Evaluation of the impact of privatization on enterprises performance the case of vietnam

By comparing financial results of 38 enterprises equitized in 2005 and early 2006 in pre and post privatization periods, the study has found dramatic increases in profitability and effic

VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

EVALUATION OF THE IMPACT

OF PRIVATIZATION ON

ENTERPRISE'S PEFORMANCE

THE CASE OF VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOP.MENIECONOMICS

BQ GiAO .DVC.D.Ao r.4-; -·

TRlfCiNG D,t l HQC KINH r{TP.HC,

11-IU\liEN

r I /11tt a

r:-Supervisor : Dr NGUYEN TRONG HOAI

TRUONG D~l HOC I<INI-J TE TP.HCM CHUdNG TRINH HQt- 1 ~C 8AO T~O

CAO HOC KINH Tl PHAT T~lt~

1/I~T N•M t-<ft L-\N (UEH-ISSl

HOCHIMINH CITY, OCTOBER 2008

TABLE OF CONTENTS

Table of Content i

Acknowledgements iv

Abstract v

List of Abbreviations vi

List of Tables vii

List of Figures vii

CHAPTER ONE: INTRODUCTION !

1.1 Background and problem statement 1

1.2 Research questions 2

1.3 Research methodology 2

1.4 Research objectives and hypotheses 4

1.5 Research data 4

1.6 Research units and scope of data 4

1 7 Structure of the study 4

CHAPTER TWO: LITERATURE REVIEW S 2.1 Introduction 5

2.2 Privatization: history and definition 5

2.2.1 History of privatization term 5

2.2.2 Definition 6

2.3 Privatization models 8

2.4 Objectives of privatization programs 9

2.5 Privatization & Performance 12

2.5.1 Fundamental economic theories 12

a Property Rights 12

b Principal-Agent Problem or Agency relationship 14

2.5.2 Empirical evidences 15

2.5.3 Summary 19

CHAPTER THREE: PRIVATIZATION PROCESS- THE CASE OF VIETNAM.21

3.1 "Equitization" terminology in Vietnam context 22

3.2 Major characteristics of Vietnam's equitization program 22

3.3 Empirical studies for Privatization in Vietnam 27

3.4 Chapter remarks 28

CHAPTER FOUR: RESEARCH METHODOLOGY 29

4.1 Research hypotheses 29

4.2 Methodology selection 30

4.2.1 Impact valuation methods 31

4.2.2 Multiple regressions 32

4.3 Model design 34

4.4 Sampling 35

4.4.1 Description of data collection 35

4.4.2 Statistical data description 35

a Structure of the sample 36

b Size ofthe samples 36

c Ownership structure 37

d Equitization modes 38

e Listing status 38

f Corporate governance 39

4.5 Chapter remarks 40

CHAPTER FIVE: DATA ANALYSIS AND FINDINGS 40

5.1 Introduction 41

5.2 Results from the method of reflexive comparison 4 2 5.2.1 Profitability 42

5.2.2 Output growth 47

5.2.3 Operating efficiency 49

5.2.4 Leverage 52

5.2.5 Employment and compensation 55

5.2.6 Summary of impact valuation analyses 58

5.3 Regression analysis 59

5.3.1 Profitability , 59

5.3.2 Efficiency 60

5.3.3 Leverage 60

5.3.4 Summary of regressions analyses 60

CHAPTER SIX: CONCLUSIONS AND POLICY IMPLICATIONS 61

6.1 Conclusions and policy implications from impact valuation 62

6.2 Conclusions and policy implications from OLS regressions 64

6.3 Research limitations 65

REFERENCES 67

APPENDICES 73

• ACKNOWLEDGMENTS

These acknowledgments must begin with, and I cannot thank enough, Dr Nguyen Trong Hoai, my supervisor, for scientific instructions and encouragements to undertake this project Behind my efforts are my parents, sister and husband whose daily patience, sympathies and encouragements were very essential I wish to express my enormous love and appreciation to my parents who have tacitly and unconditionally created the best conditions for me and to my husband who has shared with me the highs and lows in preparation of the thesis I am also grateful to several friends for providing the data as well

as valuable ideas and comments

ABSTRACT

This paper studies impacts of equitization on firm operating performance in Vietnam

By comparing financial results of 38 enterprises equitized in 2005 and early 2006 in pre and post privatization periods, the study has found dramatic increases in profitability and efficiency as well as sharp declines in leverage following equitization Unexpectedly, gains

in output growth and decreases in employments are statistically insignificant

Nevertheless, it is difficult to conclude that those improvements are sole impacts of equitization since the study is unable to control concurrent effects of structural reforms and economy-wide changes that are frequently encountered in the transition economies like Vietnam Notwithstanding the vague answer on impacts of equitization, the author gives favors to equitization in the sense of creating incentives for managers, in tum, encouraging them to be more focused on improved profit and efficiency targets

From multiple regression analyses, the study points out determinants of changes in profitability and leverage including listing status, firm size, directorship changes, and privatization modes The OLS analyses lead to implications that the government should strengthen its managements over equitization process, impose mandatory requirements on getting listed after equitization, promote directorship replacements, reduce its holdings or shift the representative role of relevant authorities to State Capital Investment Corporation

ABBREVIATIONS

BOD : Board of Directors

CEO : Chief Executive Officer

ClEM : Central Institute for Economic Management

CPI : Consumer Price Index

HASTC : Hanoi Securities Trading Center

HOSE : Ho Chi Minh Stock Exchange

IPO : Initial Public Offerings

OLS : Ordinary Least Square

SCIC : State Capital Investment Corporation

SIP : Share Issuance Privatization

SOE : State Owned Enterprise

TVEs : Township and villages owned enterprises

VND : Vietnam Currency

LIST OF TABLES

Table 2.1: Various Privatization models 9

Table 2.2: Summary of financial indicators used in MNR approach 15

Table 3.1: Number of equitized firms and average ownership structure in 1992- 2006 26

Table 4.3: Summary ofthe hypotheses for impact valuation 30

Table 4.1: Variables' definitions and their expected signs 33

Table 4.2: Variables' definitions and their expected signs 34

Table 4.4: Size of samples 36

Table 4.5: Ownership structure 37

Table 4.6: Equitization modes 38

Table 4.7: Structure of Directors 39

Table 5.1: Tests of predictions for profitability of equitized firms .45

Table 5.2: Tests of predictions for output growth of equitized firms 48

Table 5.3: Tests ofpredictions for efficiency ofequitized firms 50

Table 5.4: Tests of predictions for leverage of equitized firms 53

Table 5.5: Tests of predictions for employment and compensation of equitized firms 56

