerging-market countries may be stifled in the implementation of such policies because of the absence of key factors including professional management expertise, capital, or a stable legal and regulatory framework.  Research by Galal et al. (1994) highlight the small absolute size of national economies and slower economic growth rates of many developing countries as potentially limiting factors in the successful implementation of state privatization programs.  At a minimum, such country-level, industry- (regulatory) and enterprise-specific contingencies explain varying degrees of success in privatization programs across emerging-market countries in Latin America, Central and Eastern Europe and elsewhere.

The Mainstream View 

Almost as soon as privatization policies were implemented, researchers sought to understand whether and why privatized enterprises performed differently.  In these streams of research we can discern the development of mainstream and alternative views on performance in privatizing enterprises.  After early research by Caves and Christenson (1981) in Canada, and Yarrow (1986) and Vickers and Yarrow (1988) in the UK suggested that privatized enterprises were no more productively efficient than their nationalized counterparts, a steady flow of empirical research led by Megginson and his collaborators (Megginson et al., 1994; D’Souza and Megginson, 1999; Megginson and Netter 2001) established that, for a range of countries and industries, shifts from state to private ownership followed by decreasing state-owned equity were associated with superior operating returns, employee productivity and turnover in either top-management teams, directorial boards or both over time.  This corpus of empirical research, summarized most recently and comprehensively in Megginson and Netter (2001) provides the main supporting evidence for the mainstream view that decreasing state ownership and increasing temporal distance are central to organizational change and value creation on privatizing enterprises.

Many of these observed changes in privatizing enterprise behavior and performance are justified in terms of the re-alignment of enterprise stakeholder incentives, particularly the incentives of enterprise owners (principals) and enterprise managers (agents) (Jensen and Meckling, 1976; Holmström, 1979). As Shleifer and Vishny (1998), Hart et al. (1994, 1997) and others contend, private ownership immediately provides strong incentives for managers to innovate new products and markets and create value for the firm and its shareholders.  Where managers and the directorial boards overseeing them fail in this mission, wealth-maximizing shareholders can replace them.  And where shareholders fail the market for corporate control will lead to a transfer of shares to more vigilant holders willing to pay more.  Timely, substantial post-privatization turnover in management and directors, as well as enhanced employee productivity and firm performance are consistent with this principal-agent perspective so central to the mainstream view. 

According to the mainstream view, foreign investment by privatizing enterprises speeds the transformative process from state- to private shareholder-orientation.  Kogut (1996) suggests that the positive contribution of foreign investment results from the greater access it provides privatizing enterprises to more sophisticated individuals and capabilities.  Because foreign investment frequently involves a transfer of equity to foreign individuals and institutions, there is an added beneficial effect in the form of better monitoring of enterprise managers.  These different factors raise the probability that the enterprise will be able to draw on a broader international menu of organizational practices associated with higher performance. 

This may undermine the domestic state’s role in guiding privatized enterprises; on the other hand, it also eventually endows the privatizing enterprise with a broader portfolio of competencies outside the control of the state.  Indeed, foreign investment policies undertaken by privatizing enterprises may even have the principal purpose of simply raising the costs of state interference in enterprise affairs.  States may become more hesitant to impose their political agendas on newly-privatized enterprises if they anticipate a backlash from the foreign investment community (Guislain, 1997).

 

 

The Alternative View 

Though contrasting in its key conclusions about the impact of state ownership and temporal distance on privatizing enterprise performance, the alternative view draws on many of the same theoretical perspectives.  Conclusions drawn from Perotti’s (1995) model of “credible privatization” took issue with mainstream views espousing rapid state divestment and predicting increasingly wealth-maximizing enterprise behavior and performance over time.  Principal-agent assumptions in the model about the inability of shareholders (principals) to monitor and properly motivate managers (agents) in the privatizing enterprise led to two insights.  First, the sale of equity in such enterprises might be discounted to reflect the still developmental stage of corporate governance mechanisms in these enterprises.  Directors, private shareholders and the market for corporate control back-stopping all of them may function quite inefficiently if at all.  As Dyck (2001) points out, such governance problems may be particularly acute in many emerging-market countries.  Without strong “private governance chains” to constrain top management opportunism, shareholders would demand a steep discount on the price of privatizing enterprise equity refuse to invest at all (Dyck, 2001).

A second and related insight drawn from Perotti’s (1995) model and central to the alternative view suggests that state divestment of ownership should be gradual rather than immediate.  The state would, therefore, remain as a substantial shareholder in the privatizing enterprise in the short- to medium-term.  With retention of substantial state ownership (but with effective control in the hands of enterprise managers), the state would communicate to anxious private shareholders an intent to share in their economic fate and, thus, ensure minimal enterprise performance standards.  This may follow from state oversight of managerial agents complementing private shareholder oversight.  It might also take the form of beneficial state intervention in the privatizing enterprise’s various market relationships.  Examples include state allocation of preferred landing rights to privatizing airlines, guarantees on long-term debt carried on privatizing electricity generators, or, as is often the case with telecoms, guarantees limiting competitive entry into lucrative market segments (Guislain, 1997).  Whether by providing additional oversight or by intervening in market relationships to ensure some minimal standard of performance, state investment and related commitments may assuage private shareholder concerns about privatizing enterprise performance in the near term.

