Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms

52 Pages Posted: 27 Apr 2012 Last revised: 23 Sep 2013

See all articles by Ginka Borisova

Ginka Borisova

Iowa State University - Department of Finance

Veljko Fotak

School of Management, University at Buffalo (SUNY); Sovereign Investment Lab, Baffi Carefin, Bocconi University

Kateryna V. Holland

University of Missouri - Trulaske College of Business

William L. Megginson

University of Oklahoma

Date Written: August 15, 2013

Abstract

We investigate the effect of government share ownership on the cost of corporate debt. Government ownership could carry an implicit debt guarantee reducing the chance of default and leading to a lower cost of debt. On the other hand, government ownership could lead to a higher cost of debt if this guarantee increases moral hazard for managers and if state owners impose social and political goals that reduce corporate profitability. Using a sample of 5,048 bond credit spreads from 43 countries over 1991-2010, we find that government ownership is associated with a higher cost of debt in non-crisis years (61 basis points (bp)) but with a lower cost of debt during the recent financial crisis (18 bp) and other banking crises (9 bp). We further show that the cost of debt associated with government ownership generally decreases as the size of the government stake increases. The impact of government ownership is stronger for non-investment-grade bonds and for bonds associated with highly-levered firms. Additionally, we document that the effect of government ownership differs by type of government entity; for instance, lower spreads are more often associated with central governments, and higher spreads with sovereign wealth funds. Finally, domestic government ownership is linked to a decrease in debt pricing, while foreign government ownership is tied to an increase. Our results indicate that government ownership generally leads to a higher cost of debt, consistent with investment distortion fostered by state influence, but in times of economic recession or firm distress, the dominant effect is a reduction in perceived default risk due to implicit government guarantees.

Keywords: Privatization, Government Ownership, Bonds, Cost of Debt

JEL Classification: G32, G34, H11, H81

Suggested Citation

Borisova, Ginka and Fotak, Veljko and Holland, Kateryna V. and Megginson, William L., Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms (August 15, 2013). Paolo Baffi Centre Research Paper No. 2012-112, Available at SSRN: https://ssrn.com/abstract=2046911 or http://dx.doi.org/10.2139/ssrn.2046911

Ginka Borisova

Iowa State University - Department of Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Veljko Fotak (Contact Author)

School of Management, University at Buffalo (SUNY) ( email )

School of Management, University at Buffalo
236 Jacobs Management Center
Buffalo, NY 14260
United States
+1 716-645-1541 (Phone)

Sovereign Investment Lab, Baffi Carefin, Bocconi University ( email )

Via Roentgen 1
Milan
Italy

Kateryna V. Holland

University of Missouri - Trulaske College of Business ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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