Disinvestment and Firm Performance- A Comparative Analysis of Strategic Sale vs. Public Offerings by Indian Public Sector Enterprises

The state owned enterprises tend to suffer from operational and financial inefficiency due to severe agency problem and lack of market discipline. Disinvesting the state's stake in the state owned firms to either a strategic partner or offloading it to the general public or financial institutions, is considered as one of the effective solution to the agency problem of these firms. Sale of stake to the strategic partner is supposed to inculcate profit maximization objective in state owned firms and offloading minority stake to the general public and/or financial institutions is supposed to bring the firm under stock market monitoring mechanism, and better analyst coverage.

In the present paper, two modes of disinvestment are compared and contrasted for pre and post disinvestment performance of firms on certain parameters such as valuation, financial leverage, and operating efficiency. Paper found no statistically significant difference between pre and post disinvestment valuation ratios, financial leverage, and operating efficiencies for either of the data sets, i.e., minority sales as well as strategic sales. However, results indicate that strategic sale as a mode of disinvestment improves the valuation, operating efficiency and financial leverage for the firm.