Table 5.6: Regression results 59

LIST OF FIGURES Figure 2.1: Three layers of privatization definition 7

Figure 4.1: Structure of samples by sectors and regions 36

Figure 4.2: Listing status 38

Figure 4.3: Roles of non-executive BoD members 39

•

CHAPTER ONE INTRODUCTION

1.1 Background and problem statement

Privatization has been widely promoted as a mean of restructuring the economy in both developed and developing countries from 1980s The program has been launched under expectation to create long term benefits to both firm and entire economy levels Over two decades since Thatcher's government first introduced modem policy of privatization have provided efficient time for researchers building up theoretical frameworks as well as empirical evidences for privatization outcomes Nevertheless, nowadays, impacts of privatization remain one of the most controversial economic issues Recent reviews of impacts of privatization have shown the favor to privatization as an important tools to help allocate resources, restructure the economy and then facilitate the economic growth In contrast, there are some authors pointing out some failure evidences and drastically criticizing methodologies employed to generate these conclusions They argue that performance changes may be mixed effects of privatization and contemporaneous events including more macroeconomic stability, fiscal prudence, freer capital movements, promotion of competition and regulatory changes (Parker and Kirkpatrick, 2005)

Following the international trend, Vietnam launched the privatization program m

1992 as a major part of State-Owned Enterprise (SOE) Reform Program Privatization program, called as "equitization" in Vietnam, is an interesting case when the state retains the voting control and holdings of insiders are fairly substantial From theoretical point for view, performance of a privatized firm where the state remains the controlling role is not far different from that of a SOE (Boycko et al., 1996) Therefore, the program outcomes

remain in question

Unfortunately, the equitization program has been executed for over ten years, though, till now there are a limited number of empirical studies to evaluate appropriately the consequences of the program except reports of ClEM (2002 and 2005) and Truong et al

(2003 and 2007) ClEM studies report improved firm's performance following equitization

by using descriptive analysis on 256 equitized firms across Vietnam during 1992 and 2003

However, the studies have not come to a clear conclusion that changes are the sole impact

of equitization Whereas, Truong et al (2007) using data of 92 SOEs and 147 equitized

firms in southern provinces indicate positive impacts of equitization on firm's operating performance By employing a hybrid methodology, the latter study not only controls concurrent effects of structural reforms but also points out determinants of performance changes which include firm size, ownership, listing status, location and corporate governance

However, because most of firms selected for studies of ClEM (2002 and 2005) and Truong et al (2003 and 2007) had been equitized before 2003, they have brought the characteristics of the program in the early stage, which are small firm size, low state concentration and high participation of workers These studies could be seriously suffered from endogenous bias as just firms, with profitable and growth potential, were selected to

be equitized Therefore, their conclusions somewhat can not reflect the outcomes of whole equitization program in general and the latter stage, which is featured by larger firm size, high state concentration and high involvement of outsiders, in particular For that reason, it

is necessary to conduct a research with a different observation base in order to evaluate impact of equitization on SOEs participating in it during the accelerating stage in terms of operating performance This study aims at investigating the effects of equitization on the performance of newly equitized companies in Vietnam regarding to profitability, efficiency, leverage, and employment and compensation

an approach ofMeggison, Nash and Randenborgh (1994) (henceforth MNR), is to evaluate

impacts of equitization on firm's operating performances This method measures the effects

of equitization by making subtraction of financial indicators between before and after equitization times of the program participants In addition, to test the statistical significance

of the differences in performance indicators between two periods, two tailed Wilcoxon signed rank test is applied Finally, we adopt multiple OLS regressions to test hypotheses

on determinants of operational performance changes following equitization

1.4 Research objectives and hypotheses

The major objectives of this study are (1) to assess the impact of equitization on the firm operating performance; and (2) to test determinants of performance changes following equitization We examine firm's operational performance through five aspects which are profitability, efficiency, output growth rate, leverage and employment and compensation The study has six hypotheses which are separated into two folds Firstly, for accessing impacts of equitization, there are four hypotheses as followed

(1) It is expected that equitization will ead to improved profitability and efficiency; (2) Going along improved efficiency, equitization is expected to stimulate investments and therefore, new growth;

(3) Debt level is projected to decline in response to equitiation;

(4) Number of employees are also forecasted to decrease as the managers now shift from political or social goals to profit and efficiency maximization, which implies, in turn, an increase in employee's incomes;

Secondly, followings are two hypotheses for identifying causal factors ofthe changes

in firm's performance after equitization

(5) Profitability and efficiency: it is expected that listing status and directorate replacements have positive relationships with differences in profitability and efficiency while state ownership and firm size have negative effects after equitization

(6) Leverage: state ownership is projected to have positive impacts on leverage declines the post equitization period whereas listing status, directorship changes and the model of share issuance privatization are positive determinants

1.5 Research data

The data are extracted from firm's IPO prospectuses and annual reports which are obtained by various ways

1.6 Research units and scope of data

This study only focuses on SOEs equitized in 2005 across Vietnam However, the research unit has some restrictions due to limited data access First, on the sector front, the dataset covers all available sectors but except to traffic construction Second, the equitization form of "splitting a subsidiary or factory from an existing State Corporation Company and selling parts or all of it" is out of scope of this study Third, the study excludes firms governed by provincial authorities except Ho Chi Minh City government 1.7 Structure ofthe study

The study consists of six chapters Beside the first chapter with introduction, the second one is to review the literature on privatization The next chapter provides brief introduction about Vietnam equitization program and its outstanding characteristics The fourth chapter presents the methodology framework and describes the data used in this study The empirical results are presented and discussed in chapter five The final one then provides the conclusion of the study and policy implications as well as outlines some limitations

CHAPTER TWO LITERATURE REVIEW

2.1 Introduction

The major purpose of this chapter is to review theoretical and empirical literature for impacts of economic performance with a focus on firm-level analysis to provide a backdrop for establishing the study framework The chapter is organized five folds The section one deals with chapter introduction Section two provides a brief history and definition of privatization Section three presents various forms of privatization The fourth one aims to address the questions: why privatization? What the initial objectives of governments when embracing the privatization program? The final section is to provide reviews of the relationship between privatization and firm-level performance

2.2 Privatization: history and definition

2.2.1 History of privatization term

Many economists have believed that Drucker (1969) first coined the term

"reprivatization" in the late 1960s 1 However, Bel (2006) argues that privatization is not originated from Druker He points out that the terms "privatize" and "reprivatize" actually appeared in the 1930s by German government under Nazi Economic Policy and recurred in late 1950s in the case of automobile firm, Volkswagen

