The Financial Premium and Real Cost of Bureaucrats in Businesses

Industry Overview - The study focuses on the financial distortions in capital markets between state-owned enterprises (SOEs) and private-owned enterprises (POEs) across 24 European countries from 2010 to 2016 [2] - SOEs have subsidized access to debt and equity compared to POEs, with a 1 percentage point increase in government stake reducing the implicit average finance cost by 0.01 percent [6][7] - The removal of SOEs from the market could lead to aggregate productivity losses of up to 40 percent due to their superior technical efficiency in some sectors [2] Core Findings - Targeted reforms that shut down poorly performing SOEs lead to aggregate total factor productivity (TFP) gains of up to 15 percent in every country [2] - Reforms that remove distortions before reallocating resources toward more productive firms can increase productivity by up to 83.7 percent [2] - SOEs are prevalent across competitive industries, with 70% operating in sectors like food, construction, and hospitality, typically dominated by private firms [6] Financial Distortions and Productivity - SOEs benefit from lower debt issuance costs and direct budget support, which distorts finance, innovation, and resource allocation [6] - The methodology used to measure financial frictions shows that SOEs face lower costs of finance, with a 1 p.p. increase in government shareholding reducing the cost of finance by 0.01% for non-publicly listed firms [11] - Publicly listed SOEs, however, face higher costs of accessing finance compared to non-listed SOEs [11] Sector-Specific Insights - The largest subsidies for SOEs occur in industries critical to the economy, such as financial services, electricity, water, and information and communications [11] - The fiscal burden of SOE financial subsidies ranges from 0.001% to 0.955% of GDP for the year 2016, with Slovenia experiencing the highest subsidy cost [11] Counterfactual Reforms - Shutting down all SOEs leads to productivity losses in some countries (e.g., Bosnia and Herzegovina with a 40% decline) and gains in others (e.g., Ukraine with a 35% increase) [12] - Targeted reforms that close only poorly performing SOEs result in TFP gains across all countries, with the highest gains in Germany (14.1%), Ukraine (11.1%), and Montenegro (8.4%) [14][86] - Combining targeted SOE reforms with financial market reforms that eliminate distortions can lead to TFP gains ranging from 26.6% in Austria to 85.5% in Ukraine [92] Data and Methodology - The study uses a novel firm-level database and implements Whited and Zhao's (2021) methodology to infer financial distortions [6][8] - The analysis leverages fixed-effect regressions to assess the role of state ownership in the cost of finance, controlling for firm size, age, productivity, and country-sector fixed effects [10] - The methodology assumes a CES production function to capture sector-wide financial frictions and firm-specific wedges [7][8]