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Privatization, intermediation and performance: global evidence

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Abstract

This study compares the performances of privatized banks from 43 countries during 1992–2007 by using two matching theories, Nearest-Neighbor Matching and Mahalanobis Metric Matching. The evidence demonstrates the following: first, the privatized banks outperform non-privatized banks in terms of return on equity, net interest margin and non-performance loan but are tied in terms of return on asset; second, in most cases, full privatization is more effective than partial privatization in improving bank performance; third, the results demonstrate that privatization through asset sales yield a better performance.

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Notes

  1. See Beck et al. (2005), Boubakri et al. (2005), Weintraub and Nakane (2005), Otchere (2005), Choi and Hasan (2011) and Clarke et al. (2009).

  2. Moreover, Stuart and Rubin (2007) argued that matching methods and regression-based model adjustments should also not be seen as competing methods, but rather as complementary, which is a decades-old message. In fact, as discussed earlier, much research over a period of decades (Rosenbaum and Rubin 1983, 1985; Rubin and Thomas 1992; Ho et al. 2007) has shown that the best approach is to combine the two methods by, for example, performing regression adjustment on matched samples. Selecting matched samples reduces bias due to covariate differences, and regression analysis on those matched samples can adjust for small remaining differences and increase efficiency of estimates. This study follows their suggestion to conduct matching method.

  3. Beck et al. (2005) demonstrated that the performance improved in nine privatized banks but failed to surpass that of existing private banks in a set of data on Nigerian banks.

  4. Furthermore, Otchere (2005) also argued that minimal performance gains have been achieved following SIP since the new owners lack full control over privatized banks. Similarly, Boubakri et al. (2005) found lower economic efficiency when banks are privatized through SIP, although return on equity is also higher.

  5. Applications of PSM to investigate the treatment effect, as well as to remove the selection bias problem in economics and finances, are increasing. See Heckman et al. (1998a, b), Persson (2001), Hutchison (2004), Elston, Hofler and Lee (2004), Dehejia and Wahba (2002), Li and Zhao (2006), Glick et al. (2006), Vega and Winkelried (2005b) and Ham et al. (2011) for detail.

  6. In this paper, we adopt these five characteristic variables. However, we also use other characteristic variables, as the robustness check and the results are similar.

  7. We also use other choices of matching criteria, such as Kernal matching, caliper matching, and Mahalanobis Metric Matching with Caliper, to do the same framework. The results still confirm our hypothesis.

  8. For example, if there are 10 treated firms and 20 control firms, we have to compute 200 Mahalanobis Distance.

  9. NPL is the impaired loans to gross loans taken from BANKSCOPE.

  10. The Heckman two-step estimation proceeds as follows. The first step is to estimate a logit model by using ASSET, EQUITY, LOAN, DEPOSIT, and ROA t−1 as our dependent variables, which yields the Inverse Mills ratio. Next, the performance regression is implemented by regressing our performance against the explanation variables and the inverse Mills ratio.

  11. We skip the explanation of control variables, but they can be found in the reference cited therein.

  12. The basic characteristics include assets, liabilities, loans, deposits and earnings over the previous year. Simultaneously, state-owned banks with similar basic characteristics to privatized banks but which are not themselves privatized are selected.

  13. We also exclude the sample which is privatized with M&A in our study.

  14. Primary and secondary issues have not had the same impact on firms’ performance (Sun et al. 2002). Therefore, in this study, we only focus on the primary issue case.

  15. Control sample banks are the banks with more than 20 % state-owned shares.

  16. Accordingly, the 110 privatized banks are successfully matched with the non-privatized banks, fulfilling the prerequisite of the comparisons. Given that the matched and unmatched control samples are substantially different, the comparison would have been misleading (too many biased) if we simply use the pre-matching non-privatized banks.

  17. The estimated results of Nearest method are similar to those of Mahala method and they are available upon request.

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Acknowledgments

Authors are grateful to Iftekhar Hasan, Chih-Yung Lin, Sherrill Schaffer, and Chung-hua Shen for help on earlier drafts. Usual caveats apply.

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Authors and Affiliations

  1. Department of Accounting, Finance and Economics, Texas A&M University – Central Texas, 1001 Leadership Place, Killeen, TX, 76549, USA

    Doug Dyer

  2. Management and Marketing Department, College of Business Administration, Kuwait University, Kuwait, Kuwait

    Majdi Anwar Quttainah

  3. Pamplin College of Business, Virginia Tech, 1030 Pamplin Hill, Blacksburg, VA, 24061, USA

    Pengfei Ye

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  1. Doug Dyer
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  2. Majdi Anwar Quttainah
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Correspondence to Majdi Anwar Quttainah.

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Dyer, D., Quttainah, M.A. & Ye, P. Privatization, intermediation and performance: global evidence. Eurasian Econ Rev 5, 207–229 (2015). https://doi.org/10.1007/s40822-015-0034-5

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