Leviathan as a Minority Shareholder: Firm-Level Implications of State Equity Purchases
TL;DR: In this paper, the authors examined the effect of minority state ownership on firms' returns on assets and on the capital expenditures of financially constrained firms with investment opportunities, finding that minority stakes are less affected by the "agency distortions" commonly found for full-fledged state ownership.
Abstract: In many countries, firms face institutional "voids" that raise the costs of doing business and thwart entrepreneurial activity. We examine a particular mechanism that may address those voids: minority state ownership. Minority stakes are less affected by the "agency distortions" commonly found for full-fledged state ownership. Using panel data from publicly traded firms in Brazil, where the government holds minority stakes through its development bank, we find a positive effect of those stakes on firms' returns on assets and on the capital expenditures of financially constrained firms with investment opportunities. However, these positive effects are substantially reduced when minority stakes are allocated to business group affiliates and as local institutions develop. Therefore, we shed light on the firm-level implications of minority state ownership, a topic that has received scant attention in the strategy literature. [ABSTRACT FROM AUTHOR]
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TL;DR: The authors assess whether state ownership benefits or impedes firms' innovation by using two longitudinal panel datasets of Chinese manufacturing firms, and show that state ownership in an emerging economy enforces innovation.
Abstract: Using two longitudinal panel datasets of Chinese manufacturing firms, we assess whether state ownership benefits or impedes firms’ innovation. We show that state ownership in an emerging economy en...
543 citations
Cites background from "Leviathan as a Minority Shareholder..."
...…theory, state ownership is incompatible with innovation (Shleifer, 1998; Ramaswamy, 2001), but it overlooks the resource advantage that state ownership brings to overcome the institutional voids in emerging economies (Inoue, Lazzarini, and Musacchio, 2013; Musacchio, Lazzarini, and Aguilera, 2015)....
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...But governments as minority owners generally relinquish major decision-making power to the private owners, who employ pay-for-performance incentive practices and close monitoring systems to reduce agency problems (Inoue, Lazzarini, and Musacchio, 2013)....
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...…Administration, University of Missouri–St. Louis 3 John Cook School of Business, Saint Louis University advantage (Lazzarini, 2015; Mazzucato, 2015) and how various forms of state ownership foster firms’ performance (Inoue, Lazzarini, and Musacchio, 2013; Musacchio, Lazzarini, and Aguilera, 2015)....
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...For example, Inoue, Lazzarini, and Musacchio (2013) found that minority state ownership positively affects firms’ performance in Brazil, and Lazzarini (2015) proposed a conceptual framework to discuss how governments can actively devise industrial policies to enhance firms’ competitive advantage....
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TL;DR: In this article, a more nuanced view of state-owned enterprises as hybrid organizations, in which the levels of ownership and control by the state can vary, is presented, drawing on 36 cases from four industries in 23 countries.
Abstract: State-owned enterprises represent approximately 10% of global gross domestic product. Yet they remain relatively underexplored by management scholars. Firms have often been viewed dichotomously as either state owned or privately owned. Today, however, we encourage a more nuanced view of state-owned enterprises as hybrid organizations, in which the levels of ownership and control by the state can vary. Drawing on 36 cases from four industries in 23 countries, we lay the groundwork for a richer understanding of state-owned enterprises by management scholars in the future.
468 citations
Cites background or methods from "Leviathan as a Minority Shareholder..."
...Some hybrid SOEs, such as Brazil’s Petrobras and Vale, experience high levels of government ownership but are largely independent in their operations (Inoue et al., 2013)....
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...Clearly, state ownership and private ownership represent different institutional logics (Bruton, Ahlstrom, & Li, 2010), thus necessitating our consideration of SOEs incorporating both state and private ownership as hybrid organizations (Inoue et al., 2013)....
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...Following the earlier SOE research that appeared in top-tier journals (Inoue et al., 2013; Peng & Heath, 1996), we draw on three core managerial theories that help scholars understand all organizations to develop our understanding of hybrid SOE firms: transaction cost economics, agency theory, and…...
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TL;DR: In this article, the authors cross-fertilize the IB and SOEs literatures in their analysis of foreign investment behavior and introduce two arguments: the extraterritoriality argument, which helps explain how the MNC dimension of SOMNCs extends the SOE literature, and the non-business internationalization argument to explain how SOE dimension of SOEs and multinational companies (MNCs) in at least two ways.
