The Privatization Origins of Political Corporations. Felipe González Mounu Prem Francisco Urzúa PUC-Chile U del Rosario Erasmus U

Transcription

1 The Privatization Origins of Political Corporations Felipe González Mounu Prem Francisco Urzúa PUC-Chile U del Rosario Erasmus U

2 Political corporations and privatizations Corporations play a huge role in shaping politics (Zingales 2017). At the same time, privatization reforms are one way in which individuals acquire control of firms and create corporations Privatizations are plagued by controversies regarding sale prices and buyer identity. An example is Russia, where state-owned firms were sold underpriced to individuals who use them to bribe politicians and block reforms controversial privatizations in Argentina, China, India, Mexico, Serbia, Turkey, and the UK, among other countries This paper explores the relationship between controversial privatization reforms implemented in dictatorships as an explanation for the origins of political corporations 2 / 33

3 What we do 1. Construct data to characterize the privatization processes conducted by the Pinochet regime in Chile ( ) and identify controversies using a data driven algorithm 2. Construct data to study firms after being privatized by Pinochet in both economic and political dimensions 3. Document significant rent extraction in dictatorship and political involvement in democracy. Firms with controversies: in dictatorship: benefitted economically from the regime in democracy: formed political connections, financed campaigns, appeared in the Panama Papers Results reveal how dictatorships can influence politics, even after a regime change, through the creation of political corporations 3 / 33

4 Contribution and related literature 1. Political power of corporations (Zingales 2017), the persistence of elites (Acemoglu and Robinson 2008), and the revolving door in politics (Blanes i Vidal et al. 2012) 2. Corrupt privatizations: lots of work studying privatizations (Estrin et al. 2009) but much less work on corrupt privatizations (exception is Fisman and Wang) 3. Rent extraction by authoritarian regimes: we know that ethnic and regional favoritism are exacerbated in authoritarian regimes (Hodler and Radsky 2015, Burgess et al. 2015) 4 / 33

5 Outline I. Pinochet s controversial privatizations II. Data construction III. Corporations in dictatorship IV. Political corporations in democracy 5 / 33

6 I. Pinochet s controversial privatizations 6 / 33

7 Pinochet s controversial privatizations The Pinochet regime was in power between September 1973 and March Pinochet left power after losing a referendum known as the 1988 plebiscite (usual transition, Treisman 2018) The privatization process implemented by the regime is one of their most prominent policies and it is generally believed to have improved domestic and world welfare (World Bank 1994) However, some privatizations have generated controversy because of sale prices and buyer identity (Marcel 1989, Meller 1993, Mönckeberg 2001). An example is SQM, a leading chemical company sold underpriced to Pinochet s son-in-law 7 / 33

8 II. Data construction 8 / 33

9 Data construction 1. Firm reports balance sheets, boards, shareholders, firm-bank-level debt matched to list of all firms privatized by Pinochet (N = 50) daily stock prices around important political events classified firms into industries Privatization by industry 2. Controversial privatizations underpricing data (articles, congress, audits, etc.) board members and buyers closeness-to-the-regime 3. Politics in democracy politicians of the old and new regime campaign finance (tax authority) Panama Papers 9 / 33

10 Figure: Reports (a) Balance sheet (b) Income statement

11 Figure: Reports (a) Debt with banks (b) Owners of the firm

12 Figure: Timing of privatizations Number of privatizations Number of privatizations Year of privatization Year of privatization (a) All firms privatized by Pinochet (b) Our data of privatized firms

13 Figure: Detecting controversial privatization processes Underpricing in privatization Closeness to the Pinochet regime Firms with controversial privatization processes Other firms 13 / 33

14 Table: Characterization of privatization processes All firms Subsample of firms With controversial processes Without controversial processes Difference (1) (2) (3) (4) Share of board with links to regime (0.15) (0.18) (0.12) [0.16] Buyer has links to the regime *** (0.50) (0.21) (0.00) [0.00] Closeness to the regime *** (0.27) (0.09) (0.06) [0.00] Underpricing in privatization ** (0.45) (0.39) (0.48) [0.04] Number of firms / 33

