Does state ownership hurt or help minority shareholders? International evidence from control block acquisitions

• Date: 01 November 2020
• Author: Roxana Turturea,Marc Essen,Pursey P. M. A. R. Heugens,Steve Sauerwald
• DOI: http://doi.org/10.1002/gsj.1337
• Published date: 01 November 2020

RESEARCH ARTICLE

Does state ownership hurt or help minority

shareholders? International evidence from control

block acquisitions

Pursey P. M. A. R. Heugens

1

| Steve Sauerwald

2

| Roxana Turturea

3

|

Marc van Essen

4

1

Rotterdam School of Management, Erasmus

University, Rotterdam, The Netherlands

2

Department of Managerial Studies, University of

Illinois at Chicago, Chicago, Illinois

3

Department of Industrial Engineering and

Management, Aalto University School of Science,

Aalto University, Espoo, Finland

4

Sonoco International Business Department,

Darla Moore School of Business, University of

South Carolina, Columbia, South Carolina

Correspondence

Steve Sauerwald, Department of Managerial

Studies, University of Illinois at Chicago,

601 South Morgan Street, 2210 University Hall,

Chicago, IL 60607-1722.

Email: ssauerw@uic.edu

Research Summary:We argue that state ownership is a

crucial policy instrument for alleviating what is perhaps

the most important principal–principal (PP) agency prob-

lem around the globe: private benefits of control (PBC).

Our results illustrate that states reduce PBC in the compa-

nies in which they acquire controlling ownership posi-

tions. We also examine how legal and political institutions

influence the extent to which states accomplish this goal.

Antiself-dealing legal regulations make states more effec-

tive in their efforts to constrain PBC, while political con-

straints make them less effective. Regimes with high state

capacity appear not to prioritize PBC reduction. We test

and corroborate these ideas in a sample of 1,354 control

transactions across 54 countries.

Managerial Summary:The one-sided appropriation of

wealth by dominant owners is arguably the biggest threat

to minority shareholders around the globe. An important

question that has thus far remained unaddressed is

whether state ownership of firms increases or decreases

the extraction of these so-called PBC. By investigating a

large number of transactions involving the transfer of cor-

porate control in 54 countries, we find that state acquirers

of controlling ownership positions generally respect

minority shareholder rights more than other types of new

controlling shareholders. This effect is stronger in coun-

tries with strong legal protection of minority shareholders.

However, political constraints make it more challenging

for state acquirers to keep PBC in check while “strong”

states may (mis)use the firms they invest in as policy

vehicles.

Received: 4 July 2017 Revised: 6 December 2018 Accepted: 8 December 2018

DOI: 10.1002/gsj.1337

750 © 2019 Strategic Management Society Global Strategy Journal. 2020;10:750–778.wileyonlinelibrary.com/journal/gsj

KEYWORDS

control transactions, legal institutions, political

institutions, private benefits of control, state ownership

1|INTRODUCTION

State capitalism is on the rise across the globe (Bruton, Peng, Ahlstrom, Stan, & Xu, 2015; Guillén &

Capron, 2016; Inoue, Lazzarini, & Musacchio, 2013; Wood & Wright, 2015). After decades of pri-

vatization, in which states reduced their involvement in the corporate sector (Filatotchev, Buck, &

Zhukov, 2000; Vaaler & Schrage, 2009), governments are now again becoming more actively

involved in corporations (Musacchio & Lazzarini, 2014). For instance, state-owned enterprises

(SOEs) were involved in 9 of the 15 largest initial public offerings (IPOs) between 2005 and 2012,

represented 10% of global gross domestic product (GDP) in 2010, and grossed $3.6 trillion in sales

in 2011 (The Economist, 2012a).

These developments entail more than a pendulum swing, as state ownership itself has changed

dramatically over the years (Grosman, Okhmatovskiy, & Wright, 2016). SOEs used to be owned by

the state in their entirety (Megginson & Netter, 2001), but recently states have begun to work side-

by-side with private investors in mixed enterprises not previously government-linked (Bruton et al.,

2015; Liu, Beirne, & Sun, 2015; Musacchio & Lazzarini, 2014; Shi, Hoskisson, & Zhang, 2016).

Overall, it seems that states increasingly engage with private corporations for strategic reason s, rather

than for bailing out corporations in financial distress (Musacchio, Lazzarini, & Aguilera, 2015; Rudy,

Miller, & Wang, 2016; Stephan, Uhlaner, & Stride, 2015).

What these accounts of state involvement fail to explain, however, is what role states play in cor-

porate governance in general and what it entails for the position of minority shareholders in particular

(van Essen, van Oosterhout, & Heugens, 2013; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Cor-

porate governance theory is focused on securing the interests of minority shareholders by reducing

agency conflicts (Guillén & Capron, 2016; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998).

Agency problems may derive from principal–agent (PA) agency conflicts when managers prioritize

their self-interest over shareholder objectives (Jensen & Meckling, 1976). State ownership is rarely

effective at constraining these PA agency problems due to the low monitoring incentives of state

shareholders compared to those of private shareholders (Peng, Bruton, Stan, & Huang, 2016).

Another type of agency problem derives from principal–principal (PP) agency conflicts, involving

situations in which controlling shareholders expropriate minority shareholders (Young et al., 2008).

While this problem likely outweighs PA problems in terms of material consequences for minority

shareholders (Young et al., 2008), we currently have an insufficient understanding of how state

acquisitions of controlling ownership positions affect PP agency conflicts.

PP conflicts often materialize in the form of private benefits of control (PBC). PBC are private

returns that controlling shareholders appropriate in excess of their ownership rights. PBC do not only

affect minority shareholders, but also firm performance by increasing borrowing costs (Lin, Tsai,

Hasan, & Tuan, 2018). We theorize that when states become controlling shareholders, they have

comparatively stronger incentives to refrain from extracting PBC than when private parties become

controlling shareholders. The reason for this is that states feel the long-term consequences of PBC

extraction more severely whereas the “expropriation of minority shareholders does not imply any

HEUGENS ET AL.751