Abstract: The globalization of state-owned multinational companies (SOMNCs) has become an important phenomenon in international business (IB), yet it has received scant attention in the literature. We explain how the analysis of SOMNCs can help advance the literature by extending our understanding of state-owned firms (SOEs) and multinational companies (MNCs) in at least two ways. First, we cross-fertilize the IB and SOEs literatures in their analysis of foreign investment behavior and introduce two arguments: the extraterritoriality argument, which helps explain how the MNC dimension of SOMNCs extends the SOE literature, and the non-business internationalization argument, which helps explain how the SOE dimension of SOMNCs extends the MNC literature. Second, we analyze how the study of SOMNCs can help develop new insights of theories of firm behavior. In this respect, we introduce five arguments: the triple agency conflict argument in agency theory; the owner risk argument in transaction costs economics; the advantage and disadvantage of ownership argument in the resource-based view (RBV); the power escape argument in resource dependence theory; and the illegitimate ownership argument in neo-institutional theory. After our analysis, we introduce the papers in the special issue that, collectively, reflect diverse and sophisticated research interest in the topic of SOMNCs.
438 citations
TL;DR: In this paper, Kicking Away the Ladder: Development Strategy in Historical Perspective is presented, where the authors focus on the historical perspective of the development strategy and the historical context.
Abstract: (2007). Kicking Away the Ladder: Development Strategy in Historical Perspective. Journal of Economic Issues: Vol. 41, No. 3, pp. 883-885.
367 citations
TL;DR: A review and synthesis of existing research on institutional voids, tracking the evolution of institutional void scholarship since the inception of the concept, can be found in this article, where the authors highlight four different strategies for responding to them: internalization, substitution, borrowing and signaling.
Abstract: For nearly two decades, scholars in international business and management have explored the implications of institutional voids for firm strategy and structure. Although institutional voids offer both opportunities and challenges, they have largely been associated with firms’ efforts to avoid or mitigate institutional deficiencies and reduce the transaction costs associated with operating in settings subject to those institutional shortcomings. The goal of this special issue is to advance scholarship on this topic by (a) exploring institutional voids that are new to the literature, (b) providing a deeper assessment of the different ways in which firms respond to these voids, and (c) utilizing diverse disciplines and theoretical approaches to do so. In this introduction, we first review and synthesize extant research on institutional voids, tracking the evolution of institutional void scholarship since the inception of the concept (Khanna & Palepu, Journal of Economic Literature, 45(2):331–372, 1997) and providing our perspective on its contributions and limitations. We then summarize the contributions of the articles included in this special issue. In addition to identifying an array of institutional voids – economic and social – the articles highlight four different strategies for responding to them: internalization, substitution, borrowing and signaling. Drawing on these, we develop new insights on the implications of institutional voids for firm behavior. We conclude with suggestions for future research.
274 citations
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TL;DR: In this article, the authors examine the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time.
Abstract: Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)
26,011 citations
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.
14,517 citations
TL;DR: This paper examined whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms, and found that industrial sectors that are relatively more in need of foreign finance develop disproportionately faster in countries with more developed financial markets.
Abstract: Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.
6,815 citations
"Leviathan as a Minority Shareholder..." refers background in this paper
...For instance, voids associated with scarce capital markets limit firms’ ability to invest in profitable projects, especially projects requiring large, fixed capital allocations with long maturity (Levine, 2005; Rajan & Zingales, 1996)....
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TL;DR: This paper examined whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship: that financial development reduces the costs of external finance to firms, and they found that industrial sectors that are relatively more in need of foreign finance develop disproportionately faster in countries with more developed financial markets.
Abstract: This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship: that financial development reduces the costs of external finance to firms. Specifically, the authors ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more-developed financial markets. They find this to be true in a large sample of countries over the 1980s. The authors show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. Copyright 1998 by American Economic Association.
5,425 citations
TL;DR: This paper decompose the conventional measure of evaluation bias into several components and find that bias due to selection on unobservables, commonly called selection bias in econometrics, is empirically less important than other components, although it is still a sizeable fraction of the estimated programme impact.
Abstract: This paper considers whether it is possible to devise a nonexperimental procedure for evaluating a prototypical job training programme. Using rich nonexperimental data, we examine the performance of a two-stage evaluation methodology that (a) estimates the probability that a person participates in a programme and (b) uses the estimated probability in extensions of the classical method of matching. We decompose the conventional measure of programme evaluation bias into several components and find that bias due to selection on unobservables, commonly called selection bias in econometrics, is empirically less important than other components, although it is still a sizeable fraction of the estimated programme impact. Matching methods applied to comparison groups located in the same labour markets as participants and administered the same questionnaire eliminate much of the bias as conventionally measured, but the remaining bias is a considerable fraction of experimentally-determined programme impact estimates. We test and reject the identifying assumptions that justify the classical method of matching. We present a nonparametric conditional difference-in-differences extension of the method of matching that is consistent with the classical index-sufficient sample selection model and is not rejected by our tests of identifying assumptions. This estimator is effective in eliminating bias, especially when it is due to temporally-invariant omitted variables.
5,069 citations
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