After that, two terms "privatize" and "re-privatization" were defined clearly in 1961 edition of Webster Dictionary as 'to alter the status of (a business or industry) from public

to private control or ownership' and " the act or action of privatizing again: restoration to private ownership and control (as after nationalization)" respectively Nevertheless, English scholars in the 1960s used privatization and denationalization synonymously as the sale of

a government-owned firm to the private sector (Bel, 2006) The story hadn't changed not until Margaret Thatcher times According to Bel (2006), Margaret Thatcher preferred the term "privatization" because "denationalization" have sounded "ownership we being surrendered to foreigners" and "had a negative and unappealing connotation" After the

1

Cited from Bel (2006)

sales of British Aerospace and Cable & Wireless in 1981 and British Telecom in 1984, privatization becomes more friendly name and popular in Great Britain According to William Megginson (2000), privatization has been truly globalized in the mid 1980s and early 1990s when over 100 countries in Western Europe, South and East Asia, Latin America, Eastern Europe and sub-Sahara Africa adopted that term for their reform policies

2.2.2 Definition

Privatization has various definitions Normally, it depends on authors' targets or policy marker's objectives Many authors, such as Megginson et al (1994), Boubakri and Cosset (1998), Omran (undated), Porta and Lopez-de-Silanes (1994), Harper (2000), Truong et al (2007) and so on, employ privatization narrowly, the sales of SOEs to the

private sector or the transfer of ownership from state to new owners Boycko and Shleifer (1996) define privatization as "combination of the reallocation of control rights over employment from politicians to mangers and the increase in cash flow ownership of managers and private investors" Accordingly, privatization must be associated with completed transference of voting control from public to private hand Ramamurti (2000) views privatization as "the transfer of some or all of ownership and/or control over SOEs to private sector" According to World Bank (1991), privatization is "the model of divestiture

of the state enterprises"

However, some authors argue that privatization should be viewed as broad meanings since they believe that using narrow meanings potentially causes misleading The reason is concurrent effects of structural reforms and possibility of missing record due to application

of various privatization models For examples, privatization could be occurred under the form of "contracting out of publicly financed services, which previously performed by public sector organizations, to the private sector" (Vicker and Yarrow, 1991) Moreover, according to several researchers like Cook and Kirkpatrick (2004) and Ramamurti (2000), privatization does not always transfer resources from public to private ownership; it also implies "increases the role of the private sector in the economy" The privatization of SOEs should be coordinated with embracing deregulation, economic liberalization, strengthening institutions

To a larger extent, Pack (1987) emphasizes the role of public functions In Park's view, there are three areas for privatization comprising of finance, production and regulation By these means, government diversifies privatization forms, clarifies public functions, maintains essential public goods and promotes deregulation to support private sector From that point of view, Pack (1987), hence, designs three principal forms of privatization: (1) divestiture or devolution of the public function under the form of contracting out some public services, (2) maintaining public finance but shifting the locus

of production from the public to the private sector, (3) deregulation

In sum, privatization can be understood from three levels as presented in figure 2.1 The simplest meaning is the sales of state-owned assets to private The second level is the transfer of the operations of state-owned assets to private entrepreneurs such as contracting out The broadest one is market liberalization, liberalization of prices and trade, and encouraging competition in an economy

Figure 2.1: Three layers of privatization definition

Market liberalization, liberalization of prices and trade, and

encouraging competition in an economy Transfer of the operations of state-owned assets to

private entrepreneurs, such as contracting out

I Sales of state-owned assets to private I

Source: Stifanos (2000/

Empirically, China has introduced its privatization program as a tool not only to restructure the economy but also to create private property and the institutions of a market economy The program aims at ensuring a maximization of economic growth and a minimization of social, economic, and political disorder (Lan Cao, 2000) Chinese privatization program, so called "privatization with Chinese characteristics", is a combination between traditional privatization and China characteristics which is excessive population Chinese program emphasizes not the immediate privatization of the state sector

as the traditional model of Russia & Europe but rather retention of the state sector with

2

Cited from Debessay (2004)

concomitant creation of a parallel non-state sector designed to supplement the state sector and to serve as a social shock observers in the event that the state sector itself to be eventually "privatize" (Lan Cao, 2000)

2.3 Privatization models

Savas (1992) presents a comprehensive classification of privatization models Although the paper is in the context of post - socialist countries, his taxonomy is rather broad and systematic Brada (1996) also has synthesized four methods of privatization encompassing restitution, sale of state property, mass or voucher and privatization from below However, these methods directly or indirectly belong to three broad strategies of Savas (1992) He classifies privatization of SOEs in three broad categories: divestment, displacement and delegation Each includes several forms that are presented in table 2.1 Divestment is more focused on forms of ownership transfer while displacement and delegation is more related to institutional changes or in broad definition manner Descriptions of displacement & delegation will be skipped because they are beyond the scope ofthis study

The first form of divestment is sales of a government enterprise to one or five types of buyers Selling government assets to a sole buyer normally happens in post-socialist countries and results in joint-ventures if the state captures some stakes in order to avoid painful effects of liquidation A SOE can be sold partially or in stages in order to avoid swamping the capital markets, or sold to the public through Initial Public Offerings (IPO), managers, all employees and their users or customers For example, the IPO was used in Great Britain to sell British Telecommunications, Jaguar or National Freight Corporation In post-socialist countries, employees bought share at a discount price However, Savas (1992) is criticized when he believe that most enterprises in post-socialist countries cannot

be sold to the public due to poor performance and tenuous future

The second form of divestment is free transfer Under this model, the enterprise is offered for free to employees, users or customers, the public and the original owners (restitution) Free transfer took place in England for English Channel hovercraft ferry service, in Kenya for local water systems and in Canada Divestment in the form of free transfer to employees, customers or the public is known as mass or voucher privatization in

Central and Western Europe Citizens can use vouchers distributed free or at nominal cost

to bid shares of privatized SOEs Savas (1992) indicates that restitution is more feasible in Eastern Europe where nationalization was about 45 years ago Restitution rarely happens where expropriation occurred more than 70 years old or wasn't recorded Restitution also becomes problematic where pre-expropriated social structure was too complicated with relatively few wealthy owners, small middle class and many poor like China

Table 2.1: Various Privatization models

Divestment

Sales

I to private buyers (by auction, seal bid, or negotiation)

2 to public (by sale of shares)

1 public domain (concession)

2 public assets (lease)

Source: Savas (1992)

Liquidation is the final form of divestment Savas (1992) classifies liquidation as a form of privatization because he considers it as a transfer of government assets to private sector at a zero price This occurs in enterprises that have poor performance or gloomy outlook He denotes that liquidation carried out popularly in former East Germany Furthermore, he indicates that is inevitable form in all post-socialist countries