We limit this conclusion to the near term because of the inherently problematic nature of state commitments in a privatization context.  Since privatization equity sales represent a particularly acute form of complex and, therefore, incomplete contractual arrangement, there may be substantial opportunity for the state to renegotiate shareholder property rights in the enterprise ex post (Schmidt, 1996).  Given the state’s unique position as both a party to and frequently, judge overseeing such agreements, incentives to trim back shareholder rights in enterprise assets may be particularly great.  Perotti (1995) notes that state commitments to shareholder rights may be positively related to the stock of state-owned enterprises still waiting to be privatized.  As that stock dwindles, the state’s “cost” of retreat from initial commitments lessens.

For Ramamurti (2001), this process of state retreat from initial commitments represents a contemporary form of the obsolescing bargain phenomenon originally developed by Vernon (1966) to explain foreign direct investment negotiation and agreement between multinational corporations and host governments in the developing world.  For Emmons (2000) the resulting tendency to renegotiate property rights is central to understanding enterprise privatization’s “evolving bargain” between state and firm.  Again, the state’s tendency to pull back from initial commitments may be most acute in emerging-market countries where institutional development regarding the rule of law and respect for property rights and private enterprise are less well-developed (Murtha and Lenway, 1994), where political business cycles make such a pull-back attractive to an elected incumbent government official seeking to retain office (Schipke, 2001 and Schmidt, 2000).  In these and related contexts, privatization and post-privatization development policies are less likely to be sustained to the detriment of shareholder confidence and enterprise share value (Perotti and Laeven, 2002).

Empirical evidence on shareholder returns for privatizing enterprises has generally supported the mainstream view to date, with cross-country studies in Dewenter and Malatesta (2001), Megginson et al. (1999) and Bortolotti et al. (2001) finding positive abnormal returns over time and a negative association between the abnormal returns and the percentage of state ownership.  Indeed, Bortolotti et al.’s (2001) study focused specifically on 31 national telecommunication companies in 25 countries that were fully or partially privatized through public share offering between 1981 and 1998.  They find that by almost any financial or operating measure, the performance of these companies improves significantly, due both to shifts in ownership and control from state to private hands and to the de-regulatory measures.  Arguably, however, the methodology used in Bortolotti et al. (2001) and other previous studies examined links between enterprise privatization and shareholder returns only “in the aggregate” rather than in the context of specific material decisions taken by enterprise management.  This study seeks to complement this macro view of the privatizing enterprise’s overall performance trend.  It provides a more focused micro view of shareholder assessments around specific and material decisions taken by privatizing telecoms.  By this approach, we gain important additional insight on the value creating and destroying behavior of the privatizing enterprise as well as factors important to mainstream versus alternative views driving such behavior.

3.         Hypotheses for Empirical Analysis

Our review of the privatization literature generally, and the mainstream and alterative views on it specifically, lead to the two sets of competing hypotheses stated below.  Consistent with the mainstream view we hypothesize that:

H1a: The percentage of state ownership will be negatively related to shareholder returns associated with a privatizing telecom investment decisions.

 

H2a:  Temporal distance will be positively related to shareholder returns associated with privatizing telecom investment decisions.

 

As we indicated above, the mainstream view anticipates the prospective benefits to enterprise decision-making of less state ownership and more temporal distance from state control.  It anticipates the speedy development of enterprise incentives and corporate governance institutions to implement shareholder-wealth-maximizing strategies effectively.  These mainstream view assumptions and hypotheses seem best suited to the US, the UK and other industrialized countries with well-developed share markets, corporate governance systems and property rights regimes.

By contrast, state ownership and temporal distance are predicted to have opposite effects on shareholder returns associated with privatizing telecom investment decisions:

H1b: The percentage of state ownership will be positively related (or show no relation at all) to shareholder returns associated with a privatizing telecom investment decisions.

 

H2b:  Temporal distance will be negatively related to shareholder returns associated with privatizing telecom investment decisions

 

The alternative view carries with it skepticism regarding the effectiveness of still-developing enterprise incentives and corporate governance structures.  Indeed, there seems also to be concern in this view for the clarity, consistency and enforceability of still-developing property rights.  State participation in this context provides a partial and temporary palliative for privatizing enterprise managers and their shareholders.  These alternative view assumptions and hypotheses seem best suited to Brazil, Hungary, Thailand and other emerging-market countries with still-developing share markets, corporate governance systems and property rights regimes.

 

4.         Methodology

Given the focus on financial performance associated with specific, material decisions taken by privatizing enterprise management, we chose an event study methodology, which uses share price or asset price changes to assess the performance implications of organizational decision-making.  It is used primarily in the finance field, but has been increasingly applied to business strategy, accounting, law, organizational behavior and marketing research questions (McWilliams and Siegel, 1997).

Empirical Models

 We use two empirical models to assess our four hypotheses.  Consistent with standard event study methods equation (1) is used to estimate cumulative abnormal returns to shareholders related to privatizing telecom investment events.

