Does Privatization Affect Performance? Muhammad Fahad Siddiqi, Muhammad Nouman & Ashfaq Ahmad

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1 Muhamma Faha Siiqi, Muhamma Nouman & Ashfaq Ahma Abstract The ownership structure (Private or Public) has strong impact on firm s financial performance. Pakistan Telecommunication Limite (PTCL) was privatize in This research stuy investigates the impact of privatization on the company s financial performance an the performance of its stock. The variables Net Profit Margin (NPM), Operating Profit Margin (OPM), Return on Assets (ROA) an Earnings per Share (EPS) are use as proxies for financial performance. On the other han, the variables Average Share price (ASP), Volume of shares trae (Vol), an Number of Traes (NoT) are use as proxies for performance of stock. The paire-samples t test for mean ifference has been use for comparing the pre an post privatization performance. Results inicate negative but insignificant effect of privatization on return. On the other han, the Average Share price, Volume of shares trae, an Number of Traes are positively an significantly affecte. Analysis of the financial ata shows ecline in the net profit margin, operating profit margins, return on assets an earnings per share after the privatization; but the impact is insignificant for all the variables except the operating profit margin. Keywors: Privatization, Financial performance, Stock performance. Introuction Telecommunication plays a vital role in the economic evelopment of any country. The ownership structure (Private or Public) has strong impact on the firm financial performance. Pakistan Telecommunication Limite (PTCL) was privatize in Due to the privatization of Muhamma Faha Siiqi. Lecturer, Institute of Business an Management Sciences (IBMS), Khyber Pakhtunkhwa Agricultural University, Peshawar Muhamma Nouman, Lecturer, Institute of Business an Management Sciences (IBMS), Khyber Pakhtunkhwa Agricultural University, Peshawar. nouman9@yahoo.com Ashfaq Ahma. MS Stuent, Institute of Business an Management Sciences (IBMS), Khyber Pakhtunkhwa Agricultural University Peshawar

2 PTCL overall financial performance an the share prices of the PTCL became volatile. This research stuy focuses on the ynamic aspects of privatization. Backgroun of the Stuy As privatization is a global phenomenon, Eastern Europe an Russia have starte moving their economies from state ownership to market base system in early 1990 s. Such funamental restructuring ha not been attempte earlier. The current view of researchers regaring privatization is very authentic; they argue that privatization must take place before firms are restructure (Blanchar, Dornbusch, Krugman & Summers, 1991). Two arguments support the fast restructuring. First, consultants consier that the rapi privatization enhances a political, social an economic problem which comes ue to eficiency in management of corporate governance. Secon, common motive of government is to generate revenue, an privatizing firms are the realistic system to raise funs (Lipton an Sachs, 1990). To bring private owners instea of state owners means effective an efficient economy an quickly ealing with the property rights (Rolan, 1994). Newbery (1991) conclue that the major problem of privatization comes ue to monopolies in the market; therefore, governments have to shatter the monopolies before privatization. Accoring to Rolan (1994) privatization is the slow an graual process in to enhance political problems an possible backlash. Where as, Summers (1994) believes that ue to ineffective rules an regulations of state-owne firms inustries an institutional problems in the countries exist. Privatization is the key factor that enables markets to work properly an appropriately. Accoring to Megginson & Netter (2001) from last two ecaes most countries of the worl shifte their firms from state ownership to privatization. In 1999 the revenue of privatization firms was $ 1 trillion aroun the globe. Privatization leas to economic growth, increase in prouctivity, efficiency in utilization of resources an expansion in output an employment. The rational consumer take benefits from competition among private firms in the form of better quality services an low prices especially in banking, air travel an telecommunication sectors. Due to rigiity in our culture, Public Sector companies o not become flexible an more ynamic as compare to Private companies. In mi 1980 the ramatic change was recore in telecommunication sector. In early 1980 North American telecommunication companies were completely state owne an enjoying the monopoly. There was no isolate regulatory authority outsie Journal of Managerial Sciences 190