2.4 Objectives of privatization programs

It is useful to understand why governments are concerned about privatization by asking what's wrong with public enterprises and what the major reason is Many researchers, such as Boycko, Shleifer and Vishny (1993 and 1998) and Vickers and Yarrow (1991) and so on, believe that public enterprises are inefficient Over employment, manufacturing non-marketable goods, locating economically inefficient places, and outdated capital stock are their major causal problems

The starting point for inefficiency is the enterprises' targets or owners' objectives From standard public finance point of view, governments use public enterprises to achieve social and political objectives such as social welfare, security, industrial policies rather than efficiency and profit maximization (Boycko, Shleifer and Vishny, 1998) For instance, Russian SOEs produced military goods when the communist government wanted to secure

the government existence and pursue cold war against capitalists Boycko et a! (1998)

denote that "Politicians care about votes of the people whose jobs in danger and in many cases; and unions have significant influence on political parties" Therefore, excess employment is a chronic characteristic of state-owned firms and the most commonly noted one For examples, the British government for a long time declined to close grossly inefficient coal mines to preserve mining jobs Moreover, state-owned companies are also considered as a mean for government bureaucrat to pursue his or her personal agenda According to Vickers and Yarrow (1991 ), personal agenda includes redistribution to favored interest groups, high wage, employment levels in particular enterprises or sectors, and patronage and so on The money losing in Credit Lyonnais is a concrete example,

Boycko et al (1998) quote The French state-owned bank made it worst loans to the friends

of the governing socialist party

In order to convince managers to shift from profit maximizing to social and political objectives, politicians subsidies firms, especially loss-making ones In return, managers

hire extra people and locate economically inefficient placesS Boycko et al (1993) describe

the relationship between politicians and firms' managers as a bargain when managers come

to beg for financing Finally, such payments from governments to firms lead soft budget constraints which, in tum, create three consequences: (1) diminishing the firm's sensitivity towards interest rate and exchange rate and so on, (2) reducing ability of dynamic adjustment and, (3) excess demand for inputs especially investment

On the government side, that the state has subsidized for state-owned enterprises for a long time causes substantial budget deficit and inefficient resource allocation In turn, such persistent deficit probably leads to crowding-out effects and raising external debts Budget deficit was a common phenomenon in both rich and poor countries in late 1980s For examples, in 1975, financial deficit in Great Britain amounted to over 35 percent of the state-owned enterprises' contribution to GDP

Ramamurti (1992) points out that there is a positive correlation between budget deficit and privatization Privatization countries have higher budget deficit than non-privatizing countries, and budget deficits so seem to increase the possibilities that a country will privatize Additionally, he comes to a conclusion that financing budget deficit by external borrowings heightens the odds of privatization in comparison with domestic borrowings In general, governments have concerned about privatization as targets to promote efficiency and reduce the budget deficit

Empirically, the UK government hasn't proposed comprehensive objectives for its privatization program as a whole The goals of the program have changed over times and differed from ministers Yarrow (1986) summaries into a list of goals over stages as followed: (1) improving efficiency by increasing competition and allowing firms to borrow from the capital market, (2) reducing the public sector borrowing requirement, (3) easing problems of public sector pay determination, (4) reducing government involvement in enterprise decision making, (5) widening the ownership of economic assets, (6) encouraging employee ownership of shares in their companies, and (7) redistributing income and wealth

Regarding to privatization program in Russia, besides objectives mentioned above the government also aims to gain support from reformist's politicians Boycko el al (1993)

argue that by privatization Russian government's target is to mitigate painful effects caused

by price liberalization, monetary tightening, employment cut and reduction of government spending To a larger extent, privatization in Central and East Europe has been focuses on four key objectives comprising introducing a market economy, increasing economic efficiency, establishing democracy and guaranteeing political freedoms and increasing government revenue (Dhanji and Milanovic, 1991)

Contrary to Russia and other countries in Central East Europe, many researchers believe that in China, external factors including property rights reforms, market development, changes in institutional environment and increase in market competitiveness force local governments to choose privatization to avoid shut down of township and villages owned enterprises (TVEs) rather internal factors like inefficiencies or budget deficit By using firm level panel data collected in 11 cities in the period 1995 - 2001, Guo and Yao (2004) find out that causes of privatization in China comprise of market liberalization, hardened budget constrained and the financial position of local government Privatization is constrained by excessive debt and redundant workforce Market liberalization intensifies the competition faced by TVEs and hardened budget constraint makes TVEs difficult for financing sources from banks Bank reform from 1994 insulates local banks from the influence of local politicians and shifts the lending rights to upper level branches Although large budget can cause a delay in privatization but once the decision is made, it alleviates the constraint of excessive debts Surprisingly, efficiency is not a factor in consideration These researchers find out that efficiency is not a concern in local government's decision of privatization when an unprofitable firm may still deliver taxes to the government and maintain sizable employment

2.5 Privatization & Performance

2.5.1 Fundamental economic theories

Currently, a large number of theoretical and empirical studies have analyzed the role

of privatization program with a main focus on whether privatization program have induced

a positive impact on the company performance or not On a theoretical aspect, two methods are employed, comprising property rights and principal-agent Both theories claim that firms under private property rights are more efficient than state ownership

a Property Rights

The property rights approach points out the differences between public and private firms on how to use the resources under the conditions of scare resources, positive transaction cost and existence of Pareto optimal principal The core idea of this theory stays

at exclusive and transferable characteristic of resources owned From that point of view, Alessi (1987) points out to two reasons that lead to inefficiency at SOEs First, lacks of

•

•

exclusive and transferable rights to use the resource does not encourage managers at SOEs allocate resources efficiently Second, deriving from non transferable feature of public assets, public managers have less incentive to take into account the market conditions In placement, they take advantage of political power to seek the subsidies and regulatory protection from competitive forces Therefore, Alessi ( 1997) concludes that "a careful program of privatization would result in higher output and welfare"

The property rights are rights of individual to use resources, earn mcome from resources and transfer resources to others These rights are defined and enforced not only

by government rules but also social custom The costs of defining, monitoring and enforcing of property rights are termed as transaction costs

According to property rights theory, the effectiveness of the market in relieving scarcity is closely tied to the extent to which property rights are privately held Under private ownership form, the resources are exclusive and transferable to others at the agreeable price Alessi (1997)'s major argument is that private property allows resources owners be flexible in resources allocation to gain maximum profit after they take into account all harms and benefits Ultimately, the current transfer price reflects fully the future consequences However, the existence of positive transaction costs may reduce individuals' incentives to fully take into account harms and benefit in their decisions Alessi (1987) argues that these costs constrain to yield new efficient solutions Therefore, to economize transaction costs, the market appears The market is the place for a low-cost arrangement for facilitating specialization and exchange These arguments suggest that private ownership is equal with profit maximization Meanwhile under state ownership, individuals lack exclusive and transferable rights to use the resources Thus they have less incentive to conserve and improve them