(1)            

 

In equation (1), the subscripts i indicates the privatizing telecom and j is an investment event counter of the event.

The dependent variable, CAR, designates the cumulative abnormal returns measured according to the methodology laid out above.  We calculate CAR in equation (1) by two approaches.  First, we follow Brown and Warner’s (1985) standard event study methodology.  We identify an investment event j, record its date as t = 0, and use daily data on the stock market returns for the privatizing telecom i from t = -200 to t = -10.  These data permit estimates of expected shareholder returns over the investment event window of observation.  The returns are expected to follow the equation: 

E(r_it) = α_i + r_mt

where E(r_it) is the expected stock return of privatizing telecom i on day t, r_mt is the corresponding daily market return on the equal-weighted S&P 500 index and α_i is an intercept. For the privatizing telecom, its specific abnormal returns are calculated as:

AR_it = r_it – E(r_it)

which is the difference between the actual returns to privatizing telecom shareholders and the broader market returns over the same day in investment event window.  Cumulative abnormal return (“CARs”) simply add up these daily abnormal returns over the entire investment event window:

.

We use two-, three- and five-day windows to measure this market-based CAR.  Given this short window, both straight market measures and market measures with various adjustments discussed in Brown and Warner (1980) are not expected to be significantly different.

We use the same different investment event window lengths to measure CAR based on an alternative mean adjusted model.  Instead of considering stock market returns before the event as a predictor of expected privatizing telecom shareholder returns during the investment event window, we take the average stock returns of the telecom itself before the event.  Again, we designated the event date as t = 0, and use daily data on the stock returns from t = -100 to t = -10 in order to estimate the mean adjusted return model:

E(r_it) = α_i + r_it

where E(r_it) is the expected stock return of privatizing telecom i for investment event j, on day t; however, r_it is now the corresponding daily stock return of privatizing telecom i in the run-up to the investment event window.  α_i is again the intercept.[7]

The independent variables of central interest in equation (1) concern the level of privatizing telecom’s percentage of state ownership and its temporal distance from the initial date of privatization.  The variable, percstate, measures the percentage of equity held by the state at the end of the year of each investment event.  The term, zeromon, is the number of months between the date of initial privatization at the date of the investment event.  Since we have hypothesized that over time there is a convergence between formerly state-owned private enterprises over time, we take the natural log of zeromon, which has the effect of attributing greater weight to investment events closer to the date of initial privatization.  We also interact percstate and zeromon with each other and with a dummy variable emgmkt which assumes the value 1 if the firm is domiciled in an emerging market and 0 otherwise.  Interaction with the emerging-market dummy permits us to assess differences in state ownership and temporal distance effects between privatizing telecoms from industrial versus emerging-market countries.

The right-hand side of equation (1) includes several controls for company-specific factors that may also explain shareholder returns associated with an investment event.  Following previous event studies examining M&A or JV transactions (e.g., Grover,  2001,  Fuller et al. 2002, Park et al., 2002) equation (1) also controls for size (the natural log of sales), measured as the company revenues in US$, and profitability (roa) measured as company operating income divided by net assets in US$.    We also control explicitly for one country-level variable thought to affect CAR related to investment events, annual change in the percentage of GDP comprised by public (government) expenditure ( pubexpgpd).  This variable captures possible effects on shareholder returns linked to the change in overall state involvement in the economy.  It is measured as the difference of the percentage in the year of an investment event less the percentage in the previous year.  It is expected to have a negative sign.

Equation (1) also includes other controls including dummies for privatizing telecoms (Sw), years (Sy), and investment event types in our sample.  While the company and year dummies are straightforward, the investment event dummies merit brief explanation.   For data on investment events, we used the Securities Data Corporation’s Mergers & Acquisitions (“M&A”) Database (SDC, 2002), which provides comprehensive coverage of mergers, acquisitions (both as acquirer and target), seasoned equity offerings, joint ventures (“JVs”) and strategic alliance (“Alliance”) announcements.  As additional controls, therefore, we include three different investment event dummies, eventJV, eventMA (where the company is the acquirer) and target (where the company is the target).  Alliance events are the omitted category. 

In order to check for robustness of results obtained from the multivariate regression analysis, we estimate a second model which has the identical independent variables to equation (1), but a different dependent variable, abpos, a 0-1 indicator of whether an investment event resulted in a positive or negative cumulative abnormal return to the privatizing telecom shareholders over the observation window.  We define this dummy variable as

With abpos, equation (2) below permits assessment of the effects state ownership and temporal distance may have on shareholder returns independent of the magnitude of such returns.  It considers instead the trends in the frequency of favorable (positive) investment event returns.