15 Table: Differences before privatization More differences Firms with controversial privatizations Firms with uncontroversial privatizations Difference (2) - (1) p-value [perm. test] Firms without privatization but with reports Firms with privatization but without reports (1) (2) (3) (4) (5) Logarithm of total assets (1.1) (1.4) [0.10] (1.3) Logarithm of sales (1.4) (1.4) [0.04] (1.8) Return over equity (0.05) (0.03) [0.40] (0.62) Leverage (0.05) (0.05) [0.99] (0.22) Years since established (5) (7) [0.99] (21) Year of privatization (1) (1) [0.10] (5) Number of firms / 33

16 III. Corporations in dictatorship 16 / 33

17 The stock market We use Fisman (2001) approach to test for the hypothesis that firms with controversial privatizations benefited from the regime during its last years We exploit the outcome of the 1988 plebiscite, use stock prices from newspapers, and study abnormal returns around this event: AR it R it ( α i + β i R mt ) (1) CAR ijt = β Controversial i + δx i + η j + ε ij (2) Results suggest that financial investors perceived that controversial privatizations lost value after learning that the regime was going to (unexpectedly) come to an end 17 / 33

18 Figure: The stock market Announcement of transition.05 Abnormal return Days since plebiscite Controversial privatizations Other 18 / 33

19 Table: The stock market Dependent variable is the cumulative abnormal stock return of a firm Days after the plebiscite: 1 day 3 days 5 days 8 days 10 days (1) (2) (3) (4) (5) Controversial privatization -0.08*** -0.06*** -0.09*** -0.06* -0.06* (0.04) (0.02) (0.03) (0.03) (0.03) [0.00] [0.00] [0.01] [0.08] [0.09] Number of firms R Pre-privatization controls (X i ) No No No No No Industry fixed effects (η j ) Yes Yes Yes Yes Yes

20 Figure: Other political events Abnormal return Abnormal return Days since event Days since event (a) Pinochet gets nominated.05 (b) Constitutional reform.05 Abnormal return Abnormal return Days since event Days since event (c) 1989 Presidential Election (d) New gov. takes office

21 The credit market The credit market is useful to study because it has the potential to reveal if firms with controversial privatizations were receiving a differential treatment from the regime (Khwaja and Mian, 2005) We study how debt with the Banco del Estado differed between controversial and uncontroversial privatizations. We estimate the following regression before and after the plebiscite: Y ijt = β t Controversial ij + δ t X i + η jt + ɛ ijt (3) The coefficients of interest are β t 21 / 33

22 Table: The credit market Indicator for loans with Banco del Estado Average interest rate with Banco del Estado Leverage (1) (2) (3) Controversial privatization 0.30** (0.14) (0.02) (0.04) [0.05] [0.04] [0.93] Number of firms R Pre-privatization controls (X i ) Yes Yes Yes Industry fixed effects (η j ) Yes Yes Yes Avg. uncontroversial priv / 33

23 Table: The credit market Indicator for loans with Banco del Estado Average interest rate with Banco del Estado Leverage (1) (2) (3) Controversial privatization (0.11) (0.01) (0.11) [0.30] [0.17] [0.20] Number of firms R Pre-privatization controls (X i ) Yes Yes Yes Industry fixed effects (η j ) Yes Yes Yes Avg. uncontroversial priv / 33

24 IV. Political corporations in democracy 24 / 33

25 Table: The beginning of democracy Dep. var. are measured in 1990, the first year after Chile s return to democracy Logarithm assets Logarithm sales Leverage Return over equity (1) (2) (3) (4) Controversial privatization 1.62*** (0.35) (0.67) (0.05) (0.05) [0.00] [0.00] [0.57] [0.87] Number of firms R Pre-privatization controls (X i ) Yes Yes Yes Yes Industry fixed effects (η j ) Yes Yes Yes Yes Avg. uncontroversial priv

26 Political corporations in democracy We study the following political outcomes un democracy: dynamic formation of political connections legal and illegal campaign finance appearance in the Panama Papers (tax avoidance) We follow a similar estimation strategy than before: Y ijt = β t Controversial ij + δ t X i + η jt + ɛ ijt (4) 26 / 33

27 Table: Formation of political connections Dependent variable: Coefficient controversial privatization (β) p-value permutation test Average uncontroversial privatization R 2 Employed politician of the old regime in * [0.03] (0.14) Employed politician of the old regime in [0.10] (0.15) Employed politician of the old regime in [0.94] (0.13) Employed politician of the new regime in [0.79] (0.06) Employed politician of the new regime in [0.43] (0.11) Employed politician of the new regime in *** [0.00] (0.15) Firms 50 Pre-privatization controls (X i ) Yes Industry fixed effects (η j ) Yes 27 / 33