Furthermore, Alessi (1987) points out that the distinguishing characteristic of political firms is the high cost of transferring ownership rights in their specialized assets because the property rights in political firms are nontransferable This feature inhibits capitalization of future consequence into the current price and reduces the extent to which individuals bear the value consequences of their decisions Outcome of government ownership is that the public managers are less incentive to take the market condition into consideration as they

find it easier to receive subsidies Moreover, they have opportunity to manipulate the state power, seeking protection from government to fight against competitive forces Alessi ( 1987) criticizes political firms mask their goals under the guise of fulfilling social targets

As a result, government involvement in production of goods and services as well as the regulation of business activity is main culprit of market failures and distributive problems such as monopoly, public goods, and externalities

Another useful approach for efficiency analysis of privatization is principal-agent theory This approach is based on different agency problems and availability of solutions to them that are associated with each form of ownership (Villalonga, 1999) Principal-agent problems occur in both the public and private ownership However, it is considered that private ownership structure yields better solutions against these problems; hence, it leads to better efficiency

The principal-agent problems are defined as conflicts of interest in the agency relation The problem arises when the agents (such as mangers) may not act in the best interests of the principals (such as owners) Two problems of agency relation comprise of hiring the right agents and knowing that they will do the job appropriately which are known

as adverse selection and moral hazard respectively (Tuhaika, 2007)

Both types of firm have to face with these problems but it is argued that private firms play a better role in mitigating these affects and produce a superior efficiency Nellis (1994) and Villalonga ( 1999) justifies five reasons for greater performance of private firms: ( 1) there is a market for managers which enables the owners to find higher quality managers (2) existence of ownership rights allows the owners sell their the rights if they are not satisfied with managerial performance or want to withdraw from the market at a agreed price- actually, this is a focus of Property Rights theory; (3) The threat of bankruptcy and takeover - these threats create incentives that owners and managers will take active and enhance efficiency to avoid it; ( 4) Less intervention from politician: higher transaction costs discourage politicians from interfering into firm operation to pursue social objectives

or their personal target (5) Harder budget constraint suggests private firm to have greater

scrutiny and discipline while public enterprises obtain supports from the state both in finance and regulation

From this point of view, there are the arguments that governments can mitigate agency problems by establishing and maintaining commercial targets in stead of non commercial ones (Nellis, 1994) They can impose harder budget constraint, recruit qualified managers from the market and give autonomy to public enterprise managers to achieve commercial aims However, commitments to the priority of commercial aims or noninterference in daily management are rather fragile When the crisis fades, or when the regime changes, or when some major political claim arises, those commitments fades with

it

2.5.2 Empirical evidences

Currently, numerous researchers have assessed the impacts of privatization program

on operating performance of privatized enterprises and macroeconomic status by various methodologies Most of researchers have reported a positive relationship between privatization and efficiency improvement, including Megginson and Netton (2001), Boubakri and Cosset (1998), Megginson, Nash and Randenborgh (1994), Porta and Lopez-de-Silanes (1997), Bai, Lu and Tao (2005) and Harper (2000)

Table 2.2: Summary of financial indicators used in MNR approach

Dividend to Sales = Cash Dividends/Sales Dividend Payout= Cash Dividend/Net Incomes

Source: Megginson eta/ (1994)

Megginson, Nash and Randenborgh (1994) compare pre and post financial and operating efficiency of privatized firms The MNR study covers a large sample size including 61 companies ranging from 18 countries and 32 industries which are full or partial privatization through initial public offerings during 1961 and 1990 To measure operating results of surveyed firms in terms of profitability, operating efficiency, capital investment, output, employment, leverage and payout, these authors employ empirical proxies as presented in table 2.2 Then they calculate the mean of each proxy for each firm over post and pre privatization periods After that, Wilcoxon signed rank test is used to test significant changes in the proxies

Megginson et al (1994) present strong evidences of a significant increase in

profitability, output, capital spending and workforce; improvement in operating efficiency and a decline in leverage of firms after privatization Interestingly, the study also shows a remarkable performance improvement in both full and partial government divestments and insignificant differences between competitive and non-competitive firms These authors report greater improvement for the group of firms that have dramatic changes in directorship after privatization However, because of data and methodology limitations, they can not determine the causal factors of performance changes after divestment

On the other side, Boubakri and Cosset (1998) criticize that MNR conclusion can not

be a representative for the developing world when sample firms from developing countries are relatively small (from three to twelve, depending on the financial and operating performance measure) Economic circumstances in privatization developing countries are rather different from those in developed economies A market-friendly policy framework, a relatively well-developed regulatory and availability of institutions are prone to the success

of privatization in developed countries Privatization in high or middle-income should therefore result in improvements Meanwhile the privatization efforts of most developing countries are restrained by embryonic financial markets, weak regulatory capacity, large share of public sector to GDP, and lack of entrepreneurs and competent managers On the other hand, some of these countries have large markets and a fast economic growth, which makes the success of government divesture more likely (Galal et al., 1994)3•

3

Quoted from Boubakri eta!, 1998

-• In order to address with these regards, Boubakri and Cosset ( 1998) use exactly MNR

approach and employ a sample set of 79 companies that were divested during 1980 and

1992 from 21 developing countries that covers low-income countries (such as Bangladesh, India and Pakistan), low-middle-income countries (such as Philippines, Thailand and Turkey) and upper-middle-income countries (such as Malaysia, Mexico, Portugal, the Republic of Korea, Singapore, an Taiwan) In addition, to take into account influences of economy-wide changes, they also use market-adjusted accounting performance measures4•

They find similar results with MNR in both unadjusted and adjusted samples Furthermore, these authors emphasize the results are generally less significant when adjusting the performance ratios for market effects and weaker performance improvements for firms from low-income and lower middle income countries These suggest that well-defined institutional structure is likely one of important contributors to such improvements of post privatized firms

To reduce the bias selection, some authors (such as Porta and Lopez-de-Silanes (1997) and Mohammed Omran (undated)) employ a hybrid approach which is the combination between MNR and a method that compares performance of privatized firms with that of a control group which includes privately owned firms under similar conditions Porta and Lopez-de-Silanes (1997) has confirmed the dramatic improvements in the performance of the newly privatized firms Their samples are all non financial firms privatized covering 49 different industries in Mexico in the period of 1983-1991 The study

of Porta et a! ( 1997) not only shows the strong evidence of privatization benefits but also

estimates how many causal factors contribute to those gains The authors find 40 percent and 42 percent changes in profitability and output respectively, for example The study estimates price increases contribute roughly 15 percent to the large gains in profitability that results from privatization while the transfers from laid-off workers to shareholders account for 33 percent of the increases in operating income

