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THE EFFECTS OF CHANGES IN CORPORATE GOVERNANCE AND RESTRUCTURINGS ON OPERATING PERFORMANCE: EVIDENCE FROM PRIVATIZATIONS

Juliet D’Souza

Clayton State University

William Megginson University of Oklahoma

Robert Nash

Wake Forest University

Revised draft May 24, 2006

Abstract Using a sample of 161 firms (privatized from 1961-1999), our study offers evidence regarding how restructurings and corporate governance changes affect the firm’s post-privatization performance. Prior to privatization, governments may choose to restructure firms through governance changes (i.e., establish relation with strategic foreign investors, implement employee share ownership plans) and/or restructurings (i.e., acquisitions, divestitures, re-capitalizations). We first extend the existing privatization research by documenting and describing these restructurings. We then conduct preliminary tests to examine whether such restructurings/governance changes have contributed to improvements in post-privatization operating performance. Our results suggest that both restructuring and changes in corporate governance are important determinants of post-privatization performance. We feel that our multi-national, multi-industry sample provides a broad perspective of share-issue privatizations and offers opportunities to identify potential sources of efficiency improvements in newly privatized firms.

JEL Classification: G15, G28, G38, L33 Keywords: International financial markets, performance, privatization Please address correspondence to: William L. Megginson Price College of Business 307 West Brooks, 205A Adams Hall The University of Oklahoma Noman, OK 73019-4005 Tel: (405) 325-2058; Fax: (405) 325-7688 e-mail: wmegginson@ou.edu

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THE EFFECTS OF CHANGES IN CORPORATE GOVERNANCE AND RESTRUCTURINGS

ON OPERATING PERFORMANCE: EVIDENCE FROM PRIVATIZATIONS

I. Introduction

Over the last few decades, privatization –defined as the sale of previously state-owned enterprises

to private owners--has transformed the global economic landscape. The extant literature clearly shows

that privatization does work to improve the financial and operating efficiency of divested firms.

Megginson and Netter (2001), Djankov and Murrell (2002), López-de-Silanes (2005), Nellis (2005), and

Megginson (2005) all provide summaries of this research. In this paper, we empirically analyze reasons

why privatization may work. Specifically, we examine how restructurings and changes in corporate

governance impact the performance of newly-privatized firms. Our methods and results are similar to

those of Boubakri, Cosset, and Guidhame (2005), though our focus is more on developed countries.

Prior to privatization, governments may choose to restructure firms through governance changes,

such as establishing relationships with strategic foreign investors or implementing employee share

ownership plans, and/or through restructurings such as acquisitions, divestitures, or re-capitalizations.

We extend the existing privatization research by examining whether such restructurings/governance

changes contribute to increased improvements in post-privatization operating performance. This question

is important since some governments subject firms to significant restructurings and organizational

changes before privatization while others typically do not. Accordingly, this study will further the search

for potential sources of post-privatization performance improvements.

Using a sample of 161 firms privatized between 1961 and 1999, our study offers evidence

regarding how restructurings and governance changes affect the firm’s post-privatization performance.

Our results confirm that both restructuring and changes in corporate governance are important

determinants of post-privatization performance. First, we find that pre-privatization restructuring leads to

stronger efficiency gains. We also find evidence of stronger profitability gains for firms with lower post-

privatization employee ownership and higher state ownership. We also find stronger output gains for

firms in competitive (unregulated) industries and for firms in developing nations.

This paper is organized as follows. Section II surveys the theoretical and empirical literature to

identify potential sources of post-privatization performance improvements. Section III describes our data

and defines our testable predictions. Section IV outlines our empirical methodology and Section V

presents our findings. Section VI provides a summary and conclusion.

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II. Potential Sources of Post-Privatization Performance Improvements

The finance and economics literatures suggest reasons why privatization might cause firms to

operate more productively. We focus on the impact of changes in corporate governance and

restructuring. Specifically, privatization involves changes in corporate governance due to changes in

ownership. The act of privatization reduces state ownership. Some privatizations further re-shuffle

governance structures by providing ownership to employees and foreigners. As stressed by Boycko,

Shleifer and Vishny (1996), Nellis (1999, 2005), Shirley and Walsh (2000), and Chong and López-de-

Silanes (2005), state-owned enterprises suffer from having multiple objectives, many of which are

imposed on them by politicians who reap most of the benefits of politicized decision-making, yet bear

few of the costs. The ownership changes from privatization should help to redefine the firm’s objectives

and the manager’s incentives. This should impact post-privatization performance. Second, releasing the

firm from government control provides greater entrepreneurial opportunities. One response to this

freedom is the restructuring of the newly-privatized firms. Such restructurings include divestitures,

acquisitions, and re-capitalizations. In the following paragraphs, we examine each of these broad changes

brought on by privatization and identify specific, testable sources of potential performance improvements.

We also control for other factors that the literature identifies as potential influences on post-privatization

performance.

A.. Corporate Governance: Changes in Ownership

Privatization redefines the firm’s objective function. When the state is the owner, firms typically

pursue multiple and often conflicting objectives. Conversely, privatized firms are more focused on profit

maximization. The degree to which the privatized firms can pursue profit maximization differs

considerably across our sample companies because of differences in corporate governance. Specifically,

the ownership structure of our sample exhibits wide variation. Some of our sample firms retain

significant amounts of state ownership while others become owned by employees or by foreign investors.

We examine how differences in state ownership, foreign ownership, and employee ownership affect the

performance of newly-privatized firms.

Since SOEs pursue objectives that frequently conflict with profit-maximization, the level of post-

privatization ownership retained by the state should affect the newly privatized firm’s efficiency

improvements. Boycko, Shleifer, and Vishny (1996) predict efficiency gains from privatization only if

control rights pass from the government to private investors. Similarly, Claessens (1997) contends that, if

the state maintains majority ownership, the firm is more likely to delay restructuring and maintain

excessive employment. Additionally, Paudyal, Saadouni, and Briston (1998) argue that selling only a

small stake increases the likelihood of continuing government interference and possible renationalization.

In empirical studies of the effects of privatization, D’Souza and Megginson (1998), Boubakri and Cosset

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(1998), Eckel, Eckel, and Singal (1997), and Megginson, Nash, and Van Randenborgh (1994) report

larger efficiency improvements following sales in which the government relinquished majority control.

Accordingly, we expect that the greatest performance improvements will result from privatizations in

which private owners gain control of the firm. On the other hand, Gupta (2005) shows that even partial

privatization yields significant performance improvements in India.

The presence of foreign investors may also affect the degree of post-privatization performance

improvement, especially since foreign investment has accounted for an increasing share of privatization

revenues in developing countries. Furthermore, Shafik (1996) notes that foreign direct investment (FDI)

has been the most common means of foreign participation in privatization transactions in developing

countries. Additionally, Smith et al. (1997) and Anderson, Makhija, and Spiro (1997) find that

profitability as measured either by return on equity or revenue per employee is significantly higher for the

firms with foreign investors. This effect is especially pronounced in transition economies, as shown by

Djankov and Murrell (2002) and Brown, Earle, and Telegdy (2006).

The amount of employee share ownership may also contribute to changes in post-privatization

performance. Boycko, Shleifer and Vishny (1996) predict that employees are unlikely to support value-

maximizing restructuring efforts, and Barberis, Boycko, Shleifer, and Tsukanova (1996) conclude that

equity ownership by employees does not spur performance improvements after privatization.

Accordingly, we test for a relation between employee ownership and firm performance following

privatization. We expect employee ownership to negatively affect post-privatization performance.

B. Corporate Governance: Changes in Upper Management

Privatization also affects corporate governance by introducing changes in the privatized firm’s

upper management. Replacing the often politically appointed manager of the SOE with a professional

businessperson should lead to performance improvements. For example, Lopez-de-Silanes (1997)

recognizes that the existing SOE management may lack the appropriate human capital to effectively guide

the newly-privatized firm. He finds a positive relation between a change in the CEO and the market value

of the privatized firm. Barberis, Boycko, Shleifer, and Vishny (1996) cite new human capital as an

important factor in increasing the probability of value-maximizing restructuring. Megginson, Nash, and

Van Randenborgh (1994) also report stronger efficiency gains for firms with larger changes in top

management. Based on these findings, we expect that corporate governance changes (brought on by

different upper management) will positively impact the degree of post-privatization performance

improvement.

C. Restructuring

When fully state-owned, firms typically take on financial and organizational structures designed

to meet multiple, often politically-motivated objectives. Following privatization, firms become more

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focused on profitability and wealth maximization. Indeed, privatization is often an initial step in a

transformation process whereby the state-owned firm becomes reconfigured to compete as a private

enterprise. As we will document in the following empirical analysis, restructuring is frequently an

important part of this transformation.

We first summarize the reasons commonly associated with restructuring. More importantly, we

identify how these factors directly affect firms undergoing the privatization process. We then define the

different forms of restructurings from which newly-privatized firms may choose.

C.1. Reasons for Restructuring

The corporate finance literature identifies multiple factors which may trigger restructurings.

Most of these restructuring catalysts are especially relevant in the context of privatization. Chong and

López-de-Silanes (2002) document that restructurings occur frequently around privatizations, but also

find these are often unsuccessful.

C.1.A. Response to External Shocks

Jensen (1993), Mitchell and Mulherin (1996), and Mulherin and Boone (2000) argue that

restructurings are primarily responses to significant shocks (e.g., substantial changes in legal, political, or

regulatory systems). The ownership and institutional transformation brought about by privatization

should represent such a shock in most countries. Djankov and Murrell (2002) note that the radical

changes caused by privatization have compelled newly-privatized firms to restructure, while Birdsall and

Nellis (2003) and McKenzie and Mookherjee (2003) examine the distributional impact of privatization in

developing countries.

