State ownership and firm performance: A performance evaluation of disinvested public sector enterprises

The Indian government devised a flexible method to modify the performance of public sector firms through disinvestment in the 1990s to boost commercial strength and bridge the budget deficit. The disinvestment policy intends to reduce the government’s involvement in the country’s economic activities to encourage the private sector. The research aims to empirically examine the financial and operating performance of thirty-two Central public sector enterprises (CPSEs) in India. Further, the paper intends to study the other firm factors that influence the performance parameters. The Wilcoxon signed-rank test and random panel regression model are the methods employed to analyze the data statistically. The results show that the profitability of disinvestment has not brought significantly much improvement post-privatization in PSEs. In contrast, the productivity of employees has improved. Dividend payout ratio and no. of employees have shown improvement after five years of disinvestment, and leverage has insignificantly declined. In addition, state ownership shows a significant negative relationship with the performance variables. It implies that higher the equity shareholding of the government (state ownership) in the CPSEs, would negatively hamper the performance of firms. On the other hand, GDP and firm size are positively affecting the profitability and productivity of employees. The study concludes that the government is required to bring down the equity shareholdings in CPSEs, directing more efforts towards strategic disinvestment. Government should choose strategic disinvestment rather than partial and small-scale disinvestment because neither will offer good results. The decline in leverage shows the availability of cheaper sources of finance. Furthermore, it has been suggested that government interference in operational and administrative functions should be given the least priority.