Bai, Lu and Tao (2005) examine the impact of privatization on firm operation performance by using OLS regressions For the purpose of controlling for the potential

selection bias problem that probably occurs in selecting firms to privatize, they apply effect model based on a comprehensive panel data set of China's state-owned enterprises Their rich samples which consist of 14,496 enterprises and cover 39 mining and manufacturing industries in 31 Chinese regions are extracted from the National Bureau of Statistics of China in 1998 - 2003 They find significant impacts on firm performance including increase in sales, gains in operating income to sales and operating income to asset with the percentage of non-state ownership and improvement in efficiency The analysis also shows that decrease in the managerial expenses to sales and the financial expenses to sales and the increase in profit form main and other products are sources of the gain in the operating income to sales

fixed-Harper (2000) investigates the performance of firms privatized in two stages in the Czech Republic The author first uses MNR approach to evaluate the impacts of voucher privatization program on the Czech firms By comparing financial indicators of 554 firms privatized in 1992 (stage 1) and 1994 (stage 2) for two years pre and post privatization periods, he points out remarkable gains in profitability and operating efficiency after privatization However, different with MNR results, for the Czech case, Harper (2000) finds out significant decreases in employment and real sales (output) following privatization

Then, OLS regressions method is employed to determine the sources ofthose changes after privatization Explanatory variables are industry, firm size, timing of privatization, debt monitoring, state concentration and participation of foreign investors It is found that industry and firm size are important determinants of improved profitability and efficiency following privatization Interestingly, the study finds no support for ownership concentration and debt monitoring as agents for improved performance in second wave of Czech privatization Harper (2000) believes the reason behind the unexpected results is that bank would have incentive to force firm liquidate and collect proceeds from the sale of asset At last but most important, the study stresses on the role of structural changes as prerequisite for the success of the program in the latter stage

I

In contrast, some few authors like Martin and Parker (1995), Parker et a! (1990) and

Bishop and Thomson ( 1992)5 have contrary conclusions These authors measure performance of production efficiency by accessing growing rate in both labor and total factor productivity (TFP) All authors have the same view that privatization itself does not seem to be correlated with productivity gains When comparing performance of nine enterprises in the 1970s with that in 1980s, Bishop and Thomson ( 1992) find out that "in aggregate, both labor and factor productivity have shown significantly faster growth" However, they find it difficult to identify the effect of privatization' because they can not control the effect of the business cycle as well as improvement of the economy performance Parker et a! ( 1990) investigate performance of eleven companies and point

out that "it is difficult to sustain unequivocally the hypothesis that private ownership is preferable to nationalization on efficiency ground

Some other arguments are against econometric methodologies of historical approaches Several researchers believe that MNR approach is suitable for one or a small number of cases Parker (2005) points out that "determining causality is an important empirical work It is problematic to assess the impact of privatization programmes where the relationship between performance and policy is unclear" Meanwhile, the major limitation of MNR approach is that it unlikely determines causal factors In addition, the method that compares performance of post privatized firms with a controlling group under similar conditions finds it difficult to select controlled firms matched Furthermore, once the best firms are chosen for privatization, these approaches are suffers from selection bias and generalizability

Above-mentioned empirical studies are also criticized about ambiguous conclusions Performance of privatized firms may change because of other economic event contemporaneous with privatization In the meantime, these studies are unable to separate out the affects of privatization from other structural reforms including macroeconomic situation, fiscal policy, competition, and regulation changes Moreover, that employs various data sources raises a probability of inconsistencies in data resulting different accounting practices, unclear privatization definition

5

Cited from Debessay (2004)

Furthermore, several authors emphasize the role of institutional structure on the success of privatization policy Nellis (undated) argues that failures of the privatization programme in Russia are the result of swift ownership before/concurrently building of market-support institutions Some authors reveal that although privatization has a positive impact on economic performance and a factor of economic growth in developing countries, those improvements need other structural reforms (Parker, 2005), government commitments to legal and regulatory (Filipovic, 2005)

2.5.3 Summary

In short, although there are some contrary arguments, privatization continues to be considered as an important policy to boost improvements in firm's efficiency The spreading of privatization over the world during last two decades, again, provides a clear evidence for its economic worth As a conclusion of Megginson and Netter (2001), privatization is one of the most important elements of the continuing global phenomenon of the increasing use of markets to allocate resources

Regarding to the methodologies employed to measure the effects of privatization, there are four major approaches mentioned in this chapter The first one is the MNR approach which compares financial indicators of privatized firms between pre and post privatization windows The method, which is also known as reflexive comparison, is applied by Megginson et al (1994), Boukakri and Cosset (1998) and Harper {2000) Second is a hybrid approach which is a combination between MNR approach and a method comparing financial results of privatized with a control group The appearance of this method is to control concurrent effects of structural changes The third one which is used

by Bai, Lu and Tao (2005) is OLS regressions based on rich panel dataset The final

approach is total factor productivity employed by Parker eta/ (1990), Martin and Parker

(1995) and Bishop and Thomson (1992) Out of those methodologies, MNR or reflexive comparison appears to be applicable for this study Further discussions on methodology selection are presented in chapter four

On causality aspect, theoretical and empirical studies points out determinants of changes of financial results after privatization consisting of state ownership transfer, corporate governance, industry and firms size In particular, two theoretical schools

comprising of property rights and principal-agent emphasize on the roles of state ownership transference and replaceability of CEOs position under private ownership on improved operational performance Meanwhile empirical studies document strong relationships between industry and firm size with gains in profitability and efficiency

CHAPTER THREE PRIVATIZATION PROCESS- THE CASE OF VIETNAM

In theory, privatization by itself does not mean operating efficiency to be improved

In this regard, privatization per se is not always an effective way to establish credible commitment to restructure, the method of privatization may be well critical importance (Vicker and Yarow, 1991 ) Accordingly, the outcomes of privatization are rather dependent

on how the program is carried out than what the policy is Therefore, this chapter is to investigate major features of Vietnam privatization program in order to create a cornerstone for further discussions in the following sessions The chapter is organized by four folds The first section provides definition of equitization, the privatization version of Vietnam The second one summarizes key characteristic of Vietnam privatization program The third section reviews empirical studies evaluating outcomes of the program The final one is chapter remarks

