State ownership and firm profitability in emerging markets: A simultaneous equations analysis

Abstract

Purpose

The purpose of this paper is to examine the relationship between state ownership and firm profitability in developing countries by considering the endogenous nature of state ownership and firm profitability.

Design/methodology/approach

A simultaneous equation analysis is applied to study 232 Tunisian firms over the 2001-2013 period. This analysis is compared with OLS estimates to show its power in terms of an endogenous setting and its potential to improve estimation.

Findings

Unlike the OLS estimates that show a non-significant relationship between state ownership and firm profitability, the simultaneous equation analysis reveals a non-symmetrical concave relationship. Specifically, state ownership affects positively firm profitability when it is relatively small and negatively when state ownership dominates. Specification test indicates that both state ownership and firm profitability are endogenous. Furthermore, the simultaneous model’s explanatory power exceeds that of OLS estimates and proves to be a suitable estimation technique.

Practical implications

Taking into account public firms’ categorization, the authors implicitly examine the effect of privatization and corporatization on firm profitability. The findings imply that privatization is not the only solution to the operational problems of public firms, but an internal governance system restructuring can also be favorable for these firms.

Originality/value

In addition to focusing on a new database of developing countries, the case of Tunisian firms, the main empirical analysis is conducted by considering the endogeneity issue. Thus, the findings improve understanding of the role played by state ownership and suggest that a partial state control appears to be beneficial to firm profitability.

Citation

Ben Rejeb Attia, M., Lassoued, N. and Chouikha, M. (2018), "State ownership and firm profitability in emerging markets: A simultaneous equations analysis", International Journal of Public Sector Management, Vol. 31 No. 2, pp. 167-183. https://doi.org/10.1108/IJPSM-09-2016-0155