Restructurings may also be triggered by economic conditions (e.g., recession) or by product

market pressures (e.g., competition). As identified in Megginson et al. (1994), the newly-privatized firm

faces larger threats from these forces since privatization frequently involves the weakening of regulatory

protection and the reduction of state subsidies. Therefore, this heightened sensitivity to external shocks

should contribute to greater restructuring activity by newly-privatized firms.

C.1.B. Desire for Efficiency Improvements

The corporate control literature cites efficiency improvement as a common reason for

restructuring. Studies such as Jensen and Ruback (1983), Hite, Owers, and Rogers (1987), John, Lang,

and Netter (1992), John and Ofek (1995), and Maksimovic and Phillips (2000) conclude that restructuring

generally increases efficiency by transferring assets to firms that can put the resources to a better use.

Furthermore, Gaughan (2002) and Kaplan and Weisbach (1992) note that restructuring frequently

involves the elimination of negative synergies (by removing assets that are performing poorly or are no

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longer a strategic fit). Based on the empirical work summarized by Megginson and Netter (2001), state-

owned firms targeted for privatization may represent prime candidates for such restructuring since these

firms are frequently bloated and inefficient.

C.1.C. Pursuit of New Opportunities

New growth opportunities may also motivate firms to restructure. Weston (1989), Lang et al.

(1995), and Mulherin and Boone (2000) contend that restructurings directly result from a firm’s desire to

pursue new strategies and prospects. These growth opportunities are frequently created by evolving

economic conditions (such as the changes brought about by privatization). Therefore, it is again more

likely that newly-privatized firms should engage in some form of restructuring.

C.1.D. Change in Corporate Strategy

Restructuring may result from changes in the firm’s strategy. Kaplan and Weisbach (1992) find

that strategic change is the most common reason for many restructurings. These strategic shifts could

involve either expansion or contraction. As noted above, privatization creates growth opportunities.

Accordingly, the newly-privatized firm may engage in an expansion strategy to pursue this potential.

Alternatively, a firm may restructure in order to contract. This form of strategic adjustment typically

involves a streamlining or re-focusing on a core business. Lang et al. (1995), Slovin et al. (1995), and

John, Lang, and Netter (1992) determine that many value-enhancing restructurings result from

divestments that enhance the firm’s focus.

C.2. Forms of Restructuring

Since the extant corporate finance literature suggests that restructuring may frequently

accompany privatization, we next examine the different forms of restructuring activities that may be

undertaken by newly-privatized firms. We identify three primary methods of restructuring. In Appendix

3, we provide firm-specific details of each restructuring that we identify in our sample. In our empirical

analysis, we examine how these restructurings affect post-privatization performance.

C.2.A. Organizational/Operational Restructuring(Org/Op)

The first form of restructuring is the reorganization of the firm’s production methods and/or

management structure. Examples include the closing, consolidating, or overall reorganizing of

production facilities. This form of restructuring may also involve modernization of operations and

changes in management structure. As shown in Appendix 3 (and described in our later analysis), the

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organizational and operational restructurings are the most frequent means of reorganization for our

sample firms.

C.2.B. Acquisitions and Divestments(A&D)

A second type of restructuring occurs when the newly-privatized firm engages in an acquisition

or a divestiture. Mulherin et al. (2001) document extensive acquisition and divestment activity by newly-

privatized firms. The authors determine that restructurings facilitated by the market for corporate control

have contributed to enhanced productivity. Acquisitions cause expansion and may represent efforts by

newly-privatized firms to take advantage of opportunities created by the transfer from state control.

Alternatively, divestments cause contraction and may represent efforts to shed unprofitable units and

downsize to a more efficient functional form. All divestments by our sample firms were asset sell-offs.1

In an asset sell-off, the firm typically sells a division or major facility to an outside party. Appendix 3

identifies the newly-privatized firms that engaged in acquisitions and divestments.

C.2.C. Financial Restructuring

The final method of restructuring entails financial reorganization. Financial restructurings

typically involve a reduction in the leverage of the newly-privatized firm.2 Our sample firms

implemented financial restructurings through debt payoffs, debt write-offs, and leverage-reducing

recapitalization (e.g., debt-equity swaps). Financial reorganizations may also include a major refinancing

or restructuring of a loan. Examples of financial restructuring are presented in Appendix 3.

D. Other Factors: Macroeconomic and Institutional Environment

In addition to changes in corporate governance and restructurings, many other factors may impact

post-privatization performance. We control for these influences (which primarily relate to the firm’s

macroeconomic and institutional environment). For example, the literature suggests that we must

consider the level of capital market development. Dewenter and Malatesta (1997), Anderson, de Palma,

and Thisse (1997) and Estrin and Perotin (1991) argue that state-owned firms are less efficient because

they are immune from capital market scrutiny. As a result, managerial performance is inadequately

monitored. Upon privatization, the public trading of shares introduces the discipline of the capital.

However, recent academic research has clearly documented that the intensity of the capital market

1 Gaughan (2002) provides an extensive description of other forms of divestment (such as spin-offs, split-offs, split-ups and equity carve-outs). We observe none of these alternative forms of divestment by our sample firms. 2 Megginson et al (1994) , Dewenter and Malatesta (2001), and Megginson and Netter (2001) note an overall decrease in leverage following privatization. Faccio (2006) shows that politically connected firms (including state-

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pressure depends upon the size and sophistication of the nation’s financial system (LaPorta, Lopez-de-

Silanes, Shleifer, and Vishny (1998), Levine (1997), Demirguc-Kunt and Maksimovic (1998), Levine and

Zervos (1998), Rajan and Zingales (1998), Subrahmanyam and Titman (1999)). While many of the firms

in our sample are from countries with highly developed equity markets, many others operate in less-

developed financial markets.3 As a result, some privatized firms face greater market monitoring than

others do. We expect that the firms whose shares trade in more sophisticated and active equity markets

should display the strongest performance improvements.

For managers to feel the full disciplining pressure of the capital market, the rights of the

individual shareholder (particularly the voting rights) must be enforced by the country’s legal system.

LaPorta, Lopez-de-Silanes, Shleifer, and Vishny (1998) note that the amount of protection of

shareholders’ legal rights varies significantly across countries. Specifically, shareholders in countries

with an English common law tradition benefit from much stronger legal protection than those living in

nations with French civil law systems. The authors find that markets affording greater shareholder

protection are consistently larger and more efficient. Therefore, we predict that the degree of shareholder

rights protection within a country should be positively related to performance improvements following

privatization.

A nation’s political and economic environment may also affect the magnitude of the change in

the firm’s performance following privatization. To borrow terms used in a slightly different context by

Biais and Perotti (2001), whether a divesting government is “committed” (to privatization and economic

reform) or “populist” (selling SOEs just to raise money) should significantly influence the performance of

privatized firms. Several empirical studies support this prediction. Also, Kikeri, Nellis, and Shirley (1992)

suggest that a country with a fairly sophisticated economy and higher income is more likely to have a

market-friendly policy framework. Such factors should increase the chances of successful privatization.

However, Boubakri and Cosset (1998) find that firms in developing nations exhibit very strong

performance improvements following privatization. Therefore, to potentially resolve this ambiguity, we

test whether the level of development of a nation’s economy is a significant determinant of post-

privatization efficiency improvements.

Privatization may also expose the firm to the discipline of the product market. Having to

compete with other firms for customers and market share may provide the pressure required to stimulate

greater efficiency and profitability. Ramamurti (1997), Newbery and Pollitt (1997), and Vickers and

owned enterprises) use more financial leverage because they can be assured of government financial support if they encounter distress. 3 In fact, Megginson, Nash, Netter, and Poulsen (2004) show that governments of countries with under-developed capital markets launch share issue privatization programs specifically as a way to develop these markets. Jones,

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Yarrow (1991) identify competition as a major determinant of post-privatization performance

improvements. Vickers and Yarrow (1991) suggest that while privatization should stimulate efficiency

gains in competitive environments, there is no advantage to private ownership when market power exists.

Several empirical studies--including Megginson, Nash, and Van Randenborgh (1994), and LaPorta and

Lopez-de-Silanes (1999)--report significant differences when comparing the post-privatization

performance of competitive and non-competitive firms. These studies find that both types of firms

(competitive and regulated) experience efficiency improvements. However, the efficiency gains are

significantly greater for firms in competitive markets.4 We extend this analysis by testing for post-

privatization performance differences between competitive firms and regulated utilities.

III. Data and Methodology

Our sample consists of 161 companies from 39 countries. We draw our sample from the

appendix of Megginson and Netter (2001). Through mail requests, we directly solicit annual reports and

prospectuses from the privatized firms. We also access data from the websites of newly-privatized firms.

Our data are collected by hand from these sources. Furthermore, we limit our analysis to share-issue

privatizations. While governments may use other methods of privatization (e.g., direct sale to another

company), share-issue privatizations (SIPs) represent the largest and most economically and politically

important privatizations.

We compute proxies using local currency data in our performance measurements. Whenever

possible, the ratios include nominal data in both the numerator and denominator. We also emphasize

ratios computed using current-year, “flow” measures, which are less sensitive to inflation and to

accounting conventions. We follow the techniques of Megginson, Nash, and Van Randenborgh (1994) to

identify the prevalence of post-privatization performance improvements. We then begin our search for

factors that may explain why newly privatized firms experience changes in profitability and efficiency.

Initially, we partition the total data into various sub-samples. We use the Kruskal-Wallis procedure to test

for significant differences between the subgroups. A significant difference between subsamples would

indicate that the subgroup classification factor might be an important determinant of post-privatization

performance changes. We focus on the effect of changes in corporate governance and restructurings.