3.1 "Equitization" terminology in Vietnam context

Vietnam started the privatization program in 1992 as a major part of State-Owned Enterprise Reform Program The core objective of Vietnam privatization program is to restructure and improve efficiency of SOBs and attract investment capital from other entities Different from international practices, privatization in Vietnam, transformation of

an SOB into a join-stock company, is called as equitization The government states that the equitization is not always as privatization For small and loss-making SOBs, the equitization can be coded as privatization when the state has released these firms Whereas,

in large SOBs, the process should be an equitization rather than privatization as government continues to hold controlling role through investment management Thus, it is logical when equitization in Vietnam is considered as partial privatization in accordance with international practice This paper adopts the definition of privatization as equitization or partial privatization for the case of Vietnam

3.2 Major characteristics of Vietnam's equitization program

Equitization in Vietnam has had some major characteristics as followed:

•!• Objectives of equitization

(1) Mobilizing capital from employees, domestic and foreign investors;

(2) Reforming managerial mode and corporate governance, renewing technologies as well as creating incentives for development to adapt with the market -oriented economy;

(3) Improving the performance and competitiveness of enterprises by ownership diversification;

(4) One of the important instruments to reduce the state's budget burden from subsidizing loss-making state-owned enterprises;

(5) A voiding taking over SOEs to one private hand;

(6) Promoting development of capital markets

SOEs have been converted into joint-stock companies by internal equitization (before 2004) or public auction (since 2005) through the following forms:

(1) selling entire an existing SOE;

(2) selling a part of an existing SOE;

(3) splitting a subsidiary or factory of a State Corporation and selling parts or all of it; (4) combining between selling a part of existing state capital where the state may hold controlled or non-controlled rights and issuing additional shares;

(5) share insurance privatization: keep the SOE share capital unchanged and issue additional shares

equitization program of Vietnam has experienced many stages It can be divided into four stages8 and each stage is closely linked to regulatory changes

Stage 1 (06/1992- 04/1996): the pilot period

Vietnam inaugurated the equitization program on Jun 1992 in pursuant to Decision 202-CT The pilot program aims at small and medium-size SOEs which satisfied the following conditions: (1) Profitable or at least potentially profitable enterprises, (2) they were not "strategic enterprises" and (3) Employees of equitized firms were willing to participate to the program In other words, they have the first right to buy shares at preferential terms The results of this stage were rather minimal: in five years, only five SOEs were equitized with total chartered capital of VND33.6 billion Average chartered capital of these firms were around VND6 7 billion The employees hold the dominant interests at 54.8 percent on weighted average

Stage 2 (05/1996- 05/1998): Expansion of the pilot program

Given gloomy results of equitization process, the Government issued Decree No 28/CP in May 1996 to end the pilot program and open the new stage with strong commitments to equitization Decree 28 is the first legal document stipulating overall the process of transferring from a SOE to a joint stock enterprise Besides principal conditions

of Decision 202-CT, this decree extended the scope of equitization to all non-strategic small and medium size enterprises However, the Decree 28 continued to show the stress on equitizating companies which had growth and profit potentials Different from Decision

202, this Decree indicates that SOEs selected to equitized unnecessarily factors willingness

of their employees towards equitization However, employees continued to buy shares at very preferential terms or free of charge Government maintained special treatments on tax payment on equitized firms after equitization Foreign purchased stakes at equitized firms required an approval of the Prime Minister case by case Nevertheless, the process had performed far below expectation as only 25 additional SOEs were equitized within two years

Stage 3 (06/1998- 05/2002): Expansion of the official equitization program

8

Source: Vu (2005 and 2006)

On Jun 1998, Decree No 44/1998/ND-CP to replace for Decree 28 was introduced to stimulate equitization process Decree 44 defined clearer and more comprehensive frameworks for converting SOEs to joint stock companies By this decree, the state removed the criteria that just companies with growth potential are selected for equitization SOEs were no longer given the option to participate in the equitization program as before However, the program kept focusing on small size enterprises In this stage, government sold off all state shares of loss-making SOEs to employees and private shareholders Notably, to support for equitized firms, the government had allowed them receiving bank loans at special terms as other SOEs did Income from equitization was used to compensate, retrain dismissed workers and fund for both current SOEs and equitized firms.On the employment front, employees had rights to buy share at 30 percent discount to par value As a result, a hundred of SOEs were equitized per annum In particular, up to May 2002, Vietnam's government had privatized 875 SOEs, representing 15 percent ofthe total number of SOEs but capital amounting to only 2.5 percent of total SOEs capital9Vietnam's government remained a tight control on foreign shares purchase at equititized firms

Stage 4 (06/2002- present): Acceleration of the equitization program

In 2002, the government issued Decree No 64/2002/ND-CP in replacement for Decree No.44 for the purpose of hastening the equitization process and improving equitization legal framework to be consistent with the Enterprise Law which has been first implemented since 2000 There were notable changes in new Decree First, the new Decree extended share buyers to foreigners with maximum ownership of 20 percent Second, it is the first time, the government mentioned settlements of receivables, payables, provisions, and affiliate investments during the valuation process Third, the equitization is further decentralization when the Decree stressed on participations of related ministries, local governments and general corporations Nevertheless, independent auditing and valuation organizations remain optional, even for large enterprises

Notably, in November 2004, the government replaced Decree No.64 by Decree No.187 to overcome problems of previous decrees such as valuation methods and

9 Source: Vu, 2006, "Competition and Privatization in Vietnam: Substitutes or Complements?"

participation of strategic shareholders More importantly, public bidding and information announcements for firms with capital over VND 10 billion are compulsory requirements Furthermore, the new decree has required the presence of auditing and valuation organization for enterprises with capital in excess of VND 30 billion In addition, the Decree removed employee's privilege in terms of buying share below par Alternatively, they have a right to purchase shares at average matching price from the auction but with 40 percent discount

Table 3.1 shows that more than 2,400 enterprises were equitized in 1993 - 2006 As presented in Table 3.1, the stage four is different from previous stages, featured by further participation of larger firms, more concentration of state ownership and expansion of outsider's contribution

Table 3.1: Number of equitized firms and average ownership structure in 1992- 2006

No of Mean Average ownership structure(%)

firms firms State Employees Outsiders shareholder

Source: Vietnam Association of Financial Institutions

In sum, Vietnam's equitization program in the period of 1992 - 2006 has several characteristics as followed: (1) equitization process has been gradual but at an accelerating pace; (2) This is a partial privatization program as the state retains the large portion of shares Ownership structure has not been substantial changes by equitization when the State holds an average of 51.5 percent during 1992 - 2006; (3) It had been an internal

equitization process between the state, insiders and investors who probably have close relationships with insiders; ( 4) Because of poor managements on asset valuation procedures, it is fair to comment that equitization has probably been underpriced; (5) Equitization is featured by extensive participations of both managers and workers, an average of 27.1 percent ownership of employees in 1992 - 2006 However, participation of employments tends to shrink as a result of regulatory changes

