State ownership reinvented? Explaining performance differences between state‐owned and private firms

Abstract Manuscript Type Empirical Research Question/Issue This study aims to understand the implications of the corporate governance arrangements in state‐owned enterprises (SOEs) that are publicly listed in terms of firm performance relative to that of private firms. Research Findings/Insights Using a new database of 477 large, listed SOEs observed between 1997 and 2012 in 66 developed and emerging countries, we use matching techniques to show that these firms do not underperform similar private firms, except when the former face shocks that prioritize their social and political objectives, such as during severe recessions. These findings demonstrate the need to revise existing theories of SOE underperformance. Theoretical/Academic Implications We expand the traditional agency view of SOEs by introducing principal–principal conflicts that prevail in publicly traded firms. We argue that governments try to steer SOEs to pursue social and political objectives, which can lead to inefficiencies, but they also provide them rents and protection, factors that should lead them to perform as well or better than similar private firms. Thus, our theory of state ownership argues that their advantage or disadvantage over similar private firms cannot be identified from the theory and thus needs an empirical test. Practitioner/Policy Implications We modify the simplistic view that SOEs are inefficient and highlight that SOEs that compete with private firms may have advantages that give them a competitive edge. This has implications not only for firm‐level strategy, but also for competition policy worldwide.