In the latter stage of empirical testing, we perform a multivariate OLS regression to examine how

various firm-level, industry, and country factors affect the post-privatization performance. In each of our

Megginson, Nash, and Netter (1999) and Biais and Perotti (2002) examine how political and economic factors influence the pricing and allocation strategies of governments launching SIP programs. 4 An extremely important counter-example is, however, provided by Galiani, Gertler, and Schargrodsky (2005), who show that Argentine water companies (regulated utilities) increased both efficiency and service levels after privatization--which led directly to a decline in infant mortality on the order of several hundred deaths per year.

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models, the dependent variable is the change in the value of the performance proxy (mean value after

privatization / mean value before privatization). The independent variables are factors that the theoretical

and empirical literature identifies as potential determinants of post-privatization efficiency gains.

Appendix 1 lists the sample firms and provides some descriptive information about each

privatization. Our sample of privatizations raised $221 billion from 1961-1999. While the data range

over thirty years, a majority of the privatizations occurred in the late 1980s and early 1990s. The average

transaction resulted in the government selling approximately 50% of the firm’s equity. In 40 of the

privatizations, the government reduced its equity ownership stake from 100% to 0%.

We next specify empirical proxies (also summarized in Appendix 2) for each factor predicted to

affect post-privatization performance. The following section defines these proxies and describes how we

expect each variable to impact the newly privatized firm’s financial and operating performance.

IV. Empirical Proxies and Testable Predictions

A. Corporate Governance: Changes in Ownership

Following the transfer of ownership from the state to private investors, we expect significant

changes in the owner’s (and manager’s) incentives and in the firm’s objectives. These changes should

indicate a more focused and efficient organization. Since SOEs typically pursue objectives inconsistent

with profit maximization, we expect that privatizations that generate the largest amount of private

ownership will experience the greatest performance improvements. In addition, we predict stronger

efficiency gains for firms with more foreign ownership. We also expect a positive relation between the

percentage of employee ownership and the amount of performance improvement.

We use the percentage of shares retained by the government as a proxy for state ownership, and

we use percentage of shares allocated to foreign investors at the time of issue to measure foreign

ownership. As a proxy for employee ownership, we use the percentage of shares allocated to employees

at the time of issue. We also perform the Kruskal-Wallis test to determine the effect of “control” on

performance improvement. We divide the sample into “control” and “no-control” groups. The “control”

group consists of firms with greater than fifty percent private ownership, and the “no-control” group

consists of firms with less than fifty percent private ownership. We also examine this effect using

regression analyses.

B. Corporate Governance: Changes in Upper Management

Megginson et al. (1994) report that changes in upper management frequently occur around the

time of privatization. We identify privatized firms that replaced the CEO. We also examine Board of

Director composition (before and after privatization). We expect that the infusion of new management

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should lead to stronger post-privatization performance. The Kruskal-Wallis test assesses the impact of

changes in CEO and changes in Board of Directors on post-privatization improvements.

C. Restructuring

Just prior to privatization, we find that many firms restructure. In particular, we find firms

restructure through organizational changes and/or acquisitions and divestitures and/or financial

restructurings (i.e., re-capitalizations). There are 105 firms for which we can definitively determine

whether or not restructuring occurred. By examining prospectuses, annual reports, and secondary news

reports and company disclosures, we verify that 52 firms did some form of restructuring during the

privatization process.5 If firms restructure in order to improve profitability and efficiency, we predict that

restructuring should increase performance improvements. We perform the Kruskal-Wallis test to

determine the effect of restructuring. For the Kruskal-Wallis test, we divide the sample into firms that

restructured and firms that did not restructure. The regression analyses proxy these with dummy variables.

To more thoroughly understand the impact of restructuring, we next provide descriptive statistics

and observations regarding the restructuring activities of our sample firms. Our restructuring sub-sample

consists of 77 transactions undertaken by 52 newly-privatized firms. Since our total sample consists of

161 firms, our data indicate that approximately 1 of 3 newly-privatized firms (32%) engages in some

form of restructuring.

**** Insert Table 1 about here ****

Table 1 provides extensive descriptive statistics for this restructuring sub-sample. We array the

transactions into three groups: 1) Acquisitions and Divestments (A&D), 2) Financial, and 3)

Organizational and Operational restructurings. While acquisitions and divestments typically receive the

most popular attention, the most frequent form of restructuring is organizational and operational

restructurings. During 1981-1999, we document 37 of these types of re-organizations (48% of all

restructuring transactions). These 37 firms represent 23% of all the firms in our total sample.

Acquisitions and divestments comprise 35% of our restructuring sub-sample. Several firms conducted

multiple acquisitions and divestments during the sample period. Overall, 18 firms (11% of all firms

privatized) choose this method of restructuring. Finally, financial restructurings account for 17% of all

transactions (and are undertaken by 13 firms). This represents only 8% of all privatized firms.

5 Of the 55 restructured firms, 33 of these firms had organizational changes, 17 firms conducted financial

restructurings, and 22 firms engaged in acquisitions and divestitures. The numbers do not sum to 55 because some firms did more than one form of restructuring.

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Panel A documents the restructurings by year of our sample period. While restructurings took

place in all but two years, a preponderance occurred in the 1990s. Of the 52 firms that engaged in

restructuring, 44 (85%) did so in the 1990s. Our modal year is 1991, with 13 transactions.

Panel B shows that newly-privatized firms in all industries engaged in restructurings. The largest

number of restructurings is by manufacturing firms. However, as shown in Appendix 1, a majority of our

sample is from the manufacturing sector. In fact, we identify restructuring in only 25% of all

manufacturing firms in our sample. The telecommunications industry exhibits much greater frequency of

restructuring. The 22 telecom restructurings were conducted by 15 firms, while our total sample includes

28 telecoms. Therefore, on a per-firm basis, telecoms are over twice as likely to restructure as are

manufacturers. Privatized European telecoms, for example, were particularly active acquirers of state-

owned telecom providers in the transition economies during the 1990s, and many of these same European

operators were forced to execute large rights issues during 2002-03 in order to stave off severe financial

distress. This greater propensity for telecom restructuring is consistent with evidence presented by

Bortolotti, D’Souza, Fantini and Megginson (2002) and Li and Xu (2004). Furthermore, we identify that

transportation firms are also especially prone to restructuring. The seven transportation firms (that

conducted the 12 restructurings) represent 42% of all transportation firms in our sample. This largely

results from the turmoil roiling the global airline industry from the late 1990s onwards.

In Panel C, we partition our restructuring sub-sample by country. Newly-privatized firms

conducted some type of restructuring in 25 of our 39 sample countries.6 The modal quantity of

restructurings is from the U.K. (10 transactions by 6 firms). However, we draw limited conclusions from

this since British firms make up the largest proportion of our sample (i.e., total sample includes 27 British

firms). A large number of restructurings also occurred in Italy. The eight restructurings were undertaken

by five newly-privatized Italian firms. Since our total sample includes only 11 Italian firms, a larger

relative amount of Italian firms engaged in restructuring. Examples include the repeated acquisitions and

divestments of the electricity provider, ENEL, as it transitioned to a more competitive industrial

environment and the restructuring of Telecom Italia after it was partially acquired by an Italian investor

group. Full privatization of the Italian banking system also prompted a wave of mergers that brought

much needed consolidation. The type of restructuring also varies by location.

Organizational/Operational restructurings occurred in 22 countries, while financial restructurings took

place in only 8 countries.

LaPorta et al. (1997) present evidence that a nation’s legal environment affects financial

decisions. Specifically, English common law provides for stronger protection of investor rights. This

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institutional infrastructure contributes to a more-developed capital market and a greater emphasis on the

maximization of shareholder wealth. Accordingly, firms in nations with an English legal origin may be

more likely to restructure. In Panel D, we partition our restructuring data based on legal system (English

common law vs. non-common law). The data in Panel D suggest that legal origin does not appear to

affect the overall frequency of restructuring.7 However, a closer examination of each of the three forms

of restructuring indicates that financial restructurings are approximately evenly split between the two

legal origins. This is disproportionate since only roughly one-third of our total sample is from countries

with English legal systems. Therefore, the stronger financial market orientation (that LaPorta et al.

(1997) attribute to an English legal origin) may contribute to a greater likelihood of financial restructuring

by newly-privatized firms.

In Panel E, we examine whether the country’s overall level of economic development may affect

the frequency of restructuring. As in Megginson et al. (1994) and D’Souza et al. (2006), we use OECD

membership to distinguish developed and emerging economies. If financial market development

facilitates restructuring, we should expect greater restructuring activity in OECD nations. Panel E

indicates that a majority of our sample’s restructurings (83%) are from OECD firms. However,

approximately 83% of are sample firms are from OECD nations. Accordingly, there appears to be no

immediate evidence that the country’s level of economic development impacts the likelihood of

restructuring.8

Acquisitions and Divestments – A Closer Look

Since acquisitions and divestments are typically the largest and most visible forms of

restructuring, we devote Table 2 to a more detailed descriptive analysis of these two types of transactions.

We first separate the acquisitions from the divestments. Table 2 identifies 13 acquisitions and 14

divestments (during our 1981-1999 sample period). An initial interesting observation is that divestments

outnumber acquisitions. During the same period in the U.S. (1981-1999), acquisitions outnumber

divestments by a margin of two-to-one.9

**** Insert Table 2 about here ****

6 There are 14 countries in our sample in which no newly-privatized firm engaged in any identifiable form of restructuring. These are: Chile, Greece, India, Indonesia, Jamaica, Korea, Netherlands, Oman, Portugal, Qatar, Singapore, Thailand, Turkey, and Venezuela. 7 While twice as many non-English firms engaged in some form of restructuring, there are also twice as many firms from non-English countries in our sample. 8 One empirical regularity supporting the position that economic development may contribute to greater restructuring can be drawn from our discussion of Panel C (restructuring activity by country). As described in an earlier note, no restructurings occurred in 14 of our sample nations. Nine of these 14 countries (64%) were non-OECD. Overall, non-OECD countries comprised only 17% of our total sample.

