Jean-Claude Cosset

The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries

This paper examines the change in the financial and operating performance of 79 companies from 21 developing countries that experienced full or partial privatization during the period from 1980 to 1992. We use accounting performance measures adjusted for market effects in addition to unadjusted accounting performance measures. Both unadjusted and market-adjusted results show significant increases in profitability, operating efficiency, capital investment spending, output, employment level, and dividends. We also find a decline in leverage following privatization but this change is significant only for unadjusted leverage ratios. Our results are generally robust when we partition our data into various subsamples. Copyright The American Finance Association 1998.

Diversification strategy and capital structure of multinational corporations

Abstract This study examines the relationship between the capital structure of multinational corporations (MNCs) and their diversification strategy. Both the international market (multi-country operations) and the product (multi-industry operations) dimension of diversification are integrated into the analysis and a switching of regression regimes methodology is employed that accounts for the bi-dimensional nature of the diversification strategy pursued by MNCs. The model identifies four types of diversification regimes. The results suggest that leverage increases with both international and product diversification. It is also found that the combination of both types of diversification leads to lower levels of bankruptcy risk. Although the role of the determinants of MNC capital structure varies with the diversification strategy, there seem to be common determinants. In particular, profitability and bankruptcy risks are negatively related to the debt ratio of MNCs.

Evaluating country risk: A decision support approach

The international debt crisis of the last decade highlights the importance of country risk assessment for both academicians and practitioners. Country risk is generally defined as the probability that a country will fail to generate enough foreign exchange to service its foreign currency loans. Attempts to measure country creditworthiness have therefore centered on devising systems that give an early warning of potential debt servicing difficulties. Undoubtedly, commercial banks, which became major lenders on the intemational scene in the late 197Os, have devoted time and resources in developing such systems. However, surveys of country risk evaluation methods reveal that checklist systems are the most commonly used by bankers.1 Few banks rely upon statistical models, even though they have much data available to them through the Institute of International Finance (Washington, DC), for instance. One explanation for this lack of methodological sophistication is that reliable operational tools for the modelling of country risk assessment have not previously been available. This paper provides statistical procedures to help bankers assess their country risk evaluation model interactively and iteratively. The multicriterion decision support system, MINORA, based on the iterative use of an ordinal regression model and on a man-machine model, is used for this purpose. This decision support system rests on a trial and error learning process which is made operational through the UTA algorithm developed by Jacquet-Lag&e and Siskos [21]. The remainder of the paper is organized as follows. Section 2 presents the country risk evaluation criteria. The proposed method is developed in Section 3. Section 4 illustrates the use of this method for a hypothetical evaluator of country risk. Finally, in Section 5, we discuss directions for further research.

An estimation model for country risk rating

Abstract Several statistical models, such as multiple regression, logistic regression (LOGIT), classification and regression tree (CART), etc. have been suggested in the literature and used in practice to explain and predict country risk ratings as a function of some selected social, political, but mostly economic factors or indicators. Such models, however, seem to have some important shortcomings. First, the same set of parameter values are usually assumed to apply to all countries, regardless of whether a particular political-economic factor carries more weight in the case of some countries. Second, the level of data adjustability is achieved only within the context of the optimization techniques inherent in the statistical models chosen a priori. This paper proposes, and applies to a group of 70 countries, a procedure that employs a generalized logit model (G-LOGIT) to link country risk rating and political-economic indicators. The estimates for the parameters of the G-LOGIT model are obtained through an independently developed mathematical programming model, rather than relying on classical optimization techniques as do most statistical models. The performance results of the proposed procedure are compared with two widely used statistical models: LOGIT and CART. The results indicate that the new procedure is superior to the statistical models, with respect to both estimation and validation errors.

Privatization, corporate governance and economic environment: Firm-level evidence from Asia

Abstract We examine the postprivatization performance of newly privatized firms in Asia and document how the private ownership structure evolves over time. We show that privatization leads to an increase in profitability, efficiency, and output in former state-owned firms from Asia. However, these changes are generally less significant than those reported in other developing countries (DCs). We also find that higher improvements in performance are associated with certain aspects of (1) corporate governance and (2) the economic environment. Finally, we show that governments generally do not relinquish control and private ownership concentrates over time, but by far less than what we observe elsewhere in developing countries.

The measurement of the degree of foreign involvement

This paper extends Errunza and Senber (1984) in assessing the relationship between alternative measures of the degree of foreign involvement (DFI) and the conditions under which the use of a specific measure will not affect the outcome of empirical studies on corporate international diversification. The results suggest that among 21 pairs of seven most widely used series of DFI, only three series (foreign assets, foreign earnings and foreign tax ratios) in two pairs are equivalent. Evidence of constant returns to scale between the ratio of foreign to total assets and the ratio of foreign to total earnings is also discussed.

On the presence of risk premiums in foreign exchange markets

Abstract This paper provides evidence that for most currencies the exchange risk premium as identified in Grauer, Litzenberger and Stehle (1976) is highly volatile, random and on average equal to zero. Further investigation suggests that this volatility can be traced to the fact that our index of world market performance does not adequately represent the common element of variance among currencies. In the light of this evidence we investigate the existence of an exchange risk premium in the framework of an alternative model. The Arbitrage Pricing Theory proposed by Ross (1976) is a particularly appropriate alternative since it does not accord an essential role to the market portfolio. The results of our tests suggest the presence of an exchange risk premium.

Large Shareholders and Target Returns: International Evidence †

Abstract We examine the market valuation of targets with multiple large shareholders (MLS) and single large shareholder (SLS) structures, in an international sample of M&A announcement in 19 countries outside North America. We find that the presence and power of MLS in these firms are negatively associated with abnormal returns and first-bid-to-merger-completion returns, suggesting that MLS mitigate agency problems in the target, and hence their acquisition is perceived as “a loss of good governance.” The negative association between MLS targets and returns is stronger in widely held firms suggesting that MLS indeed curb expropriation of minority shareholders. By contrast, when the second largest shareholder in the MLS structure of the target is a family, we find positive cumulative abnormal returns at the merger announcement, suggesting exacerbated agency problems in these firms that should benefit from the “acquisition of good governance.” Our evidence is robust to a battery of tests and to addressing potential endogeneity.