Government-Owned Enterprises: Political Influences Essay

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Government-owned enterprises establish themselves as profit-maximizing non-profits with certain socio-political objectives, while at the same time offering definite assurances against default (Faccio et al., 2006). However, the federal control of SOEs may have adverse repercussions due to two primary reasons. First, the government stake leads to the administration of various political objectives or the curtailing of the extent of state financial backing and its role as the “grabbing hand” (Shleifer and Vishny, 1997; Durnev and Fauver, 2009).

Political influences can sink the risk-adjusted outcomes of state-owned enterprises, resulting in larger debt since a firm’s profitability directly affects the capacity to reimburse its creditors (Borisova et al., 2015).

Second, the definite assurances by the government provide stakeholders and managers with more opportunity for risk-taking while public funds are available to prevent the firm from bankruptcy, but can also create a moral hazard when such conduct leads to adverse outcomes (Stiglitz et al., 1993). Iannotta, Nocera, and Sironi (2013), as well as Gropp, Gruendl, and Guettler (2014), all state that as a result of this status quo, it is expected that managers of government-backed firms are engaged in higher degrees of financial risk-taking, which impact on a company’s performance and indirectly influences the levels of debt.

The issue of moral hazards is further exacerbated by inconsistent monitoring since government agencies lack either the motivation or competence (possibly as a result of political designations) to oversee the management appropriately(Borisova et al., 2012). As a consequence, such enterprises rely on larger loans from state-owned banks, which generally have higher penalties for defaults.

Several contingencies of corporate governance legislation in GCC countries are implemented on a symbolic level to integrate with the regulatory climate, including avoidance of engaging in cumulative voting in the majority of the listed firms (Alamri, 2016).

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IvyPanda. (2020, December 5). Government-Owned Enterprises: Political Influences. https://ivypanda.com/essays/government-owned-enterprises-political-influences/

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IvyPanda. (2020) 'Government-Owned Enterprises: Political Influences'. 5 December.

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IvyPanda. 2020. "Government-Owned Enterprises: Political Influences." December 5, 2020. https://ivypanda.com/essays/government-owned-enterprises-political-influences/.

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IvyPanda. "Government-Owned Enterprises: Political Influences." December 5, 2020. https://ivypanda.com/essays/government-owned-enterprises-political-influences/.

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