Ownership and performance in the market for corporate control - role of public enterprises

Despite a wave of privatizations in the past three decades, several governments own major corporations in industries such as energy, mining, telecommunications, transport, banking, manufacturing, both in the emerging BRIC countries and in some developed economies. Contemporary state-owned enterprises (SOEs) are increasingly active players in the international and domestic markets for corporate control, through domestic and cross-border mergers and acquisitions. This paper contributes to a new strand of literature on SOEs form the angle of the market for corporate control (MCC). Do the SOEs, behave as their private counterparts when purchasing other firms? The standard prediction of the “inefficient management hypothesis” is that firms that perform well will buy firms of inferior managerial quality (Manne, 1965). An alternative prediction is offered more recently by Rhodes-Kropf and Robinson (2008), who suggest that for US listed companies “like buys like”. To test both the alternative views and the research question on how public ownership has an impact on the market for corporate control, we build a new dataset from Zephyr and Orbis, two databases managed by the Bureau Van Dijk. By matching Orbis and Zephyr data 2000-2012, we select only those M&A deals where it is possible to determine whether the top shareholder of the acquirer is a private or a government entity; and for which the pre-deal economic performance of both the acquirer and the target company are simultaneously available. Our sample is composed by 25,332 observations worldwide, and around 10% of these deals (2,488) are performed by a SOE acquirer. After developing a theoretical model that describes the behavior of public and private acquirers in the MCC, we test our theoretical results empirically. By focusing on the difference of ROS between the acquirer and the target firm, and controlling for different factors, we are able to confirm the inefficient management hypothesis for both private and public enterprises, with however two new results: the Rhodes-Kropf and Robinson (2008) prediction is more likely for listed companies, but not for the others; SOEs tend to buy “lower” relative to their own performance than private companies do, while their behavior converges towards the private benchmark when the SOEs are listed. We conclude that mergers and acquisitions by SOEs in the years we consider are not at variance with the “inefficient market hypothesis”.