Do state and foreign ownership affect investment efficiency?

Evidence from privatizations

Ruiyuan Chena, Sadok El Ghoulb, Omrane Guedhamic,*, He Wangd
Literature Review and Hypotheses
1. Determinants of Investment Efficiency
Firm investment may deviate from the optimal level because of capital market frictions. Information
asymmetry and agency problems are the two main frictions examined in the investment literature.
Information asymmetry models imply that information asymmetry between managers and investors
leads to underinvestment . Agency models suggest that managers are self-interested and may not
always act in the interests of shareholders , leading to investment inefficiencies. In brief, the effects of
state and foreign institutional ownership on the sensitivity of investment expenditure to investment
opportunities, and argue that the two forms of ownership differ in terms of both information asymmetry
and agency problems, leading to different investment behaviors.
The company's investment may deviate from the optimal level because of capital market friction.
Asymmetric information and agency issues are the two main friction tested in investment literature..
Information asymmetric models imply that information asymmetry between managers and investors
leads to poor investment. Agent models show that managers are self-interested and sometimes act not
forthe interests of shareholders, resulting in a lack of investment efficiency. In summary, the influence of
state and foreign institutional ownership on the sensitivity of investment spending on investment
opportunities and the two different ownership forms on both information asymmetry and agencies
problem, resulting in different investment behaviors.
2. State Ownership and Investment Efficiency
Arguably the greatest problems associated with state ownership are inefficiency and hence value
destruction. We have 2 theories to argue which is information asymmetry and agency problem, and
these are likely to distort firm investment, leading to investment inefficiency.
Empirical evidence from the privatization literature shows a significant improvement in performance
and governance after SOE divestments, but these improvements are less pronounced or even disappear
when The government continues to be the majority owner after privatization, meaning not giving up
control.
Based on the above discussion,we predict that state ownership in NPFs is negatively related to
investment efficiency. More formally:
H1: State ownership in NPFs is negatively related to investment efficiency.
The biggest problems related to state ownership are ineffective . We have two theories to argue:
information asymmetry and agency issues, and these have the potential to distort company investment,
resulting in inefficient investments.
Empirical evidence from the privatization literature shows a significant improvement in performance
and governance after SOE divestments, but when the government continues to be the majority owner
after privatization, that is, without giving up control, the improvements become stagnant. Based on the
above discussion, they predict that state ownership in NPF is negatively related to investment
performance.

3. Foreign Ownership and Investment Efficiency

Foreign institutional investors to be associated with improved investment efficiency since they help
mitigate information asymmetry and agency problems in NPFs through two channels: the monitoring
channel and the information channel..
The monitoring channel, institutional investors are expected to implement strong corporate governance
to safeguard their investments.
With respect to the information channel, institutional investors are better able to collect and process
information due to their superior investment experience and expertise and hence are better informed
than other investors , which helps reduce information asymmetry problems.
From empirical studies and discussions leading to conclusions that:
H2: Foreign ownership in NPFs is positively related to investment efficiency.
Foreign institutional investors are involved in improved investment efficiency because they help
minimize information asymmetry and agency issues in NPF through two channels: monitoring and
information.
Monitoring channel, institutional investors are expected to exercise strong corporate governance to
protect their investment. As for information channels, institutional investors are better able to collect
and process information thanks to their superior investment experience and expertise and therefore to
be better informed than other investors that help reduce information asymmetric issues. From
empirical studies and discussions leads to the conclusion that: Foreign ownership in NPF is positively
related to investment efficiency.