3 the ministry who observe that sector. Accoring to the report of International Telecommunications Union (1999) in year 1999 total 90 companies aroun the globe privatize their telecommunication firms an 95 countries of the worl reforms isolate regulatory authorities. An over view of PTCL In 1947, after inepenence, Pakistan ha an insufficient telecom base. Only 14,000 lan lines were there in whole country an only one epartment of Telephone an Post Telegraph. In 1962 these two epartments were alienate as Postal epartment an Telephone an Telegraph Department (T&T). Pakistan starte graually enhancement in telecommunication sector in The brief history of PTCL is as follows: Telegraph an Postal Department was establishe in Telephone an Telegraph Department was establishe in Pakistan Telecom Corporation was establishe in PTCL was liste in the Karachi Stock Exchange in Internet an mobile subsiiaries was establishe in Policies of Telecom sectors were finalize in Deregulation policy of Telecom sector was announce in Pakistan countenance insignificant growth in telecommunication sector over the years because of state ownership an monopoly in the market. Justification of the Stuy As privatization stuy is one of the areas of interest for researchers, investors an government. Number of stuies has been one on this topic. But this stuy has its own importance because it covers both the financial an the share market aspect. This stuy will be helpful for upcoming researchers in the fiel of privatization. The investors of stock market may also be the beneficiary of the stuy. The management of PTCL can also take the managerial ecision accoring to the finings of this stuy. Objectives of the Stuy This research stuy aims to examine the effect of firm s privatization on the performance of the Pakistan Telecommunication Limite (PTCL). The objectives of the stuy are as follows. a. To evaluate impact of privatization on the stock Prices an stock traing of PTCL. b. To evaluate impact of privatization on the financial performance of PTCL. Journal of Managerial Sciences 191

4 Review of Literature This section escribes the ifferent imensions of privatization in the light of previous research stuies on privatization an its impact on financial performances of telecom companies. Wallsten (2001) in his research stuy conclue that there is no relationship between only privatization an improvement in telecommunication sector. The privatizations along with structuring new regulatory reforms are significant enough for enhancement in telecommunication sector. Galal & Nauriyal (1995) evaluate the performance of telecom sector before an after regulatory reforms. They explore the issues of pricing, commitment, information an how countries become able to balance regulatory authority. They foun all three issues achieve greatest improvement in Chile. Philippine also was not categorize in worst performance. Megginson, Nash, & Ranenborgh (1994) compare pre an post financial an operating performance of 61 firms from 32 inustries of 18 ifferent countries uring the perio 1961 to Their Finings suggest that output, profitability an operating efficiency of the sample companies have increase after privatization. Boubarki an Cosset (1998) compare three years pre an three years post financial an operating performance of 79 firms from 21 eveloping countries. They conclue that financial an operating efficiency improves in the post privatization perio. D Souza an Megginson (1999) compare performance of 78 companies uring the perio 1990 to 94. Their finings show improvement in the performance in the post-privatization perio. Verbrugge, Megginson an Lee (1999) conucte a stuy on 65 banks to evaluate their performance in pre an post privatization perio. They foun moerate improvement in the performance after privatization. Beck, Cull an Jerome (2003) conucte a stuy to evaluate impact of privatization on performance of banks. He use an unbalance panel of 69 banks. Annual ata for the time perio 1990 to 2001 was use. Finings suggest positive impact of privatization on efficiency. Hill & Abala (1996) conclue that the risk factor plays an important role at the time of biing of the firm that is going to be privatize. Investors face fewer uncertainties if regulatory structure is place at the time of privatization of the firm, so investors are willing to pay more for the firms. Some research stuies foun average performance after reforms. Where as, some stuies foun positive effect of reforms. Privatization gives significant an greater benefits to the inustries. Monopoly Journal of Managerial Sciences 192