 

(2)                

Turning to our four hypotheses, equations (1) and (2) facilitate straightforward tests.  Hypotheses 1a and 2a make mainstream view predictions that privatizing telecoms will take investment decisions resulting in higher (more frequently positive) CARs as the percentage of state ownership decreases and temporal distance increases.  This implies a negative coefficient sign on percstate and a positive coefficient sign on log(zermon).  In terms of the each equation, the test statistics are:

H1a:    β₁<0     and       H2a:    β₂>0

This prediction is challenged by the alternative view of privatization, which predicts positive coefficient sign on percstate and a negative coefficient sign on log(zermon).  The test statistics are:

H1b:    β₁>0     and       H2b:    β₂<0

An interesting subsidiary analysis interacts percstate and log(zermon) with the the emerging market country indicator (emgmkt).  The impact of state ownership and temporal distance may be different for privatizing telecoms from emerging-market countries suited to alternative view assumptions versus those from industrialized countries suited to mainstream assumptions.  If so, then the coefficient sign on percstate*emgmkt interaction should be positive relative to the coefficient sign on percstate alone, which represents state ownership impact for privatizing telecoms from industrialized countries.  Similarly, the coefficient sign on log(zermon)*emgmkt interaction should be negative relative to log(zermon) alone.  This reduces to the test statistics:  β₄>0 and β₅<0.

 

Estimation Strategy

Previous empirical research using event study models suggests many different approaches for estimating models described above.  For the model using CARs (1), sign-tests provided the earliest approach (e.g., Dolley 1933), but over the decades from the early 1930s until the late 1960s the level of sophistication of event studies increased.  In the late 1960s seminal studies by Ball and Brown (1968) and Fama et al. (1969) introduced the methodology that is essentially the same as that which is in use today.[8]  We estimate model (1) using a generalized least squares estimator, which for our sample of privatizing telecom events includes robust standard errors to correct for possible heteroskedasticity and clustering on each privatizing telecoms.

We estimate equation (2) using a probit model, which estimates:

 

where Ф is the standard cumulative normal distribution.  As with the estimators in (1), we use robust standard errors and adjust for clustering on each privatizing telecom.  To aid interpretation of our results from estimation of the probit model, we also report in Table 8, column (4) the first derivative of the probit coefficients obtained ().  This calculation (dprobit) gives us a sense of each independent variable’s marginal effect on the probability of positive CARs after announcement of an M&A, JV or strategic alliance by a privatizing telecom.

Data Sources and Sample

To obtain our sample of privatizing telecoms for study of shareholder returns associated with their investment decisions, we turned to the “Telecom/Data Networking” category of Bank of New York’s Depository Directory (Bank of New York, 2002).  This directory lists all firms that have issued depository receipts (“DRs”) in the US, whether they are traded on regulated exchanges or on over-the-counter and whether they are sponsored or not.  By limiting our data to privatizing telecoms with DRs in the US, we are able to assess shareholder returns for firms from different countries with a common currency ($) and against a single (US) stock market index of returns.

We then sampled from these data firms operating in the fixed-line telecommunications business, with a history of state ownership or effective state control, and having experienced either the sale of former state-owned equity or the release from de facto control of such equity by the state since 1980.  This reduced the sample to 18 privatizing telecoms, 15 of which were previously wholly-owned by the state, and three of which had de jure private private owners but were under de facto state control (i.e., Telecom Italia, Telefónica de España and Philippine Long-Distance Telephone Company).  We noted the date of initial sale of equity, either through private placement or public offering of shares, material asset sale, voucher distribution or related means as the date of initial privatization for the 15 previously state-owned telecoms.  For the remaining three telecoms, we followed the methodology in Vaaler (2001) and noted their date of initial privatization as the date of fixed-line telecom operation deregulation, which, in each case shifted de facto control to private owners.

 From this group of 18, we eliminated non-operating (corporate holding company) privatizing telecoms and those for which there was no data on DR prices from the Center for Research in Security Prices database (CRSP, 2002).  Our final sample reported in Table 1 comprised 15 privatizing telecoms, 11 of which were domiciled in industrialized countries (i.e., British Telecom, Deutsche Telekom, France Telecom, Hellenic Telecom, KPN (Netherlands), New Zealand Telecom, Nippon Telephone & Telegraph, Portugal Telecom, TDK (Denmark), Telecom Italia and Telefónica de España) and four of which came from emerging-market countries (Korea Telecom, Philippine Long Distance Telephone Company, Rostelecom (Russia) and Teléfonos de Mexico).  Dates of initial privatization ranged from 1984 (British Telecom) to 1997 (France Telecom and Rostelecom), with the majority undergoing initial privatization in the early to mid-1990s.  DRs for all 15 were from sponsored programs and listed on US exchanges.

****    Insert Table 1 Approximately Here ****

Our two dependent variables for empirical study are based on shareholder returns associated with privatizing telecom investment events. Accordingly, we collected data on prices in US$ for DRs from the CRSP database and noted the daily percent returns for each of the 15 privatizing telecoms.  We also obtained from the CRSP database daily percent returns of the equally weighted S&P 500 index.

For data on investment events, recall that we used the SDC and their investment event designations:  Merger&Acquisition (acquirer or target), JV and Alliance.  SDC defines JVs and Alliances as transactions that do not include the transfer of equity, though they may nonetheless involve substantial financial commitments by the cooperating parties.  JVs are distinguished from strategic alliances by the creation of some distinct third party to carry out the cooperative venture.  Mergers, acquisitions and seasoned equity offerings involve the transfer of equity.  For these investment events we noted whether the privatizing telecom was the acquirer or target.  For seasoned equity offerings, we judged that the privatizing telecom was the constructive “target” since outside investors were acquiring equity.