14

As with all of our restructuring, the transactions are concentrated in the 1990s. Of the total

acquisitions and divestments, 22 (81.5%) occurred in the 1990s. During those same years, only 65% of

our sample firms were privatized. We observe 85% of the acquisitions and 79% of the divestments in the

1990s.

The industry group with the largest number of acquisitions and divestments is the manufacturing

sector. This is not surprising since the largest number of our sample firms are manufacturers. Somewhat

surprising is that there were no acquisitions or divestments by newly-privatized utilities (an industry

group that comprises 19% of our total sample). It is also somewhat surprising that acquisitions and/or

divestments only occurred in 12 countries. That is less than one-third of the countries in our total sample.

Analysis according to legal origin indicates that firms in countries with an common law legal

system are less likely to restructure by acquisition and/or divestment. A total of 18 firms engaged in

acquisitions/divestments. Of these firms, four (22%) are from common law origin countries. However,

approximately 40% of the total sample firms are from common law origin countries. Finally, the

proportions of acquisitions and divestments (segregated by OECD vs. non-OECD status) appear

consistent with the overall composition of the sample.

D. Other Factors: Macroeconomic and Institutional Environment

The level of sophistication and intensity of capital market monitoring should influence the degree

of the newly privatized firm’s performance improvements. We expect that firms with shares trading in

larger, more-developed markets should experience greater efficiency gains. We use GNP per capita in

US$ to measure the development of the economy. To determine the effect of growth in the economy

during the pre and post privatization window, we use the real GDP growth in the economy.

To measure the level of capital market development and sophistication, we use the ratio of offer

size (market value of the privatizing share issue) to total market capitalization. Since this value will be

smaller for firms in larger financial markets, we predict a negative relation between the issue size/market

cap ratio and the post-privatization efficiency gains.

For private ownership to trigger performance improvements, the rights of the shareholder must be

enforced. We expect that a stronger degree of shareholder rights protection will lead to greater post-

privatization performance improvements. We use the LLSV Shareholders Rights Index (SRI) to measure

how strongly a nation’s laws favor the interests of minority stockholders. The SRI takes on a larger value

as the legal support of shareholder rights increases. Higher values of SRI should lead to greater post-

privatization performance improvements.

9 Data are from Mergerstat Review (as presented in Gaughan (2002)). Kaplan and Weisbach (1992) report a similarly larger proportion of acquisitions to divestments (using U.S. data from 1971-1982).

15

The pressure of international product market competition may also force the newly privatized

firm to operate more efficiently. Vickers and Yarrow (1992) contend that the introduction of competition

is the driving force behind post-privatization performance improvements. Therefore, firms privatized in

competitive industries may experience the largest efficiency gains. Accordingly, we test whether

performance improvements are stronger in regulated utilities (which retain significant market power) or

competitive firms (which must operate efficiently to survive in internationally competitive markets). To

distinguish regulated utilities from competitive firms, we include an indicator variable, which has a value

of one if the privatized firm is a telecom or an electric/water/gas utility.

V. Empirical Results

Our first round of empirical tests measures post-privatization financial and operating

performance. Our data confirm that, following privatization, firms experience significant increases in

profitability, efficiency, and real output in the three-year post-privatization period, compared to the

average values from the three-year pre-privatization period. Table 3 summarizes our specific results.

**** Insert Table 3 about here ****

Having confirmed that newly privatized firms experience significant increases in profitability and

efficiency, we next turn to our search for potential causes of these performance improvements. We begin

by partitioning our total data into subsamples based on factors that the literature identifies as potentially

important influences on the firm’s post-privatization financial and operating efficiency. We focus on the

effect of changes in corporate governance and restructuring.

**** Insert Table 4 about here ****

Whether or not control passes to private investors may impact the performance of the newly

privatized firm. Accordingly, we partition our data into two groups: a control sample (where private

investors own at least 50% of the equity) and a no-control sample (where the government retains over

50% ownership). Table 4 summarizes the results of our comparison of these sub samples. Results show

that while post-privatization profitability, output and efficiency for control firms are higher than increases

for no-control firms; the capital expenditure is higher for no-control firms than for control firms. Firms

with majority private investors (control firms) show average (median) increases in profitability of 2.26

percentage points (1.93 percentage points), while real sales climb 46 percentage points, from an average

80% of year-zero level during the three years before privatization (year 0) to an average of 126% of year-

zero level afterwards (median increases from 68% to 150% of year-zero value). Sales efficiency increases

by a stunning 114 percentage points, from 84% (77%) of year-zero level before privatization to 198%

(142%) afterwards, while capital expenditure nearly triples, from an average 80% (68%) of year-zero

level during the three years before divestiture to an average 228% (160%) for the three year post-sale

16

period. On the other hand, firms with majority government ownership (no-control firms) show average

(median) increases in profitability of 2.23 percentage points (2.93 percentage points), in output of 107

percentage points (70 percentage points), in efficiency of 88 percentage points (66 percentage points )

and in capital expenditure of 163 percentage points (71 percentage points ). The difference is

insignificant between the two groups for profitability, output and efficiency and is significant for capital

expenditure.

**** Insert Table 5 about here ****

Changes in a newly privatized firm’s upper management may also trigger performance

improvements. Table 5 presents the results for those firms that have had at least a 50% change in board

of directors following privatization versus those experiencing less than a 50% change in board

composition after privatization. The Wilcoxon test statistic shows profitability increases significantly for

firms with greater than 50% change in board of directors, while it decreases, insignificantly, for firms

with less than 50% change in board of directors. The Kruskal-Wallis test shows no significant differences

between the two groups for any of the variables.

**** Insert Table 6 about here ****

Table 6 presents comparisons of firms that restructure versus firms that do not restructure. Our

data indicate that restructured firms experience significantly larger decreases in employment and

leverage. The mean employment decreases by 1,235 workers for restructured firms and increases by

1,278 workers for non-restructured firms. Mean leverage decreases by 9.45 percentage points for

restructured firms but by only 2.99 percentage points for non-restructured firms. The Kruskal-Wallis test

for employment is significant at the one percent level. For leverage, it is significant at the ten percent

level.

B. Regression Results

In our multivariate regression models, the dependent variables represent percentage changes after

privatization in return on sales (ROS), level of real sales (RSALE), sales efficiency (SEFF), employment

(EMP), real capital expenditure (CAPEX), and leverage (LEV), respectively. To explain these changes in

post-privatization performance, we employ the following independent variables: state ownership, foreign

ownership, employee ownership, restructured firms, regulated firms, the shareholder rights index (SRI),

GNP per capita ($), offer amount to market capitalization, and real GDP growth. These variables are

listed and defined in Appendix 2. Table 5 presents the results of our regressions.

**** Insert Table 7 about here ****

17

B.1. Profitability

Ownership is the most significant determinant of changes in post-privatization profitability. First,

we identify a significantly negative relation between profitability and employee ownership. This suggests

that a one percent increase in employee ownership leads to a 9% decrease in profitability improvements.

Our finding that higher employee ownership leads to lower profitability improvements is consistent with

Barberis, Boycko, Shleifer, and Tsukanova (1996) who conclude that providing equity incentives to

existing employees does not add value. Additionally, the regression analysis reveals a significantly

positive relationship between profitability and state ownership. This is puzzling since we expect

performance improvements to increase as state ownership declines. It could be that a large residual stake

gives the government greater incentive to encourage performance improvements, since it has more of the

company left to sell in subsequent rounds. Finally, the regression analysis indicates that restructuring has

the expected positive impact on profitability (although the effect is not statistically significant). Overall,

it appears that corporate governance is a driver of the change in the profitability that generally follows

privatization.

B.2. Real Sales

According to Table 5, as predicted, we find that higher private ownership (lower state ownership)

leads to significantly greater output increases. The restructuring variable has an insignificant effect on

output, perhaps because the impact of restructuring on change in output may be diminished if many firms

restructure through divestments. Also, consistent with the predictions of Vickers and Yarrow (1991), the

regression analysis shows a significant positive relation between output and competition. This also

confirms the conclusions of Megginson, Nash, and Van Randenborgh (1994), who find that firms thrust

into a competitive environment quickly become more productive.

B.3. Efficiency

The efficiency regression provides the strongest evidence of the value added by restructuring.

Firms that restructure have significantly larger improvements in operating efficiency. Specifically,

restructured firms show an 18 percentage-point greater increase in sales efficiency than firms that do not

restructure. Since restructuring has an insignificant impact on employment (see section B.4), the

efficiency improvements that result from restructuring are not simply due to job cuts. The restructuring

apparently leads to a more efficient deployment of resources.

Consistent with the results of other studies—particularly those examining the transition

economies, surveyed in Djankov and Murrell (2002) and most recently in Brown, Earle, and Telegdy

2006—we find that foreign ownership contributes to stronger efficiency improvements after privatization.

The significant, positive sign of the foreign ownership variable indicates that a one percentage point

increase in foreign ownership leads to a 0.67 percent increase in post-privatization sales efficiency. We

18

expect this outcome since foreign ownership should result in an infusion of managerial talent, access to

advanced technology, and entry into more lucrative product and capital markets.

Finally, the amount of national wealth (GNP per capita) has a marginally significant, negative

relation with post-privatization efficiency improvements. These results are consistent with Boubakri and

Cosset (1998) and who also document strong efficiency improvements for firms in developing nations.

Additionally, the level of financial market development also impacts post-privatization efficiency

improvements. The significant, negative sign of the offer amount to market capitalization ratio indicates

that firms in larger, more developed capital markets experience larger gains in efficiency following

privatization. This is consistent with our expectations since firms in larger markets should be subject to

greater scrutiny and capital market pressure. The more stringent monitoring apparently spurs the newly

privatized firm to function with greater efficiency.