5 provier faces less incentive to enhance services. Many countries aroun the worl privatize their telecom firms with agility an buil up regulatory capacity more graually (Kikeri, John & Shirley, 1992; Wellenius, 1992). Ambrose, Hennemeyer & Chapon (1990) conclue that competition is the major source of improvements in any sectors. The researcher also note that the moving monopoly from state ownership to privatization will not result in competitive behaviour. Stuy further emonstrate that privatization affects both performance an price the investor are willing to pay. Research Methoology The stuy basically focuses on the impact of Privatization on the financial performance of PTCL an the performance of its stock in Karachi stock exchange. Description of the Data The aily stock ata has been use in this stuy which has been collecte from online atabase of Business Recorer. Collecte ata is base on two years before an after Privatization (1 st January 2003 to 31 st December 2006). For measuring the financial performance, financial ata for five year pre an 5 year post privatization perio (2000 to 2009) has been collecte from the annual reports of PTCL. Variables an Statistical Techniques For measuring the stock performance four ifferent variables have been use, namely i). Average Share Price (ASP) ii). Stock return (SR) i.e., per ay stock return iii). Volume of Stock (Vol) for evaluating the ifference of trae volume iv). No. of Traes (NOT) per ay For calculating the Stock Return the following equation has been use. R t = Ln(P t / P t-1 ) Where R t = is the return of stock or any particular ay P t is the stock price of current ay P t-1 is the stock price of the previous ay. For measuring financial performance the following four variables have been use: i). Operating Profit Margin (OPM) Journal of Managerial Sciences 193

6 ii). Net Profit Margin (NPM) iii). Return On Equity (ROE) iv). Earnings per share (EPS) The ata is ivie into two samples, where one sample consists of pre privatisation ata an the other one consists of post privatization ata. The ata has been teste by using the paire-samples t test for mean ifference. This test explains volatility an significance of the variables, with the assumptions that the istribution of the variable is normal an that the variance of the variable is same in both set of populations. The test statistic is given by t = S n (Chaury & Kamal, 2004), Where, is sample mean ifference. n is number of sample ifference an S is the stanar eviation of Formulas for, S an Analysis an Finings S = S are : n ( i ) = n 1 Pre & Post Privatization Analysis of PTCL Stock 1 2 Table-1 Paire Samples Statistics for variable ASP St. Error ASP-Pre ASP-Post t Sig * * Value is significant at 0.05 The results of Paire-samples t test for the variable ASP are summarize in the table1. ASP of PTCL stock before privatization was recore as Journal of Managerial Sciences 194

7 35.77 an after privatization It shows that the average share price of PTCL has increase after privatization. Stanar eviation is higher in the post privatization perio as compare to pre privatization years which inicates that stock price has become more volatile after privatization. The significant value is 0.00 which inicates that significant change has been observe in the ASP of PTCL after privatization. These results complement the finings of Megginson, Nash & Ranenborgh (1994). Table-2 Paire Samples Statistics for variable SR St. Error SR-Pre SR-Post T Sig * * Value is significant at 0.05 Table 2 shows summary of result of Paire-samples t test for the variable stock return (SR). value for the return is negative after privatization of PTCL ( ) whereas, before privatization it was The value for the stanar eviation is a bit higher for the post privatization perio. The mean an stanar eviation inicate that the average return has ecrease after privatization; moreover, it has become more volatile as compare to the pre-privatization perio. The significance level for this variable is 0.57 which is greater than the 0.05 which shows that statistically there is no significant ifference in the stock return in pre an post privatization perio. These results are almost same as fining of Galal & Nauriyal (1995). Table-3 Paire Samples Statistics for variable Vol. St. Error Vol-Pre Vol-Post t Sig * * Value is significant at 0.05 In table 3 result of Paire-samples t test are summarize for the variable Vol. volume of PTCL stock has increase after privatization. The stanar eviation is higher in the post privatization perio as compare to pre privatization perio inicating increase in the volatility of volume after privatization. Whereas, the significant value is 0.00 which is less Journal of Managerial Sciences 195

8 than 0.05 which inicates that significant change has been observe in the Volume of PTCL stock after privatization. Same results have been seen in Malaysia by Ibrahim (2003). Table-4 Paire Samples Statistics for variable NoT St. Error NoT-Pre Not-Post t Sig * * Value is significant at 0.05 Table 4 summarizes result of paire t test for the variable Number of traes. The mean value of the Number of traes is almost ouble in the post privatization. Whereas, the stanar eviation for the number of traes is high in the post privatization perio. P or significant value for the variable Number of Traes (NoT) is highly significant as it is less than.005 inicating that the number of traes per ay is significantly affecte ue to privatization. Pre & Post Privatization Analysis of PTCL Financial Performance Table-5 Paire Samples Statistics for variable OPM St. Error t Sig. OPM-Pre * OPM-Post * Value is significant at 0.05 Table 5 shows summary of result of Paire-samples t test for the variable operating profit margin (OPM). value of the OPM is lower in the post privatization perio. On the other han, stanar eviation is higher in the post privatization perio as compare to pre privatization perio. It inicates that privatization has negative impact on the net profit margin; moreover, it has also become more volatile after privatization. Whereas, the significant value is less than 0.05 which inicates that significant change has been observe in the OPM after privatization. Journal of Managerial Sciences 196

