Distributive policy

State ownership and corporate leverage

In their seminal paper, Modigliani and Miller (1958) established that in the absence of frictions and transaction costs, a firm’s capital structure is irrelevant. Since then, economists have developed various theories describing the frictions and transaction costs that drive the choice of corporate financing decisions, including taxes, bankruptcy costs, agency problems, and informational asymmetries. All of these factors can affect debt and equity financing differently and therefore influence a company’s optimal capital structure.

Political economy is an important source of distortions in financial markets (Lambert et al. 2021). For example, Facio et al. (2006) showed that politically connected firms are much more likely to be bailed out than similar unconnected firms. The markets understand this and should therefore be more willing to extend (cheaper) credit to these companies. This is what a recent study by Bussolo et al. (2021) find: despite being less productive, politically connected firms borrow more than similar unconnected firms.

The ultimate form of political relations is state ownership. If governments are more likely to bail out public companies than private companies, then the former should resort more to debt. However, governments can not only provide bailout guarantees (implicit or explicit), but they can also use state-owned companies for political purposes. For example, especially in countries with weaker institutions, SOEs can be (ab)used to maximize the vote of incumbent parties and politicians rather than to maximize shareholder value and the ability to repay loans ( for example Bircan and Saka 2019). The politicization of business decisions by SOEs works against the interests of creditors and can therefore lead to an increase in the cost of credit.

Which of these countervailing forces dominates is an empirical question. The existing literature mainly supports the first argument. For example, Dewenter and Malatesta (2001) consider the 500 largest non-US companies and show that public companies are more indebted. They also show that the leverage effect decreases after privatization. Similarly, Boubakri and Cosset (1998, 79 large firms), D’Souza and Megginson (1999, 85 large firms) and Megginson et al. (1994, 61 large companies) find that after privatization, companies reduce their debt ratio. Boubakri and Saffar (2019, 453 large firms) also find a positive correlation between state ownership and indebtedness.

These existing studies analyze all the data of large and for the most part listed companies. In a recent paper (De Haas et al. 2022), we consider a much larger dataset that covers 4 million companies from 89 countries. The vast majority of these businesses are small or medium-sized; very few of them are listed. Our data comes from the merging of various historical versions of Bureau Van Dijk’s Orbis dataset. They extend over twenty years (2000-2019) and include 20 million annual observations (i.e. five observations per company on average).

The comprehensive nature of this new dataset allows us to compare public and private companies while controlling not only for conventional firm-level determinants of leverage (such as size, profitability, asset tangibility and tax shield unrelated to debt) but also for sector-country-year fixed effects. We find that, on average, state ownership is negatively correlated with leverage, defined as a firm’s debt relative to total assets (Villar-Burke 2013). In other words, for the vast majority of firms, the negative impact of state ownership more than offsets the benefits firms can derive (in terms of borrowing capacity) from the state as a as a shareholder. This effect increases with the degree of state ownership, but it is significant even if the state holds only a small stake. The magnitude of the effect is substantial: within the same country-sector-year, state-owned enterprises have, on average, a debt-to-asset ratio lower by 5 percentage points. This is about a quarter of the median leverage of 19% in our sample.

This strong negative relationship between state ownership and corporate debt likely reflects the corporate governance risks associated with state ownership. Creditors may fear government interference in the operations of companies, and they may therefore be less inclined to lend to these companies. Indeed, we find that the negative effects of public ownership on indebtedness are much stronger in countries with weaker rule of law, control of corruption, investor protection and insolvency proceedings. . These results are consistent with the view that public ownership is particularly costly in countries with weaker political and legal institutions.

The negative relationship between state ownership and corporate indebtedness holds across most of the distribution by firm size – with the important exception of very large firms (discussed earlier). Consistent with previous literature on this topic, we show that (only) among the largest firms in our sample (those with more than $3 billion in assets) state ownership is associated with higher indebtedness. businesses (see Figure 1). In other words, only the largest companies in a country benefit from (partial) state ownership through bailout guarantees and cheaper credit. The market seems to believe that these guarantees are most credible for “national champions” whom the state is likely to treat favorably.