B.4. Employment

Ownership appears to significantly affect the changes in employment after privatization. As

predicted, there is a significant, negative relation between foreign ownership and post-privatization

employment levels. Foreign owners, who are less affected by political and social concerns, are more

likely to reduce jobs if the divested firms are truly overstaffed. Additionally, our analysis yields the

somewhat surprising result that higher state ownership leads to lower post-privatization employment. This

result has been documented for transition economies by Lizal and Svejnar (2002) and Brown, Earle, and

Telegdy (2006), but we are unaware of any other study documenting this for non-transition economies

and this is unexpected since overemployment was common in state-owned firms. As with foreign

owners, we expected larger amounts of private ownership would stimulate deeper cuts in job rolls.

However, our results suggest that the state is also not hesitant to eliminate jobs, especially if such

reductions are offset by increased profitability (as indicated by our ROS regression). This finding is also

consistent with the proposition that partial privatizations give the state greater incentives to maximize

value in order to maximize the future sale price of the government’s remaining stake.

Capital market characteristics also affect the level of changes in post-privatization employment.

Specifically, our analysis shows that stronger protection of shareholder rights leads to deeper cuts in

employment. This is consistent with Wurgler’s (2000) contention that stringent legal enforcement of

investor rights empowers shareholders to object to overinvestment and limit inefficiencies (such as over-

staffing). Furthermore, the development and sophistication of the nation’s capital market impacts post-

privatization employment. The data indicate a significant positive relation between employment changes

and the ratio of offer size to market capitalization. It may be that the closer monitoring of the analysts

and sophisticated investors in these larger markets may drive the newly-privatized firms to seek efficiency

improvements by lowering excessive employment.

19

VI. Summary and Conclusions

Over the last twenty years, privatization has changed the world’s economic landscape by reducing

the role of the state in many nations’ economies. The empirical literature (summarized in Megginson and

Netter (2000), Djankov and Murrell (2002), López-de-Silanes (2005), Nellis (2005), and Megginson

(2005)) generally documents significant improvements in the financial and operating performance of

newly privatized firms. Given the strong evidence of economic benefits of privatization, the pressing

issue is no longer whether privatization leads to performance improvements, but rather why do these post-

privatization performance improvements occur. This study seeks to provide some answers regarding the

sources of the financial and operating improvements of newly privatized firms. We focus on the effects

of restructuring and changes in corporate governance.

Since governments frequently choose to restructure a firm prior to privatization through

acquisitions, divestitures, and/or financial restructuring (i.e., re-capitalizations), we examine whether such

restructurings contribute to increased improvements in post-privatization operating performance. Our

results confirm that restructurings are important determinants of post-privatization performance.

Specifically, our data provide evidence that restructuring leads to stronger efficiency improvements.

Second, changes in corporate governance (especially changes in ownership) brought on by

privatization may also contribute to the performance improvements. As expected, higher amounts of

foreign ownership lead to larger gains in post-privatization efficiency and lower levels of employment.

Additionally, we expect that firms will become more productive as state ownership decreases. Our results

confirm that real output significantly increases as state ownership declines. Finally, we test for the impact

of employee ownership on the performance of the newly privatized firm. Consistent with earlier

empirical studies, profitability decreases as employee ownership increases. Therefore, the proportional

post-privatization ownership (by the state, by foreign investors, and by employees) is an important

indicator of the firm’s success following privatization.

20

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1

Table 1

Restructuring Activity by Newly-Privatized Firms

This table documents the restructuring activities undertaken by our sample of newly-privatized firms. Our total sample, presented in Appendix 1, contains 161 firms from 39 countries. We categorize restructurings as: Acquisitions and Divestments (A&D), Financial, and Organizational/Operational (Org/Op).

Panel A

Year A&D Financial Org/Op Total % Total Res

1981 1 0 2 3 3.9%

1982 0 0 0 0 0.0%

1983 2 1 0 3 3.9%

1984 0 1 2 3 3.9%

1985 0 0 0 0 0.0%

1986 1 0 0 1 1.3%

1987 0 1 0 1 1.3%

1988 1 1 1 3 3.9%

1989 0 0 0 0 0.0%

1990 0 0 2 2 2.6%

1991 4 2 7 13 16.9%

1992 2 0 5 7 9.1%

1993 3 0 3 6 7.8%

1994 1 0 6 7 9.1%

1995 2 0 0 2 2.6%

1996 1 1 3 5 6.5%

1997 5 2 2 9 11.7%

1998 2 1 2 5 6.5%

1999 2 3 2 7 9.1%

Total 27 13 37 77 100.0%

Panel B

Industry A&D Financial Org/Op Total % Total Res

Financial 1 2 5 8 10.4%

Manuf 12 2 9 23 29.9%

Service 0 0 1 1 1.3%

Telecom 7 2 13 22 28.6%

Trans 7 2 3 12 15.6%

Utility 0 5 6 11 14.3%

Total 27 13 37 77 100.0%

2

Panel C

Country A&D Financial Org/Op Total % Total Res

Australia 2 0 3 5 6.5%

Austria 2 0 1 3 3.9%

Brazil 2 0 1 3 3.9%

Canada 2 0 3 5 6.5%

China 0 0 1 1 1.3%

Denmark 0 0 1 1 1.3%

Estonia 0 1 1 2 2.6%

Finland 1 0 0 1 1.3%

France 2 2 3 7 9.1%

Germany 2 0 1 3 3.9%

Hungary 2 0 1 3 3.9%

Ireland 0 0 1 1 1.3%

Israel 0 0 1 1 1.3%

Italy 3 2 3 8 10.4%

Japan 4 0 2 6 7.8%

Kuwait 0 1 0 1 1.3%

Malaysia 0 0 2 2 2.6%

Mexico 0 0 1 1 1.3%

New Zealand 0 1 1 2 2.6%

Poland 0 0 2 2 2.6%

Spain 0 1 1 2 2.6%

Sweden 3 0 2 5 6.5%

Switzerland 0 0 1 1 1.3%

UK 2 4 4 10 13.0%

US 0 1 0 1 1.3%

Total 27 13 37 77 100.0%

Panel D

Legal Origin A&D Financial Org/Op Total % Total Res

English 6 6 15 27 35.1%

Non-English 21 7 22 50 64.9%

Total 27 13 37 77 100.0%

Panel E

Development A&D Financial Org/Op Total % Total Res

OECD 23 11 30 64 83.1%

Non-OECD 4 2 7 13 16.9%

Total 27 13 37 77 100.0%

3

Table 2

Restructuring Activity by Newly-Privatized Firms: Acquisitions & Divestments

This table presents details regarding the choices made by newly-privatized firms to restructure through acquisitions and divestments.

Year Acquisition Divestment Total

1981 0 1 1

1982 0 0 0

1983 1 1 2

1984 0 0 0

1985 0 0 0

1986 1 0 1

1987 0 0 0

1988 0 1 1

1989 0 0 0

1990 0 0 0

1991 3 1 4

1992 1 1 2

1993 2 1 3

1994 0 1 1

1995 1 1 2

1996 0 1 1

1997 2 3 5

1998 1 1 2

1999 1 1 2

Total 13 14 27

Industry Acquisition Divestment Total

Financial 1 0 1

Manufacturing 6 6 12

Service 0 0 0

Telecom 3 4 7

Transportation 3 4 7

Utility 0 0 0

Total 13 14 27

Country Acquisition Divestment Total

Australia 1 1 2

Austria 1 1 2

Brazil 1 1 2

Canada 1 1 2

4

China 0 0 0

Denmark 0 0 0

Estonia 0 0 0

Finland 0 1 1

France 1 1 2

Germany 1 1 2

Hungary 1 1 2

Ireland 0 0 0

Israel 0 0 0

Italy 2 1 3

Japan 1 3 4

Kuwait 0 0 0

Malaysia 0 0 0

Mexico 0 0 0

New Zealand 0 0 0

Poland 0 0 0

Spain 0 0 0

Sweden 2 1 3

Switzerland 0 0 0

UK 1 1 2

US 0 0 0

Total 13 14 27

Legal Origin Acquisition Divestment Total

English 3 3 6

Non-English 10 11 21

Total 13 14 27

Development Acquisition Divestment Total

OECD 11 12 23

Non-OECD 2 2 4

Total 13 14 27

5

Table 3: Summary of Results from Tests of Predictions for the Full Sample of All Privatized Firms

This table presents empirical results for our full sample of privatized firms. The table presents, for each empirical proxy, the number of useable observations, the mean and median values of the proxy for the three-year periods prior and subsequent to privatization, the mean and median change in the proxy’s value after versus before privatization, and a test of significance of the median change. We employ the Wilcoxon rank sum test (with its z-statistic) as our test for significance for the change in mean values. The final two columns detail the percentage of firms whose proxy values change as predicted, as well as a test of significance of this change. Finally, sales efficiency uses inflation-adjusted sales figures divided by the number of employees each year. Deflated sales per employee is normalized to equal 1.000 in year 0 so other year figures are expressed as a fraction of per capita output in the year of divestment. Real sales and real capital expenditure are computed similarly. Variables

N

Mean Before (Median)

Mean After (Median)

Mean Change (Median)

Z-Statistic for Difference In Means (After-Before)

Percentage of Firms With Improved Performance

Z-Statistic for Significance of Percentage

PROFITABILITY Return on Sales (%)

137

7.47

(5.29)

9.87

(7.37)

2.40

(2.08)

4.369*

77.14

7.65*

OUTPUT Normalized Real Sales

128

0.76

(0.64)

1.92

(1.42)

1.16

(0.78)

7.974*

82.81

9.839*

EFFICIENCY Normalized Sales Efficiency

108

0.87

(0.72)

1.88

(1.35)

1.01

(0.63)

6.766*

82.41

8.845*

EMPLOYMENT Total

Employment

121

30,510

(12,000)

31,082

(11,437)

571.76

(-562.33)

-0.537

47.93

-0.455

INVESTMENT Normalized Real Capital

Expenditures

113

0.79

(0.65)

2.43

(1.58)

1.65

(0.93)

7.93*

89.38

13.59*

LEVERAGE Debt to Assets (%)

132

46.66

(41.68)

40.35

(34.04)

6.31

(7.63)

-5.06*

31.06

-4.70*

* indicates significance at the one percent level. ** indicates significance at the five percent level. *** indicates significance at the ten percent level.

