Performance Differential between Private and State-owned Enterprises: An Analysis of Profitability and Solvency

Motivated by the rise of state capitalism, the paper investigates the relationship between ownership identity and the performance of firms in terms of profitability and solvency. Using cross-sectional data covering over 25,000 firms worldwide and by employing various empirical methods, we find robust evidence that state-owned enterprises (SOEs) tend to be less profitable than private-owned enterprises. However, they appear to use debt for their financial need and are, thus, better leveraged. SOEs are also more labor-intensive and have higher labor costs. In addition, an improvement in institutional quality could benefit both SOEs and POEs. Thus, evidence from this study could be interpreted to mean that privatization could improve the performance of public firms; however, this process should come with several prior-privatization approaches. A study over a more extended period is needed before these results can be considered conclusive.