28 Table: Campaign finance and Panama Papers Dependent variable: Coefficient controversial privatization (β) p-value permutation test Average uncontroversial privatization R 2 Legal campaign finance 0.31** [0.05] (0.15) Illegal campaign finance 0.18 [0.19] (0.14) Appeared in the Panama Papers 0.36** (0.15) Firms 50 Pre-privatization controls (X i ) Yes Industry fixed effects (η j ) Yes 28 / 33

29 Discussion and interpretation Robustness and omitted variables 1. Additional controls: wave, substitution links, links in Use of different clustering algorithms and Mönckeberg (2001) 3. Exclude one controversial privatization at the time 4. Use of k-nearest matching, control for pscore 5. Truncate distribution of propensity score (Crump et al. 2009) 6. Role of unobservables, coefficient stability approach Unbundling controversies 1. Closeness to the Pinochet regime 2. Underpricing 29 / 33

30 Table: Robustness of results and omitted variables I Truncate matching (Crump et al. 2009) Matching controls pscore controversial Matching using k-nearest neighbor Adds control for privatization wave Drops firms with takeovers Coefficient stability (Oster 2017) Journalistic investig. (Mönckeberg 2001) (1) (2) (3) (4) (5) (6) (7) Employed politician of old regime ** 0.28** 0.27** 0.26* 0.22* * (0.12) (0.13) (0.12) (0.14) (0.13) (0.21) Employed politician of old regime (0.13) (0.13) (0.10) (0.14) (0.20) (0.13) Employed politician of new regime (0.07) (0.06) (0.13) (0.06) (0.07) (0.17) Employed politician of new regime *** 0.40*** 0.40*** 0.39*** 0.41** ** (0.14) (0.14) (0.13) (0.14) (0.18) (0.21) 30 / 33

31 Table: Robustness of results and omitted variables II Truncate matching (Crump et al. 2009) Matching controls pscore controversial Matching using k-nearest neighbor Adds control for privatization wave Drops firms with takeovers Coefficient stability (Oster 2017) Journalistic investig. (Mönckeberg 2001) (1) (2) (3) (4) (5) (6) (7) Legal campaign finance 0.32** 0.33** 0.36** 0.29* 0.38** * (0.15) (0.15) (0.18) (0.15) (0.17) (0.19) Illegal campaign finance *** (0.13) (0.13) (0.16) (0.13) (0.13) (0.18) Appeared in the Panama Papers 0.34** 0.33** ** ** (0.16) (0.15) (0.19) (0.16) (0.19) (0.21) 31 / 33

32 Table: Unbundling the importance of privatization characteristics Closeness to the regime Underpricing in sale p-value (1) = (2) p-value (1) = 0 & (2) = 0 (1) (2) (3) (4) Employed politician of old regime * (0.07) (0.08) Employed politician of old regime (0.07) (0.09) Employed politician of new regime (0.03) (0.06) Employed politician of new regime (0.07) (0.07) Legally financed political campaigns 0.15** (0.07) (0.10) Illegally financed political campaigns 0.12* (0.07) (0.09) Appeared in the Panama Papers 0.15* (0.08) (0.07) 32 / 33

33 Conclusion We have presented evidence of political corporations operating in democracy having their origins in crooked privatization reforms These results reveal how dictatorships can influence politics even after a regime change Our results have at least two implications: 1. caution when interpreting the effects of democratizations 2. greater benefits from regulating privatizations We believe these results open new and interesting questions: 1. how long-lasting are the effects of dictatorial policies? 2. what are efficient mechanisms to sell state firms? 33 / 33

34 Appendix

35 Table: Privatizations by industry Back to data Industry All Controversial Agriculture, forestry and fishing 3 2 Construction 1 0 Electricity and gas 12 5 Information and communication 4 2 Manufacturing 20 9 Mining and quarrying 5 3 Transportation and storage 4 1 Wholesale and retail trade 1 0 Number of firms: 50 22

36 Table: Subsample of firms in second wave Back Controversial privatizations Uncontroversial privatizations p-value Difference p-value (perm. test) (1) (2) (3) (4) Capital investment (0.09) (0.04) Short-term leverage (0.03) (0.04) Long-term leverage (0.04) (0.07) Liquidity (0.04) (0.03) Cash-flow (0.03) (0.02) Number of firms 16 15