Can Company Disclosures Discipline State-Appointed Managers? Evidence from Greek Privatizations

Abstract

Conventional economic theory portrays privatization as a transformative event for a company, even when it is partial and the state maintains control. According to this view, private investors have stronger incentives than voters to monitor management performance and constrain side-payments to political allies of the government. But how exactly can private investors discipline managers they cannot fire? Proponents of privatization place their hopes on disclosure obligations under securities laws, triggered by privatized companies’ stock exchange listings. They argue that, because company disclosures can reveal side-payments to government allies and cause private investors to abandon the stock, management should avoid political favoritism after a stock exchange listing.
The Article explores whether investors responded to indications of political favoritism as the above theory would predict. Case study evidence comes from major privatizations in Greece during the last two decades in telecommunications, energy, and gaming. The Article examines the public disclosures of partially privatized companies in two key areas where the risk of political side-deals and corruption remains high: contracts with suppliers and relationships with labor. Greek companies’ disclosure documents included clear indications that payouts to suppliers and labor continued to increase during the period of partial privatization. However, these companies’ stocks remained attractive to investors.