The materiality of any such investment event appearing in these data was determined based on whether it was disclosed in SEC filings, or was reported in either the American edition of the Wall Street Journal, the Financial Times, or the Reuters News Network.  We eliminated events prior to the issuance of the privatizing telecom’s DR, or if two events for the same privatizing telecom were reported within an interval of five business days. 

These screens resulted in 224 investment events occurring between 1986 and 2001.  Table 1 reports the breakdown of investment events by the 15 privatizing telecoms in our sample, while Table 2 gives a breakdown based on investment event type (M&A, JV, Alliance).  Not surprisingly telecoms from industrialized countries are responsible for the vast majority of investment events to be analyzed, though there turns out to be a sufficient number of investment events involving emerging-market telecoms to assess differences in shareholder returns related to the industrial versus emerging-market status.  The types of investment events are also well-distributed as are sub-types of M&A investment events. Again, there appears to be sufficient variation in the data sample to estimate different effects on shareholder returns based on the type of investment event.

****    Insert Table 2 Approximately Here ****

As additional checks on the distribution of events and related shareholder returns we examined in Table 3 below the percentage of events with positive cumulative shareholder returns (51.8%) and negative returns (48.2%), indicating  and checked their distribution frequencies against the two variables of central interest in explaining the quality of privatizing telecom investment decision-making:  percentage share of state ownership, and temporal distance (measured in months since initial privatization).  These frequencies are reported in Figures 1 and 2 below.

****    Insert Table 3 Approximately Here ****

****    Insert Figures 1and 2 Approximately Here ****

Investment events are distributed over state ownership ranging between 0% and 75%, and over temporal distance ranging from 10 to 200 months.  Interestingly, approximately 2/3 of our investment events involved state ownership levels of 0-10% and 40%-50%, with the remaining 1/3 of investment events distributed well across other state ownership ranges. The concentration at 0-10% is almost certainly correlated with the temporal distance, size and investment orientation of certain privatizing telecoms from industrialized countries (i.e., British Telecom), a suspicion confirmed in Figure 2’s pronounced right-hand side weighting of investment events privatizing telecoms with greater temporal distance.  Concentration of investment events in the 40-50% state ownership range is interesting since it suggests that substantial but still minority state ownership is important, consistent with the alternative view discussed above.

Data on independent variables for our analyses related to the enterprises themselves and their respective countries of domicile, and the investment events they announced.  Regarding enterprise-specific data, we used 20-F filings with the US Securities and Exchange Commission (“SEC”)[9] to obtain information on the percentage of state-ownership and confirmed dates of initial privatization or effective transfer of control to private owners (“History and development of the company”).  Using Compustat (2002) corporate data, we obtained information on annual sales, net income, assets, market capitalization, and number of shares outstanding for the 15 privatizing telecoms .  We also noted any changes in country domicile and grouped the telecoms into industrial and emerging-market categories based on definitions given in Standard and Poor’s Emerging Market Database (Standard and Poor’s, 2002).  For country-level data, we drew on the World Bank’s World Development Indicators database (World Bank, 2002).  These data included information on aggregate yearly government spending per GDP for each country where a privatizing telecom was domiciled. 

5.         Results and Significance

In this section we present the results of our tests of the relationship between state ownership and temporal distance and abnormal returns for telecom firms.  Together, the results from the descriptive and statistical analyses lend mixed support for the classical research stream on privatization.  The results also provide evidence that the alternative conceptual literature on privatization—emphasizing the role of the government as a “guarantor” of the company—is particularly suitable in emerging market contexts.  Table 5 provides an overview of the key findings of our different analyses.  We detect different patterns for industrialized and emerging market countries.  We find tepid evidence that CARs are negatively associated with state ownership in industrialized countries, and we find significant evidence that CARs are positively associated with state ownership in emerging markets.  We also find that CARs are negatively associated with temporal distance to the date of privatization; this effect is highly significant and substantial in emerging market countries.  The analyses underline also the importance of controlling for the temporal factor in privatization studies.  In sum, the results provide statistical evidence for hypotheses (1b) and (2b) and therefore the alternative view on privatization, but little support for the mainstream view articulated in hypotheses (1a) and (2a).

****    Insert Table 5 approximately here ****

Descriptive and nonparametric results

Table 4 reports descriptive statistics on these variables.  The mean ownership by the state is approximately 26% and the average event took place approximately 111 months after privatization.  We also can see that the sample firms are large and profitable, with average sales of $35 billion and an average return on assets of 4.2%.