6

Table 4: Comparisons of Performance Changes Following Privatization for Control Firms (Firms that have been Privatized by More Than or Equal to 50%) Versus No-Control Firms (Firms that have been Privatized by Less Than 50%)

This table presents comparisons of performance changes for Control Firms (companies that have been privatized by more than or equal to 50 percent) and No-Control firms (companies that have been privatized by less than 50 percent). The table presents, for each empirical proxy the number of useable observations, the mean and median values of the proxy for the three-year periods prior and subsequent to privatization, the mean and median change in the proxy’s value after versus before privatization, and a test of significance of the mean change. We employ the Wilcoxon signed rank test (with its z-statistic) as our test for significance for the change in mean values. The final three columns present the Kruskal-Wallis results for differences between the control subsample and the no-control subsample. The Krusual-Wallis test statistic mentions the ‘p’ value using the chi-square approximation. Finally, sales efficiency uses inflation-adjusted sales figures divided by the number of employees each year. Deflated sales per employee is normalized to equal to 1.0 in year 0 so other year figures are expressed as a fraction of per capita output in the year of divestment.

Variables N Mean Before (Median)

Mean After (Median)

Mean Change (Median)

Z-Statistic for Difference in Medians (After-Before)

Kruskal-Wallis Results for Differences between subsamples

Mean Rank Control No-Control KW Test Subsample Subsample Statistic ‘p’ value

Return on Sales Control No-Control

72

60

6.10

(5.23)

9.10 (5.36)

8.36

(7.16)

11.33 (8.29)

2.26

(1.93)

2.23 (2.93)

3.75*

2.35**

79.2

74.4

0.50

Real Sales Control No-Control

77

64

0.80

(0.68)

0.86 (0.67)

2.06

(1.50)

1.93 (1.37)

1.26

(0.82)

1.07 (0.70)

7.129*

4.91*

74.3

67.1

0.30

Sales Efficiency Control No-Control

61

45

0.84

(0.77)

0.88 (0.69)

1.98

(1.42)

1.76 (1.35)

1.14

(0.64)

0.88 (0.66)

6.05*

3.57*

54.9

51.6

0.59

Employment Control No-Control

63

55

32645

(13145)

26892 (11099)

34414

(12268)

26514 (10766)

1769 (-877)

-378

(-334)

-0.94

-0.33

60.0

59.1

0.88

Capital Expenditure Control No-Control

62

62

0.80

(0.68)

0.93 (0.69)

2.28

(1.60)

2.56 (1.40)

1.49

(0.92)

1.63 (0.71)

6.25*

4.62*

68.8

57.3

0.07***

Total Debt to Total Assets Control No Control

67

59

49.37 (41.68)

46.08

(46.93)

43.53 (35.91)

39.70

(34.99)

-5.84 (-5.77)

-6.38

(-11.94)

-3.27*

-3.64*

68.6

63.2

0.42

* indicates significance at the one percent level ** indicates significance at the five percent level *** indicates significance at the ten percent level

7

Table 5: Comparisons of Performance Changes Following Privatization for Companies with Greater than 50% Change in Board of Directors versus Less than or Equal to 50% Change in

Board of Directors

This table presents comparisons of performance changes for companies with less than fifty percent change in Board of Directors and companies with greater than or equal to fifty percent change in Board of Directors. The table presents, for each empirical proxy the number of useable observations, the mean and median values of the proxy for the three-year periods prior and subsequent to privatization, the mean and median change in the proxy’s value after versus before privatization, and a test of significance of the mean change. We employ the Wilcoxon signed rank test (with its z-statistic) as our test for significance for the change in mean values. The final three columns present the Kruskal-Wallis results for differences between Companies with Greater than Fifty Percent Change in Board of Directors versus Companies with Less than or Equal to Fifty Percent Change in Board of Directors The Krusual-Wallis test statistic mentions the ‘p’ value using the chi-square approximation. Finally, sales efficiency uses inflation-adjusted sales figures divided by the number of employees each year. Deflated sales per employee is normalized to equal to 1.0 in year 0 so other year figures are expressed as a fraction of per capita output in the year of divestment.

Variables N Mean Before (Median)

Mean After (Median)

Mean Change (Median)

Z-Statistic for Difference in Medians (After-Before)

Kruskal-Wallis Results for Differences between subsamples

Mean Rank

≥ 50% < 50% KW Test BoD Change BoD Change Statistic Subsample Subsample ‘p’ value

Return on Sales ≥ 50% change in BoD < 50% change in BoD

35 39

6.26

(5.48)

6.90 (4.86)

9.45

(7.14)

6.87 (5.83)

3.18

(1.66)

0.03 (0.97)

1.98**

0.97

41.0

41.9

0.86

Real Sales ≥ 50% change in BoD < 50% change in BoD

34

42

0.82

(0.71)

0.50 (0.51)

2.21

(1.40)

0.46 (0.44)

1.39

(0.70)

-0.04 (-0.07)

4.24*

4.49*

38.7

38.3

0.93

Sales Efficiency

≥ 50% change in BoD < 50% change in BoD

23

30

0.83

(0.80)

0.79 (0.59)

1.47

(1.13)

1.50 (1.13)

0.64

(0.32)

0.71 (0.54)

2.25**

3.39*

24.7

28.8

0.34

Employment ≥ 50% change in BoD < 50% change in BoD

26

37

19935

(11478)

37188 (12158)

20896

(10756)

38228 (17605)

961

(-723)

1040 (5447)

0.512

-0.14

32.8

31.4

0.76

Real Capital Expenditure

≥ 50% change in BoD < 50% change in BoD

26 41

0.80 (0.71)

0.69

(0.50)

2.77 (1.34)

1.54

(1.23)

1.96 (0.63)

0.86

(0.73)

3.75*

4.13*

38.0

31.5

0.19

Total Debt to Total Assets ≥ 50% change in BoD < 50% change in BoD

38

40

52.13 (53.79)

50.22

(51.32)

47.39 (40.16)

45.78

(43.52)

-4.74 (13.63)

-4.43

(-7.80)

-2.81*

-2.04**

37.8

43.0

0.32

* indicates significance at the one percent level ** indicates significance at the five percent level *** indicates significance at the ten percent level

8

Table 6: Comparison of Performance Changes Following Privatization for Companies that Restructured versus Companies that Did Not Restructure

This table presents comparisons of performance changes for companies that restructured versus companies that did not restructure. The table presents, for each empirical proxy the number of useable observations, the mean and median values of the proxy for the three-year periods prior and subsequent to privatization, the mean and median change in the proxy’s value after versus before privatization, and a test of significance of the mean change. We employ the Wilcoxon signed rank test (with its z-statistic) as our test for significance for the change in mean values. The final three columns present the Kruskal-Wallis results for differences between firms that restructured and firms that did not restructure. The Krusual-Wallis test statistic mentions the ‘p’ value using the chi-square approximation. Finally, sales efficiency uses inflation-adjusted sales figures divided by the number of employees each year. Deflated sales per employee is normalized to equal to 1.0 in year 0 so other year figures are expressed as a fraction of per capita output in the year of divestment.

Variables N Mean Before (Median)

Mean After (Median)

Mean Change (Median)

Z-Statistic for Difference in Medians (After-Before)

Kruskal-Wallis Results for Differences between subsamples

Mean Rank Restructure No-Restructure KW Test Subsample Subsample Statistic ‘p’ value

Return on Sales Restructure No-Restructure

49 25

8.10

(5.76)

9.19 (5.37)

10.24 (8.49)

11.54 (7.82)

2.14

(2.73)

2.35 (2.45)

2.56*

2.61*

51.8

51.2

0.92

Real Sales Restructure No-Restructure

50 45

0.74

(0.67)

0.94 (0.78)

2.07

(1.55)

2.56 (1.65)

1.33

(0.88)

1.62 (0.89)

5.09*

5.53*

48.4

47.5

0.87

Sales Efficiency Restructure No-Restructure

39 35

0.69

(0.62)

1.01 (0.85)

1.99

(1.36)

2.34 (1.96)

1.30

(0.74)

1.32 (1.10)

4.57*

4.37*

37.9

37.0

0.85

Employment Restructure No-Restructure

42 40

31461

(15003)

22972 (8229)

30226

(16331)

24250 (9817)

-1235 (1327)

1278

(1588)

-2.85*

1.46

34.0

49.4

0.003*

Real Capital Expenditure Restructure No-Restructure

46 47

0.72 (0.56)

1.04

(1.01)

2.03 (1.44)

3.34

(2.95)

1.31 (0.87)

2.30

(1.94)

4.78*

5.49*

47.5

46.5

0.85

Total Debt to Total Assets Restructure No-Restructure

40 40

44.79 (38.42)

35.36

(27.79)

35.34 (29.77)

32.37

(27.73)

-9.45 (-8.64)

-2.99

(-0.06)

-4.28*

-1.14

36.9

49.3

0.07***

* indicates significance at the one percent level ** indicates significance at the one percent level *** indicates significance at the one percent level.

9

Table 7: Regression Results to Identify Sources of Performance Improvements Regression results to identify the sources of performance improvements in newly-privatized firms. The dependent variables in the six models are change in return on sales (ROS), change in real sales, change in sales efficiency (sales per employee), change in employment, change in real capital expenditure, and change in leverage respectively. Change in each of the dependent variable is defined as percentage growth rate of the average of the three years post privatization data over the average of three years preprivatization data. See Table 6 for a description of the explanatory variables. T-statistics are in parentheses.

