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Paris I The Impact of Privatization on the Performance of European Firms Hassan OBEID European Business School - Paris International Competition In Banking.

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Presentation on theme: "Paris I The Impact of Privatization on the Performance of European Firms Hassan OBEID European Business School - Paris International Competition In Banking."— Presentation transcript:

1 Paris I The Impact of Privatization on the Performance of European Firms Hassan OBEID European Business School - Paris International Competition In Banking : Theory and Pratice Co-author : Patrick Piget Université de Paris I - France

2 Paris I Introduction Literature Review Data and Methodology Results Conclusions Limits and Perspectives 2/18 Table of contents

3 Paris I The Privatization Movement Definition: what is privatization? Transfer more than 50 % of capital European Privatization 1986 – 1988 : Starting the program 2004 – 2006 : Mass Privatization Country : France % Sector : Electricity % Year : 2004, % Modalities : how Privatize? Share Issue Privatization (SIPs), Over-the-Counter (OTC) Other … Objectives Fiscal, political, financial 3/18

4 Paris I Can Privatization Improve Performance? Political Privatization Economic Social Transfer Of Property Change in the Ownership Structure Change in the des Relationship Can Privatization improve financial and economic performance? Accompanied by : 4/18

5 Paris I Theoretical Approach The explications of Pareto, Walras, Keynes and Marx. The Agency Theory, Property Rights theory, Theory of Public Choice, etc. Control relations Public Sharelholder Private Manager Citizen Deputy Governor manager The theoretical basis of public company Public firm maximizes social welfare Regulation of Market Imperfections 5/18 The theoretical basis of Privatization

6 Paris I Littérature Review Megginson & al. (1994) and Boubakri & Cosset (1998) Increased in the profitability and production, etc. Dumontier & Laurin (2003) Privatization has a positive impact on the firm performance Nationalization doesn't have a negative effect on the firm performance J.T. Harper (2001) Efficiency decrease immediately after privatization Boadrman & Vining (1989) and Laporta & Lopez-De-Silanes (1999): Private > Public > Mixte Caves & Christensen (1980) and Bishop & Key (1989) : Absence of proof of Public less efficient than Private Comparison Before vs After Pub. Vs Priv conclusion Bozec (2004) 89 empirical studies 56 (63%) Private were more efficient than public 11 (12%) Public were more efficient than private 17 (19%) found no significant difference 5 (6%) mixed results 6/18

7 Paris I Empirical Study hypotheses A positive impact of privatization of the firm performance Private firm is more efficient than the public firms 7/18

8 Paris I Annual reports of governments OECD Firms reports Data List of Privatized firms Financial Data : Thomson One Banker Worldscope database Infinancials Sample : European firms privatized between 1996 – Original sample = 200 operations, Final sample = 56 firms + 56 private firms 8/18

9 Paris I Private Operation date Private Privatized Public METHODOLOGY 9/18 t

10 Paris I METHODOLOGY 10/18 The method is based on the approach used by Megginson & al. (1994). First, the performance indicators of privatized firms three years before and after privatization were compared. Second, the environmental factor was taken in account. The originality of the study is that it uses the IFRS as the unique framework of accounting standards.

11 Paris I RATIOS 11/18 1. OM – Operating margin : Operating result/Revenue 2. NOM – Net operating margin : Net income/Revenue 3. ROA – Return on assets : Net income/Total assets 4. ROE – Return on equity : Net income/Total equity Profitability ratios 1.ODB – Overall debt ratio : Current and non-current liabilities/Total equity 2. LDB – Long-term debt ratio : Total equity/Non-current liabilities 3. ICR – Interest coverage ratio : Cost of net financial debt/Revenue Debt ratios

12 Paris I RATIOS 12/18 1. AST – Financial assets structure : Non-current assets/Total assets 2. CAC – Current assets coverage ratio : Working capital/Current assets 3. RCR – Sales and Revenues coverage ratio in days : 360 Working capital/Revenue 4. TAT – Total assets turnover : Revenue/Total assets Financial structure ratios 1. TCR – Total current ratio : Current assets/Current liabilities 2. QR – Quick Ratio : Current assets except inventories/Current liabilities 3. WCD – Working capital requirements in days of sales : 360 (Inventories on sales and revenues + receivables on sales and revenues – payables on sales and revenues)/Revenues Liquidity ratios