****    Insert Table 4 approximately here ****

The first analysis we undertook was a nonparametric test of the ratio between negative and positive abnormal returns as a function of our two key variables of interest.  For any given level of state ownership (or temporal distance), the ratio is 0 if there are only negative CARs and 1 if only positive CARs occur, and in-between these numbers for any other combination of positive to negative CARs.[10]  Figure 4 in the appendix shows this ratio depending on the level of ownership.  As hypothesized by the traditional view of privatization, the relationship is overall negative.  Increasing state ownership is associated with a lower ratio of positive abnormal returns.  While this relationship is true for any level of ownership,[11] Figure 4 reveals that between 0% and approximately 50% state ownership the probability of positive CARs is stable at slightly more than 50%.  In fact, approximately half of all events in the sample registered a positive abnormal return (see Table 1).  Figure 4 also illustrates that the probability of positive CARs decreases substantially when state ownership exceeds 50%.  This is consistent with literature on corporate governance, where the 50% threshold seems to be an important breakpoint, since minority shareholders are easily overridden in any decision by the majority shareholder.

****    Insert Figure 4 approximately here ****

Figure 5 illustrates the ratio of positive CARs as a function of temporal distance to privatization.  This nonparametric analysis shows that positive CARs are positively associated with temporal distance to the date of privatization.  In particular during the first 50 months (approximately four years) after privatization, investors perceive decisions of telecoms negatively.  This seems to confirm the traditional view that investors believe convergence of formerly state-owned firms and private-sector peers occurs slowly over time.  A former state-owned company needs time and experience to make good decisions and become competitive, and makes sub-optimal decisions when first exposed to market forces.

****    Insert Figure 5 approximately here ****

In the following section we turn to the parametric analyses and we will review the results more closely by distinguishing between effects on telecoms domiciled in emerging markets and industrial countries.  We will see different patterns from the nonparametric results by controlling for the type of events and firm-idiosyncratic characteristics.

Parametric Analyses

We report in Tables 6 and 7 Generalized Least Square regression results for equation (1) above using the market adjusted and the mean adjusted return models respectively.  Columns 1-3 report specifications with ownership variables, columns 4-6 report specifications with temporal distance variables, and columns 7-9 contain both sets of variables and their interaction terms.  Consistent with previous event studies examining M&A, alliance, or JV transactions, we limit our discussion on the 3-day event window specifications (i.e., columns 2, 5, and 8).  We will check robustness of results with the 2-day and 5-day event window specifications.

****    Insert Table 6 approximately here ****

Table 6 reports a negative relationship between state ownership and CARs in industrialized countries.  The coefficient on percstate is relatively small, and it is statistically significant when we did not control for temporal distance.  This negative relationship is consistent with previous findings that firms tend to align interests more closely with private shareholders with decreasing state ownership (Megginson, 2001).  When analyzing telecoms domiciled in emerging markets, this relationship runs opposite.  We find statistically significant and substantial increases in CARs with increasing state ownership.  While this might be puzzling first, the alternative view of privatization helps to explain this pattern.  Investors feel more confident being a co-investor with the government in an emerging market firm.  Perotti (1995) has theorized that states will need to remain credible throughout the privatization process; this implies the alignment of interests with other shareholders whose utility function is described by wealth maximization.  Our results confirm Perotti’s (1995) argument.  In emerging market contexts, investors perceive the state not only as a provider of capital but also as a guarantor of success for a recently privatized telecom company.

The government however might lose the commitment for credible privatization as the time to privatization increases.  This point becomes evident when examining the coefficient on the temporal distance terms log(zeromon) and log(zeromon) * emgmkt in Table 6, column 8.  We find tepid support for a negative relationship between CARs and the time passed since privatization in industrialized countries, and we find a statistically significant and substantial negative relationship in emerging market countries.  Contrary to the results of the nonparametric analysis, controlling for event and firm-idiosyncratic effects reveal that investors are increasingly negative about decisions in emerging market telecom firms with increasing temporal distance to privatization. 

Results in Table 7, which contains regression specifications based on the mean adjusted model, confirms the robustness of the adjusted market model results.

****    Insert Table 7 approximately here ****

Table 8 reports results from the probit regressions on the probability to achieve a positive CARs using model (2).  These results confirm the results of GLS regressions on CARs reported in Tables 6 and 7.  We find a negative and statistically significant effect on state ownership in industrialized countries, and a very substantial negative and significant effect on state ownership in emerging markets.

In these probit estimations we also find support for the alternative view of privatization with regards to temporal distance.  The point estimate of log(zeromon) is negative but not significant, and is strongly negative and significant for emerging markets.  State ownership is statistically significant and negatively related with decreasing probability of positive CARs in industrialized countries, but positively related in emerging markets.  The negative point estimate for industrialized countries is so far the only statistically significant evidence for the mainstream view of privatization.  The reported marginal effects for model (2) in column illustrate this finding:  a 1% increase from the mean state ownership of our sample (26%) decreases the probability of positive CARs by 0.08% for industrialized countries.  Likewise, an increase of 1% in the temporal distance reduces the probability of positive CARs by 0.7%.

****    Insert Table 8 approximately here ****

Illustration and Practical Implications of Results

In this section we illustrate our empirical results and describe practical implications of state ownership and distance to privatization in the telecom sector.