9 Table-6 Paire Samples Statistics for variable NPM St. Error NPM-Pre NPM-Post T Sig * * Value is significant at 0.05 Table-7 Paire Samples Statistics for variable ROE St. Error ROE-Pre ROE- Post * Value is significant at 0.05 Table-8 Paire Samples Statistics for variable EPS St. Error EPS-Pre EPS-Post T Sig * T Sig * * Value is significant at 0.05 Table 6, 7 an 8 shows summary of result of Paire-samples t test for the variable Net Profit Margin (OPM), Return on Equity (ROE), an Earning per Share (EPS) respectively. Results show that all of these three variables have ecline after privatization, an have become more volatile. The significance value is greater than 0.05 which inicates that changes in these variables are not statistically significant. Conclusions Pakistan Telecommunication Lt (PTCL) the largest telecom company in Pakistan was privatize in The privatization has affecte the financial an operational performance of the company. This research focuses on the impact of privatization on PTCL. To achieve this objective, the financial performance of PTCL an performance of PTCL common stock has been analyze before an after privatization, using Paire-samples t test for mean ifferences. Finings suggest that there is a significant effect of privatization on the average share prices, volume Journal of Managerial Sciences 197

10 an number of traes. This effect is being foun positive as well. But the stock returns are not significantly affecte from the privatization. Analysis of the financial ata shows ecline in the financial performance of the company after privatization measure by operating profit margin, net profit margin, return on equity an earnings per share ratio. These entire four variables show ecline in the post privatization perio but the change is significant only in the variable operating profit margin (OPM). Hence we can conclue that privatization of PTCL has not been foun analytically favourable from the investors point of view. Journal of Managerial Sciences 198

11 References Ambrose, W., Hennemeyer, P., & Chapon, J. P. (1990). Privatizing Telecommunications Systems: Business Opportunities in Developing Countries. IFC Discussion Paper: Washington, DC. Beck, T., Cull R. an Jerome A. (2003). Bank Privatization in Nigeria. Working paper, Worl Bank Group. Blanchar, O., Dornbusch, R., Krugman, P., & Summers, L. (1991). Reform in Eastern Europe. Cambrige: MIT Press. Boubakri, N., an Cosset J. C. (1998). The Financial an Operating Performance of Newly Privatize Firms: Evience from Developing Countries. Journal of Finance, 53, pp Chaury, S. M., & Kamal, S. (2004). Introuction to Statistical Theory II: 6 th eition (pp ), Ilmi Kitab Khana Lahore, Pakistan. D Souza J. an Megginson. W. L. (1999). The Financial an Operating Performance of Newly Privatize Firms in the 1990s. Journal of Finance, 54, pp Galal, A., & Nauriyal, B. (1995). Regulating Telecommunications in Developing Countries. Worl Bank Policy Research Working Paper: Washington, DC. Hill, A., & Abala, M. (1996). Argentina: The Sequencing of Privatization an Regulation in Regulation, Institutions, an Commitment: Comparative Stuies of Telecommunications. Brian Levy an Pablo Spiller es. Cambrige: Cambrige University Press, pp Ibrahim, M. H. (2003). Macroeconomic Forces an Capital Market Integration: AVAR Analysis for Malaysia. Journal of the Asia Pacific Economy, 8 (1), pp Kikeri, S., John, R. N., & Shirley, M. M. (1992). Privatization: the lessons of experience. Worl Bank Policy Research Working Paper: Washington, DC. Lipton, D., & Sachs, J. (1990). Privatization in Eastern Europe: The Case of Polan. BPE, 2, pp Journal of Managerial Sciences 199

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