13 Paris I RESULTS Ratios Average before Average after % change Median before Median after % change Wilcoxon test p-value A. Profitability OM 10.4%13.4%28.4%9.0%9.8%7.9% % NOM 3.3%7.5%127.8%4.2%6.4%51.9% % ROA 2.4%4.4%83.0%2.4%4.0%65.2% % ROE 85.7%14.7%-82.9%10.4%12.5%20.2% % B. Leverage ODB % % % LDB 143.9%129.6%-9.9%79.8%78.8%-1.4% % ICR -4.1%-3.0%-26.8%-2.3%-2.1%-10.1% % B. Capital structure CAC -46.2%162.5%-452.0%-0.6%5.8% % % RCR % % % AST 65.7%64.1%-2.4%73.0%69.1%-5.3% % TAT % % % C. Liquidity TCR 109.2%114.6%5.0%99.4%103.7%4.3% % QR 91.2%93.6%2.7%80.9%85.7%6.0% % WCD % % % Table 2 – Public firms three years before privatization (a–3) and three years after privatization (a+3) 13/18

14 Paris I RESULTS Ratios Average public Average private %change average Median public Median private %change median Wilcoxon test p-value A. Profitability OM 10.4%9.2%-11.8%9.0%8.0%-11.3% % NOM 3.3%2.0%-39.7%4.2%4.7%12.1% % ROA 2.4%2.9%21.3%2.4%4.0%65.2% % ROE 85.7%15.3%-82.1%10.4%12.2%17.1% % B. Leverage ODB % % % LDB 143.9%306.9%113.3%79.8%127.9%60.2% % ICR -4.1%-2.5%-39.5%-2.3%-1.5%-35.1% % C. Capital Structure AST -46.2%31.7%-168.7%-0.6%18.6% % % CAC % % % RCR 65.7%93.1%41.8%73.0%71.0%-2.7% % TAT % % % D. Liquidity TCR 109.2%140.3%28.5%99.4%117.4%18.2% % QR 91.2%115.5%26.7%80.9%92.0%13.7% % WCD % % % Table 3 – Public firms three years before privatization (a–3) and private firms three years before privatization (b–3) 14/18

15 Paris I RESULTS Ratios Average public Average private %change average Median public Median private %change median Wilcoxon test p-value A. Profitability OM 13.4%12.7%-4.9%9.8%10.2%4.2% % NOM 7.5%7.6%2.0%6.4%5.7%-10.8% % ROA 4.4%4.8%9.7%4.0%5.1%25.4% % ROE 14.7%17.8%21.3%12.5%14.4%14.6% % B. Leverage ODB % % % LDB 129.6%277.9%114.5%78.8%100.1%27.0% % ICR -3.0%-2.4%-18.9%-2.1%-1.2%-40.4% % C. Capital Structure AST 162.5%0.1%-99.9%5.8%11.3%94.6% % CAC % % % RCR 64.1%75.6%18.0%69.1%67.6%-2.3% % TAT % % % D. Liquidity TCR 114.6%114.4%-0.1%103.7%108.4%4.6% % QR 93.6%93.5%-0.2%85.7%83.5%-2.5% % WCD % % % Table 4 - Public firms three years after privatization (a+3) and private firms three years after privatization (b+3) 15/18

16 Paris I CONCLUSION The analysis of the economic and financial performance of firms following privatization is a rich and controversial area of research. The results of the tests were not consistent with the hypothesis that private ownership is more efficient than public ownership. However, the Mann-Whitney-Wilcoxon tests provided evidence in support of hypothesis H0, showing that these results were not significant. Based on the results of this study, there is no evidence to suggest that privatization had a positive impact on the economic and financial performance of the European firms included in the sample. However, the hypothesis that privatization has no impact on the improvement of IFRS financial ratios cannot be rejected. 16/18

17 Paris I L IMITS AN P ERSPECTIVES Limits : European Sample : the size Reasons : Merger, acquisitions, lake of data Perspectives : The factor of differences Prices after privatization 17/18

18 Paris I THANKS Public Privatization Private PERFORMANCES Paris I PIGET OBEID UABS Ebs


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