3.3 Empirical studies for Privatization in Vietnam

The typical characteristics of Vietnam equitization program have been raised the question whether or not the program has satisfied its objectives in general and leaded to improved firm's operating performance in particular Unfortunately, there are a few studies examining the outcomes of equitization in Vietnam Notably, there are two The first one was conducted by the Central Instituate of Economic Management (ClEM) in 2002 and

2005 while the second was carried by Truong eta! in 2003 and 2007

The ClEM study (2005) is based on the national-wide survey of 255 enterprises equitized during 1992 - 2003 By using descriptive statistics, the study reveals that there were substantial improvements on the firm's performance in terms of financial status, productivity and employee's income following equitization The study also indicates that greater stress on profit target, more autonomy in daily operation decision of managers and close ties of worker's benefit to company's performances are causal factors Interestingly, ClEM finds out no crucial changes in corporate governance, market position, technology and product quality of surveyed firms after equitization However, the study does not identify those changes are sole effects of equitization or jointly impacts of regulatory reforms

Truong et al (2007) evaluates the effects of equitization by using data of 147

equitized firms and 92 SOEs in southern region of Vietnam In order to control the concurrent effects of economy-wide changes and regulatory reforms, they employ a hybrid method which is a combination of MNR, different in different and OLS methods In general, the study concludes that equitization in Vietnam has positive effects on firm performance but there has not got substantial changes in corporate governance following equitizations

These studies whose samples were equitized before 2003 are bring the characteristics

of the equitization in the stage I to 3 which are small firm size, extensive participation of employees and low concentration of state ownership For example, mean state ownership in Truong et al 's study (2007) is 30.7 percent, well below the average of 42.2 percent during the period 1993 - 2003 or 51.5 percent for 1993 - 2006 To contrast, firms equitized in stage for, especially after November 2004, are featured by larger size, high concentration of state ownership, increasing participation of outsiders at the expense of lower employee's presence Therefore, this study is conducted for the purpose of figuring out whether or not stage four equitization with greater state concentration could induce positive impacts on firm's operating performance as previous stages do as reports of mentioned above studies

3.4 Chapter remarks

The study adopts equitization by the meaning of partial privatization which implies partial sales of state stakes in SOEs to employees and public investors Vietnam equitization program are featured by a gradual process but high accelerating pace, internal equitization process, possibility of asset underpricing, high state concentration and extensive participation of equitized firm's employees Regarding to empirical studies, there are few academic assessments on the program outcomes Notably, there are reports of ClEM (2005 and 2007) and Truong et a! (2003 and 2007) and both of them give favors to the equitization

CHAPTER FOUR RESEARCH METHODOLOGY

The purpose of this chapter is to provide research framework for empirical analysis and issues related to data collection and structures of the samples The chapter includes five sections The first section discusses about methodology selections for impact valuation and OLS regressions The second section presents model design The following one provides in detail the study's hypotheses first mentioned in 'Introduction" chapter Description of data collection and structure of the dataset are in the third section four The final section is the chapter summary

4.1 Research hypotheses

The major objective of this study is to assess the impacts of equitization on the firm operational performance We examine firm's operational performance through five aspects which are profitability, efficiency, output growth rate, leverage and employment and compensation Four hypotheses ofthis study are as followed

(1) It is expected that equitization leads to improved profitability and efficiency; (2) Going along improved efficiency, privatization is expected to stimulate investments and therefore, new growth

(3) Debt level is projected to decline in response to equitiation

(4) Number of employees also decreases as the managers now shift from political or social goals to profit and efficiency maximization, which implies, in tum, an increase in employee's incomes

Following previous researches such as Megginson and Netter (2001), Harper (2002),

or Boubakri and Cosset (1998), in this study we focus on several major indicators These indicators are presented in table 4.3

It is very important to note that the equitized firms in Vietnam have enjoyed tax holiday in the first two years after equitization As a result, to avoid a bias in measuring the effects of equitization we use earnings before tax in placement for income after tax for all related indicators such as returns on sales, returns on equity, returns on assets and so on

Table 4.3: Summary of the hypotheses for impact valuation

changes

1 Profitability

Earnings before tax margin (EBTM) Earnings before tax/total sales Increase Earnings before tax on assets (EBTOA) Earnings before tax/total assets Increase Earnings before tax on equity (EBTOE) Earnings before tax/total equity Increase

5 Employment and Compensation

Real income Qer emQloyee Norminal income Qer emQloyee/CPI Increase

Regarding to determinants of operational performance changes, there are two additional hypotheses

(7) Profitability and efficiency: it is expected that listing status and directorate replacements have positive relationships with differences in profitability and efficiency while state ownership and firm size has negative effects after equitization

(8) Leverage: state ownership is projected to have positive impacts on leverage declines the post equitization period whereas listing status, directorship changes and the model of share issuance privatization are positive determinants

Detail hypotheses for this part are presented in the next section

4.2 Methodology selection

Description, impact valuation and multiple OLS regressions are three methods applied in this study Descriptive statistics is the method to use the data to describe concerned issues This method can not provide an insight view in the research issue and give us a sound answer for impact of privatization Therefore, to assess the effect of equitization on performance of firms, impact valuation is employed Finally, we use multiple OLS regressions to determine causal factors of performance changes

•

4.2.1 Impact valuation methods According to Barker (2000) and Ravalli on (200 1 ), there are four quantitative methods recommended to assess impacts of a project or program on beneficiaries They include instrument variables, reflexive comparisons, double difference or difference in difference and propensity score In general, these methods measure the effect of program on beneficiaries by scientifically constructing two similar groups for comparison, participants (treatment group) and non- participants (control group)

(a) Instrumental variables method is used to figure out factors or criteria that determine decision of company or authorities whether or not equitize Randomization requires selection into the treatment and comparison groups is random in some well-defined set of people

(b) Matching or propensity score needs a larger survey for an ideal comparison group It is very difficult to find out the comparison group of state-owned enterprises that have the closest characteristics of equitized ones Furthermore, even if we define the closet group, approaching financial data of these companies is infeasible

(c) Double difference compares difference between a treatment and comparison group in both before and after a program Once again, finding a comparison group to satisfy the method requirements seems to be impossible in reality (d) Reflexive comparison becomes the best alternative for this study by making a subtraction between before and after the equitization time of the participants This method is employed by numbers of researchers to assess impacts on privatization on firm performance and widely known as MNR approach

From econometric aspect, the financial performance (S) of the ith firm in our samples can be interpreted in the equation (4.1):

(4.1) Where a, b, c are parameters; S implies to profitability, efficiency, output growth, leverage, employment and compensation; X stands for control variables such as listing status, state ownership and so on; and E is residual that includes other determinants of