ROSA/ ROSB

RSALEA/ RSALEB

SALEFFA/ SALEFFB

EMPA/ EMPB

CAPEXA/ CAPEXB

LEVA/ LEVB

Constant

-10.882 (-0.07)

59.649 (1.85)c

8.461 (0.38)

86.084 (1.67)c

52.044 (0.34)

-3781.32 (-3.43)a

State Ownership

1.588 (1.74)c

-0.343 (-1.82)c

0.124 (0.90)

-0.905 (-2.85)a

-0.303 (-0.40)

0.578 (0.10)

Foreign Ownership

-0.825 (-0.51)

-0.189 (-0.56)

0.673 (2.50)b

-1.736 (-2.93)a

-1.676 (-1.17)

15.282 (1.46)

Employee Ownership -8.776 (-2.07)b

0.277 (0.32)

-0.009 (-0.01)

1.640 (1.12)

7.492 (2.06)b

8.840 (0.30)

Restructured Firms

85.665 (1.46)

13.259 (1.11)

17.985 (2.17)b

-18.112 (-0.95)

3.340 (0.07)

-503.56 (-1.26)

Regulated Firms

75.07 (1.19)

-20.599 (-1.59)

-0.611 (-0.07)

-2.062 (-0.10)

-38.261 (-0.73)

624.29 (1.49)

Shareholder Rights Index (SRI)

37.379 (1.27)

-9.816 (-1.65)c

2.834 (0.63)

-30.612 (-2.94)a

6.693 (0.27)

105.67 (0.55)

Real GDP Growth -2.664 (-0.87)

1.476 (2.34)

0.430 (0.97)

1.917 (1.88)c

3.503 (1.32)

91.07 (4.47)a

GNP per capita ($)

-0.004 (-0.67)

-0.0004 (-0.41)

-0.002 (-2.14)b

0.003 (1.62)

-0.003 (-0.54)

0.134 (3.62)a

Offer to Market Cap -11.737 (-0.39)

3.983 (0.66)

-8.842 (-2.17)b

20.676 (2.20)b

23.253 (0.91)

-218.54 (-1.16)

Adjusted R-Squared

0.0413

0.218 0.257 0.239 0.135 0.374

F-Value 1.03 2.02c 2.53b 2.43b 1.74 3.58a

Observations 48 47 41 42 44 40

a indicates significance at the one percent level b indicates significance at the five percent level c indicates significance at the ten percent level.

10

Appendix 1: Sample Firms Privatized Through Public Share Offerings, 1961 to 1999.

This table provides descriptive information for our sample of companies fully or partially privatized through public share offering during the period 1961 to 1999.

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

AUSTRALIA Tabcorp Holdings

Service

1994

504

100

0

CSL Manufacturing 1994 228 100 0

Qantas Transportation 1995 1070 100 75

Commonwealth Bank Financial 1996 3100 50.4 0

Telstra Telecommunications 1997 10530 100 66.6

AUSTRIA Omv

Manufacturing

1987

117

100

85

Flughafen Wien Ag Transportation 1992 162 100 73

Voest-Alpine Ag Manufacturing 1992 104 100 51

Austria Tabak Manufacturing 1997 340 100 56

Bohler Uddeholm Manufacturing 1996 393 72.7 25

BRAZIL Petrobras Manufacturing 1997 534 100 79.2

CANADA Fishery Products

Manufacturing

1987

134

100

0

Air Canada Transportation 1988 196 100 57

Potash Corp. of Saskatchewan Inc Manufacturing 1989 197 100 63

Telus Telecommunications 1990 835 100 40

Petro Canada Manufacturing 1991 478 100 81

Cameco Corp. Manufacturing 1991 86 100 76

Nova Scotia Power Corp. Utility 1992 675 100 69

Suncor Inc Manufacturing 1992 151

Alberta Energy Co Ltd Utility 1993 355 100 0

CHILE Soquimich

Manufacturing

1983

100

0

Chilmetro Utility 1985 100 0

Cap Manufacturing 1985 82 100 53

Iansa Manufacturing 1986 100 0

CHINA China Steel Corporation

Manufacturing

1991

195

100

91

Brillance China Automotive Holdings Ltd Manufacturing 1992 86 92 68

China Telecom Telecommunications 1997 4000 100 75

Huaneng Power Intl Utility 1998 142 100 75

11

DENMARK Kryolit Selskabet Oeresund

Manufacturing

1985

50

0

Teledanmark Telecommunication 1994 2894 90 51

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

ESTONIA Estonian Telecom Telecommunications 1999 221 100 76.3

FINLAND Rautarurkki oy

Manufacturing

1989

101

99

87

Kemira O.Y. Manufacturing 1994 240 100 71

Fortum Manufacturing 1998 573 97.5 75.5

Sonera Telecommunications 1998 1400 100 78.8

FRANCE Saint Gobain

Manufacturing

1986

2091

100

0

Elf Aquitaine Manufacturing 1986 493 67 56

Compagnie Financiere de Paribas Financial 1987 2742 100 0

Compagnie Financiere de Credit Commercial Financial 1987 732 100 0

Societe Generale Alsaciene de Banque Financial 1987 3577 100 0

Agence Havas Manufacturing 1987 405 40 0

Compagnie Financiere de Suez Financial 1987 2929 100 0

Banque Industrielle et Mobiliere Financial 1987 60 100 0

Compagnie Generale d'electricite Manufacturing 1987 1331 100 0

Credit Local de France SA Financial 1991 340 73 51

Total SA Manufacturing 1992 906 34 15

Banque Nationale de Paris SA Financial 1993 4920 100 40

Rhone-Poulenc SA Manufacturing 1993 564 78 67

Credit Lyonnais Financial 1999 6960 100 10

France Telecom Telecommunications 1997 7080 100 77

Pechiney Manufacturing 1998 371 10.5 1

STMicroelectronics Manufacturing 1994 2000

GERMANY Volkswagen

Manufacturing

1961

315

100

20

Veba Manufacturing 1965 206 100 36

Ivg Service 1986 84 100 55

Viag Utility 1986 339 100 60

Deutsche Verkehrs Kredit Bank Financial 1988 11 100 75

Deutsche Pfandbrief & Hypothekenbank AG Financial 1991 1340 100 53

Deutsche Telekom Telecommunications 1996 13300 74 65.6

12

GREECE OTE Telecommunications 1996 398 100 94

HUNGARY Matav Telecommunications 1997 1200 22.75 5.75

OTP Bank Financial 1997 213 25

0

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

INDIA Gas Authority of India (GAIL) Utility 1999 42 0 0

VSNL Telecommunications 1997 527 82 65

INDONESIA Indosat

Telecommunications

1994

1060

100

68

IRELAND Greencore Group PLC

Manufacturing

1991

136

100

49

Northern Ireland Utility 1993 520 100 0

Telecom Eireann Telecommunications 1997 4300 100 23

ISRAEL Bank Leumi Financial 1998 52 63.5 61.5

Bezeq Telecommunications 1998 223 63.5 54

ITALY Saipam

Manufacturing

1984

74

100

80

Credito Fondiario Financial 1985 28 100 79

Aeritalia Manufacturing 1986 59 100 84

Nuovo Pignone Manufacturing 1986 60 100 82

Stet Telecommunications 1991 264

Banco di Napoli Financial 1991 323 59 50

Credito Italiano SPA Financial 1991 140 65 58

AEM Utility 1998 900 100 51

Autostrade Transportation 1999 4600 47.7 0

Banca Nazionale del Lavoro Financial 1998 4600 85 0

Enel Utility 1999 18900 100 65.5

JAMAICA NCB Group

Financial

1986

16

100

0

Caribbean Cement Company Manufacturing 1987 46 100 0

JAPAN Nippon Telephone and Telegraph

Telecommunications

1987

15097

100

88

Japan Airlines Transportation 1987 2600 35 0

Japan Tobacco Ltd Manufacturing 1994 3400 100 81

Japan Railroad East Transportation 1999 5800 100 50

13

Japan Railroad West Transportation 1996 4400 100

NTT DoCoMo Telecommunications 1999 18400 100 67.1

KOREA Pohang Iron And Steel

Manufacturing

1988

3400

100

51

Korea Telecom Telecommunications 1993 100 100 71

Korea Electric Power Utility 1999 750 100 79

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

KUWAIT Arab Insurance Group Financial 1997 290 100 49.5

MALAYSIA Malaysian Airlines

Transportation

1985

78

100

73

Telekom Malaysia Telecommunications 1990 872 100 76

Tenaga Nasional Berhad Utility 1992 837 100 77

MEXICO Telefonos De Mexico

Telecommunications

1991

2170

30

15

NETHERLANDS Koninklijke Ptt Nederland N.V. (Kpn)

