In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

Abstract

A large legal and economic literature describes how state-owned enterprises (SOEs) suffer from a variety of agency and political problems. Less theory and evidence, however, have been generated about the reasons why state-owned enterprises listed in stock markets manage to attract investors to buy their shares (and bonds). In this Article, we examine this apparent puzzle and develop a theory of how legal and extralegal constraints allow mixed enterprises to solve some of these problems. We then use three detailed case studies of state-owned oil companies – Brazil’s Petrobras, Norway’s Statoil, and Mexico’s Pemex – to examine how our theory fares in practice. Overall, we show how mixed enterprises have made progress to solve some of their agency problems, even as government intervention persists as the biggest threat to private minority shareholders in these firms.