First, we turn to an emerging market telecom, Russia’s Rostelecom.  It announced on July 9, 1999 a joint venture with Sweet and Great Northern Telegraph Company to invest in the Russian company RTC Page.  RTC Page possessed a license to operate a national paging system based on the digital ERMES standard.  During the 3-day event window around the announcement date, Rostelecom’s ADR registered a CAR of 1.7%.  The market adjusted return for Rostelecom throughout the period is close to 0%, the abnormal return therefore is approximately 1.7%.  During the time of the event, the Russian government owned 45% of Rostelecom’s equity, and the event took place 25 months after the date of privatization in July 1997.  Using the results from the regression analyses discussed above, we can calculate the hypothetical return if Rostelecom would have had zero percent state ownership.  Since the coefficient in Table 6, column 8, for state ownership in emerging markets is +0.0572 (β₁+ β₄), the effect of zero state ownership on the abnormal return would be 2.57% (45%*0.0572).  In other words, if Rostelecom were a 100% privately-owned company, the announcement would have registered a negative CAR of 0.87% (1.7%- 2.57%) rather than the realized positive CAR of 1.7%.  In terms of market capitalization, the difference between 45% and 0% state-ownership is approximately $-19.6 million.[12] 

Now we turn to the temporal distance effect of privatization.  From Table 6, column 8, we obtained the coefficient for log (zeromon) in emerging markets of -0.4594 (β₂+ β₅). [13]  If this event had taken place 50 instead of 25 months after privatization, the event return would have been 0.78 percentage points lower, or approximately 0.92 %.  The negative wealth effect of the increased temporal distance is approximately $10.9 million.  This lower event return and the negative wealth effect can be explained by investors less enthusiastic of Rostelecom investing in the paging business, because the government is more distant to the company and is less likely to “insure” this decision.

****    Insert Figure 6 approximately here ****

For telecoms in industrialized countries, the level of state ownership has the opposite—albeit at a lesser magnitude—effect of emerging market countries, and time effects run in the same direction, but at a much higher magnitude.  Telecom Italia’s (TI) announcement on October 19, 1998 to acquire a 25% stake in Tele Norte Leste Participacões, a unit of Brazil’s Telebras, is a case in point.  At the time of the announcement, the Italian Treasury owned 5.2% of TI’s equity, and the ADR registered a cumulative abnormal return of 10.7% over the 3-day event period.  If the Italian state had owned 50% of the equity, the abnormal return would be 0.13% lower, resulting in a negative wealth effect of $61.7 million.[14]

Increasing time since privatization is negatively associated with CARs for telecoms in industrialized countries (β₂ in Table 6, column 8 is -0.0435).  Consequently, materially important decisions close to the time of privatization are likely to be more negatively viewed than those occurring long after.  If the event of acquiring parts of Brazil’s telecom infrastructure had occurred 12 months instead of the actual 146 months after TI’s privatization, the event return would be 6.7%, and the negative wealth effect would be approximately $1.9 billion.

****    Insert Figure 7 approximately here ****

This illustration of two real examples highlights the thrust of this paper:  investors perceive positively decreasing state-ownership in both industrialized and emerging market countries.  They also perceive positively the convergence over time of former state-owned companies with private sector peers in industrialized countries.  In emerging markets, however, they see the government as an “insurer” of the company’s operations, and this commitment fades away over time.

6.         Conclusion: (Un-)Creative Destruction in Emerging Market Telecoms

This study examined empirically two alternative conceptual research regarding privatization.  The hypotheses predict different effects of state ownership and temporal distance on the financial performance of the firm.  The mainstream view (Shleifer and Vishny, 1998 and others) argue that state ownership is not desired by shareholders, and that governments generally do not make any commitments throughout the privatization process.  Perotti (1995) encounters these arguments by developing a framework which shows that government have incentives to pursue gradual and credible privatizations with a commitments towards shareholders of new privatized firms.

In this empirical study, we find only tepid statistical support for the mainstream view.  We find, however, significant evidence for Perotti’s (1995) view of governments aiming to privatize “credibly”, in particular in emerging markets.  These results raise interesting implications for research and practice related to telecoms privatization strategy and policy.  The results also indicate that the event returns of privatized telecoms are contingent.  They do not necessarily materialize the moment telecoms first transfer equity from public (state) to private hands.  Privatization is a complex process of institutional transformation, not a discrete financial transaction.  Value creation from a shareholder perspective depends on the resolve of the state to press on with successive transfers of ownership and control to domestic and foreign investors. 

This analysis of privatizing telecoms and their efforts to create value as a private firm with a new set of stakeholders also raise a host of issues for future study.  By taking for example the trends which this study may observe showing that shareholders appear to reward privatizing telecoms with greater demand for their shares when they engaged in cooperative forms of foreign investment such as joint ventures and strategic alliances.  One area for follow-on study could examine links between the higher abnormal returns this study might report for certain privatizing telecoms and their inclination to engage in cooperative foreign investment.  Other, further exploration of the prospective findings of this study may be an exploration of the link between higher abnormal returns and the propensity of telecoms with more experience in the private sector and or higher percentages of private ownership to specialize over time in investments in specific geographic regions.  Such follow-on work may provide additional insight on investment strategies helpful to managers seeking competitive advantages for their privatizing firms, and greater value-creation for their shareholders.