Telecommunications

1994

3750

100

69

KLM Transportation 1986 295 55 39

DSM Manufacturing 1989 630 100 66

NEW ZEALAND Petrocorp

Manufacturing

1988

500

100

30

Telecom Corporation Of New Zealand Telecommunications 1991 819 100 0

Contact Energy Utility 1999 1420 100 85

OMAN Oman Flour Mills

Manufacturing

1986

90

60

POLAND Polifarb-Cieszyn

Manufacturing

1993

1

100

20

T.C.Debica Manufacturing 1994 56 100 51

Polifarb-Wroclaw Manufacturing 1994 30 100 25

KGHM Polska Miedz Manufacturing 1997 415 100 49

PORTUGAL Banco Portugues Do Atlantico Sa

Financial

1990

382

100

67

Banco Espirito Santo & Commercial Financial 1991 385 100 60

Electricidade de Portugal Utility 1997 2100 70 52

14

QUATAR Qatar Telecom Telecommunications 1998 740 100 55

SINGAPORE Singapore Intl Air

Transportation

1985

233

77

63

Singapore National Printers Manufacturing 1987 3 100 63

Keppel Corporation Manufacturing 1988 68 30

Singapore Telecommunications Ltd Telecommunications 1993 1950 100 93

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

SPAIN Gesa

Utility

1986

61

94

56

Repsol Manufacturing 1989 1140 100 73

Argentaria Financial 1993 850 100 75

Amadeus Service 1999

Indra Manufacturing 1999 433 66 0

Red Electrica Espanola Utility 1999 349 100 65

Telefonica Telecommunications 1997 4360 21 0

SWEDEN Procordia

Manufacturing

1987

165

100

81

Svenkt Stal Ab (Ssab) Manufacturing 1992 364 48 0

Celsius Manufacturing 1993 144 100 53

Pharmacia Ab Manufacturing 1994 1040 58 10

SWITZERLAND Swisscom Telecommunications 1998 5600 100 65.5

THAILAND Thai Airways

Transportation

1992

225

100

95

TURKEY Netas - Northern Elektrik Telecommunikasyon

Manufacturing

1993 60

Turk Otomobil Fabrikasi As (Tofas) Manufacturing 1994 333 100 79

Turkiye Is Bankasi Financial 1998 651 12.3 0

UK British Petroleum

Manufacturing

1979

602

51

46

Cable & Wireless Manufacturing 1981 466 100 50

British Aerospace Manufacturing 1981 339 100 48

Amersham Intl Manufacturing 1982 131 100 0

Associated Brit Ports Transportation 1983 33 100 49

British Telecom Telecommunications 1984 4763 100 50

British Gas Utility 1986 8012 100 0

Rolls Royce Manufacturing 1987 2234 100 0

15

British Airports Authority Transportation 1987 2028 100 0

British Airways Transportation 1987 1327 100 0

British Steel Manufacturing 1988 4524 100 0

London Electricity Utility 1990 1010 100 0

Northern Electric Utility 1990 570 100 0

South Wales Electricity Plc Utility 1990 470 100 0

Seeboard Plc Utility 1990 589 100 0

Manweb Plc Utility 1990 550 100 0

Southern Electric Plc Utility 1990 1249 100 0

COMPANY INDUSTRY ISSUE DATE US$ SIZE GOVT BEFORE

GOVT AFTER

U.K. (contd…) Eastern Electricity Plc

Utility 1990 1249 100 0

East Midlands Electricity Plc Utility 1990 1010 100 0

Yorkshire Electricity Group Plc Utility 1990 959 100 0

Midland Utility 1990 969 100 0

Scottish Power Plc Utility 1991 2933 100 0

Forth Ports Authority Transportation 1992 45 100 10

British Energy Utility 1996 2200 100 12.5

Railtrack Transportation 1996 3100 100 0

USA Conrail

Transportation 1987 1650 100 0

United States Enrichment Corp Utility 1998 1425 100 0

VENEZUELA CANTV Telecommunications 1996 1010 49 0

16

Appendix 2: Definitions of Explanatory Variables Used in Regression Analysis

The following table defines the empirical variables used in our regression models to identify potential determinants of post-privatization performance improvements.

Variable

Proxy For

Empirical Definition

State Ownership

Share Ownership Retained by Government

Percent of shares owned by the government after the privatization

Foreign Ownership

Share Ownership by Foreign Investors

Percent of shares allocated to foreign investors at the time of issue

Employee Ownership

Share Ownership by Employees

Percent of shares allocated to employees at the time of Issue

Restructured Firms

Whether Firm Was Restructured

Indicator variable with value = 1 if firm has restructured in the form of organizational restructure and/or acquisitions and divestitures and/or financial restructure during the seven year window period, 0 if not.

Regulated Firms

Regulation versus competition

Indicator variable with value = 1 if firm is from a regulated industry, else 0. A firm is in regulated industry if it belongs to the utilities or telecommunication industries.

Shareholder Rights Index (SRI)

Protection of Shareholder Rights

Value from 0 to 5; higher values indicate stronger protection of rights of minority shareholders

Real GDP Growth

Growth in the Economy

Percentage growth in Real GDP for three year post-privatization period over the three year pre-privatization period

GNP per capita ($000)

Development of Economy

Gross National Product per capita in U.S.$ thousands.

Offer to Market Capitalization

Capital Market Development

Ratio of offer amount (market value of the privatizing share issue) to total market capitalization of country’s equity market

17

Appendix 3: Details of Firms that Restructured during the Privatization Window This table shows the firms that restructured and the manner in which they restructured.

Obs. No. Name of Company

Priv Date

Type of Restructure Details of Restructure

1 AEM 1998 F Financial Restructure (restructure loan and refinance debt)

2 Air Canada 1989 O General Organizational Restructure (completed in year of privatization)

3 Arab Insurance Group 1987 F Financial Restructuring (overall restructuring of balance sheet)

4 Associated British Ports 1983 F Financial Restructuring (debt write-off of Pound 84 Million)

5 Autostrade 1991 O Organizational Restructure (functional re-organization)

6 Banco Di Napoli 1991 O, A Organizational Restructure (in year of privatization); Acquisition

7 Bezeq

1994 O Organizational Restructure (employment restructure; early retirement plan)

8 Bohler Uddeholm

1997 O, A Operational Restructure (restructure production sites); Acquisitions and Divestitments

9 British Energy

1996 O Organizational Restructure (redundancy and severance program)

10 British Telecom 1984 O, F General Organizational Restructure; Financial Restructure (substantial debt write-off)

11 Cable Wireless 1981 O General Organizational Restructure (at time of privatization)

12 Celsius 1993 O, A General Organizational Restructure; Acquisitions

13 China Telecom

1992 O Organizational Restructure (unify cellular telephonic business; reorganization of telecom business)

14 Commonwealth Bank

1990 O Operational Restructure (modernization of information technology processing and computer equipment)

15 Compagnie Financiare De Suez 1997 O General Organizational Restructure

16 Credit Lyonnais 1991 O, F General Organizational Restructure; Financial Restructure

17 Deutsche Telekom

1998 O, A

Organizational Restructure (re-organization of staff and R&D function); Acquisitions and divestments also took place during the same period.

18 ELF 1986 A Acquisitions

19 ENEL 1996 O, F General Organizational Restructure; Financial Restructure

20 Estonian Telecom

1999 O, F General Organizational Restructure; Financial Restructure (equity re-capitalization)

18

Obs. No. Name of Company

Priv Date

Type of Restructure Details of Restructure

21 Fishery Products 1988 A Divestment (prior to privatization)

22 Fortum 1994 A Divestment

23 Japan Railroad East

1996 O, A Operational Restructuring (restructuring of retailing, convenience store, and restaurant business); Divestment

24 Japan Railroad West 1999 A Acquisitions and Divestments

25 KGHM Polska Miedz

1998 O Organizational Restructure (employment and divisional reorganization; some redeployment of assets)

26 Matav 1983 A Divestment

27 Nova Scotia Power 1992 O Organizational Restructure

28 NTT DoCoMo 1981 O, A Organizational Restructure; Divestment

29 OTP Bank

1992 O

Organizational Restructure (following privatization, reorganize capital market service; realignment of divisions within OTP)

30 Pechiney

1997 F, A Financial Restructuring (restructure long-term obligations to employees and retirees); Acquisitions

31 Petro Canada 1991 O, A Organizational Restructuring; Acquisitions

32 Petrobras

1993 O, A General Organizational Restructuring; Acquisitions and Divestments

33 Petrocorp 1988 F Financial Restructuring (debt write-off prior to privatization)

34 Pharmacia 1994 O Organizational Restructure (re-organize management)

35 Polifarb-Wroclaw 1994 O Organizational Restructure (in year of privatization)

36 Qantas 1995 A Acquisitions and Divestments

19

Obs. No. Name of Company Priv

Date Type of

Restructure Details of Restructure

37 Railtrack

1997 F, A Financial Restructuring (equity recapitalization in 1997); Acquisitions and Divestments

38 Red Electrica Espanola

1995 O, F

Financial Restructuring (debt restructuring); Operational Restructuring (reorganization of management and overall operations)

39 Rhone Poulec 1993 O General Organizational Restructuring (beginning prior to privatization and continuing through prospectus date)

40 Scottish Power 1991 O, F General Organizational Restructuring; Financial Restructuring (debt write-off of Pound 508.70 million)

41 SSAB 1992 A Acquisitions and Divestments

42 STET 1991 A Acquisitions and Divestments (prior to privatization)

43 TABCORP 1994 O General Organizational Restructuring

44 Telecom Corp Of New Zealand 1991 O General Organizational Restructuring

45 Teledanmark 1994 O Organizational Restructuring (managerial re-organization)

46 Telefonos De Mexico 1991 O General Organizational Restructuring

47 Telekom Malaysia 1990 O General Organizational Restructuring

48 Tenaga National 1992 O General Organizational Restructuring

49 U.S. Enrichment Corp. 1999 F Financial Restructuring (short and long-term debt reduction)

50 Swisscom 1992 O Organizational Restructuring (layoffs and outsourcing)

51 Telecom Eireann 1984 O Organizational Restructuring (staff restructure and layoffs)

52 Telstra

1994 O Operational Restructuring (computerization; employment re-organization)

“O” means firms restructured by means of operational and/or organizational restructure. Firms either had employee lay off, or changed centralization to decentralization of units.

Total of 38 firms had management and/or organizational restructure. “F” means firms that had financial restructure. The most common mode of financial restructure is debt write-offs or debt-to-equity swaps. Total of 14 firms had financial

restructure. “A” means firms restructured by means of acquisitions and divestiture. Divestitures of loss making units were more common than acquisitions. Total of 27 firms restructure by

means of acquisitions and divestitures