Figure 1 The effect of state ownership on corporate debt by firm size

Remarks: This figure captures the average marginal effects of government ownership on corporate leverage with 95% confidence intervals.
Source: De Haas et al. (2022).

We complement our between-firm results with a within-firm analysis based on panel data for firms that have been privatized. We compare the evolution of capital structure over time in these companies to the evolution of leverage of observationally similar but non-privatized public companies. The results are very similar to those of the inter-firm analysis, both qualitatively and quantitatively. We find that firms typically increase their leverage by about 5 percentage points (27% of the sample mean) in the five years following privatization and relative to comparable non-privatized firms (see Figure 2). . Interestingly, the leverage effect starts to increase two years before the actual privatization, which probably reflects the fact that the implementation of privatizations takes time and that the credit markets take into account in advance the effects of future privatizations.

Figure 2 Privatization and corporate leverage: event study

Remarks: This figure provides a graphical representation of an average treatment analysis over the treaty (ATT). Dots correspond to annual estimates of ATT, including a bias adjustment term. The whiskers represent 95% confidence intervals.
Source: De Haas et al. (2022).

Our results can also be seen in light of recent literature (Bento and Restuccia 2018) which highlights the substantial misallocation of capital and labor across firms – even within narrowly defined industry sectors and across within the same country. State ownership can be an important source of this allocative inefficiency and the resulting slowdown in total factor productivity. Our results highlight a mechanism by which public ownership can introduce distortions and misallocation of resources: it interferes with the ability of all but the largest firms to access credit.


Bento, P and D Restuccia (2018), “Misallocation is a key determinant of average plant size and aggregate productivity in rich and developing countries”, VoxEU.org, 22 October.

Bircan, C and O Saka (2019), “Lending Cycles and Actual Outcomes: Costs of Policy Misalignment”, VoxEU.org, 10 May.

Borisova, G, V Fotak, K Holland and WL Megginson (2015), “Government Ownership and the Cost of Debt: Evidence for Government Investments in Publicly Listed Firms”, Journal of Financial Economics 118(1): 168-191.

Boubakri, N and JC Cosset (1998), “The financial and operational performance of newly privatized companies: evidence from developing countries”, Finance Journal 53(3): 1081-1110.

Boubraki, N and W Saffar (2019), “State Ownership and Choice of Debt: Evidence from Privatization”, Journal of Financial and Quantitative Analysis 54(3): 1313-1346.

Bussolo, M, F de Nicola, U Panizza and R Varghese (2022), “Politically connected firms and privileged access to credit: evidence from Central and Eastern Europe”, European Journal of Political Economy 71:102073.

De Haas, R, S Guriev and A Stepanov (2022), “State Ownership and Corporate Leverage Around the World”, CEPR Discussion Paper 17300.

Dewenter, KL and PH Malatesta (2001), “Public and private enterprises: an empirical analysis of profitability, leverage and labor intensity”, American Economic Review 91(1): 320-334.

D’Souza, J and WL Megginson (1999), “The Financial and Operating Performance of Privatized Firms during the 1990s”, Finance Journal 54(4): 1397-1438.

Faccio, M, R Masulis and J McConnell (2006), “Political Connections and Corporate Bailouts”, Finance Journal 61(6): 2597-2635.

Lambert, T, E Perotti and M Rola-Janicka (2021), “Political Economy in Finance”, VoxEU.org, 6 July.

Megginson, WL, RC Nash and M Van Randenborgh (1994), “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis”, Finance Journal 49(2): 403-452.

Modigliani, F and M Miller (1958), “The cost of capital, corporate finance and investment theory”, American Economic Review 48(3): 261-297.

Villar-Burke, J (2013), “Assessing lever in the financial sector through flow data”, VoxEU.org, 14 November.