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Table 1:  Telecom Firms in the Sample

 

Table 2: Frequency of Events by Category

 

Table 3: Frequency of Positive and Negative CARs

 

Table 4: Summary Statistics

Table 5: Summary of Results

Panel A: State Ownership and Temporal Distance Effects:  3-day CARs Using Market Adjusted Return Model (Table 6).

	State Ownership Effect	Temporal Distance Effect
Industrialized Countries	percstate -0.0028	log(zeromon) -0.0435
Emerging Market Countries	percstate + percstate*emgmkt +0.0572**	log(zeromon)+log(zeromon)*emgmkt -0.4594**

 

Panel B: State Ownership and Temporal Distance Effects:  3-day CARs Using Mean Adjusted Returns (Table 7).

	State Ownership Effect	Temporal Distance Effect
Industrialized Countries	percstate -0.0028	log(zeromon) -0.0436
Emerging Market Countries	percstate + percstate*emgmkt +0.0571**	log(zeromon)+log(zeromon)*emgmkt -0.4586**

 

Panel C: State Ownership and Temporal Distance Effects Regressed on Dummy Variable abpos (Table 8).

	State Ownership Effect	Temporal Distance Effect
Industrialized Countries	percstate -0.2112*	log(zeromon) -1.8615
Emerging Market Countries	percstate + percstate * emgmkt +19.2800***	log(zeromon) + log(zerom)* emgmkt -129.9523***

 

Panel D: Nonparametric Analysis: Running procedure of Stata using Dummy Variable abpos (Figures 4 and 5).^a

	State Ownership Effect	Temporal Distance Effect
All Countries	Negative, in particular if > ~50%.	Positive, in particular if < ~5 years.

 

** significant at 5%; *** significant at 1%.

^a Stata’s running procedure graphs and smoothes abpos on the independent variable.

Table 6: Regression Results, Dependent Variable: CARs Using Market Adjusted Returns ^{a, b}

Variables Included	State-Ownership			Temporal Distance to Privatization			Ownership and Temporal Distance
Estimator/Event Window→   Variable↓	(1) GLS 2 days	(2) GLS 3 days	(3) GLS 5 days	(4) GLS 2 days	(5) GLS 3 days	(6) GLS 5 days	(7) GLS 2 days	(8) GLS 3 days	(9) GLS 5 days
percstate [β1]	-0.0013***	-0.0013***	-0.0014**				-0.0015	-0.0028	-0.0040
	(0.0003)	(0.0003)	(0.0005)				(0.0013)	(0.0024)	(0.0029)
log (zeromon) [β2]				0.0113	0.0076	0.0095	-0.0149	-0.0435	-0.0637
				(0.0109)	(0.0211)	(0.0240)	(0.0273)	(0.0521)	(0.0691)
emgmkt [β3]	dropped	dropped	dropped	-0.0522	1.5180**	1.6011**	dropped	dropped	dropped
				(0.3512)	(0.6284)	(0.6573)
percstate * emgmkt [β4]	-0.0024	-0.0063*	-0.0070*				-0.0034	0.0601**	0.0618**
	(0.0019)	(0.0032)	(0.0034)				(0.0151)	(0.0256)	(0.0260)
log (zeromon) * emgmkt [β5]				0.0245	-0.4152**	-0.4393**	0.0066	-0.4159**	-0.4275**
				(0.0937)	(0.1602)	(0.1714)	(0.0956)	(0.1575)	(0.1663)
log (zeromon) * percstate [β6]							-0.0000	0.0003	0.0006
							(0.0003)	(0.0006)	(0.0008)
eventJV [β7]	0.0134	0.0230*	0.0270**	0.0137	0.0234*	0.0274**	0.0135	0.0230*	0.0269**
	(0.0105)	(0.0109)	(0.0089)	(0.0106)	(0.0111)	(0.0092)	(0.0106)	(0.0109)	(0.0087)
eventMA [β8]	0.0093	0.0281*	0.0163	0.0152	0.0330*	0.0217	0.0097	0.0268	0.0146
	(0.0143)	(0.0149)	(0.0121)	(0.0142)	(0.0160)	(0.0156)	(0.0150)	(0.0159)	(0.0124)
target [β9]	-0.0126	-0.0216	-0.0002	-0.0164*	-0.0235	-0.0023	-0.0125	-0.0196	0.0017
	(0.0089)	(0.0151)	(0.0140)	(0.0089)	(0.0149)	(0.0150)	(0.0095)	(0.0155)	(0.0141)
log (sales) [β10]	-0.0217	-0.0474*	-0.0460*	0.0079	-0.0170	-0.0131	-0.0171	-0.0284	-0.0152
	(0.0136)	(0.0224)	(0.0226)	(0.0120)	(0.0236)	(0.0195)	(0.0152)	(0.0341)	(0.0418)
roa [β11]	-0.2218***	-0.3526***	-0.3630**	-0.2104**	-0.3401***	-0.3495**	-0.2185***	-0.3619***	-0.3829**
	(0.0651)	(0.1022)	(0.1594)	(0.0749)	(0.1010)	(0.1484)	(0.0605)	(0.0949)	(0.1636)
pubexpgdp [β12]	0.1066	0.1123	0.4408**	-0.0479