Post-Crisis Performance of State-Owned Enterprises: Evidence from Indonesia. Graduate School of Finance and Accounting

Abstract

This study compares the relative performance level of state-owned enterprises (SOEs) to privately owned firms in Indonesia during a 10-year period, from 2000 to 2009. This is the period following the 1997-1998 Asian financial crisis. We find significant positive differences in terms of the profitability of SOEs measured in return on sales, return on assets, and return on equity. However, our findings also support previous studies that SOEs employ higher leverage and labor intensity and are less efficient than privately owned firms. Descriptive statistic results of our sample firms explain the reasons. In all profitability measures, SOEs outperform privately owned firms. We argue that the better profitability performance of SOEs compared to privately owned firms comes from the lower cost of loans employed by SOEs given their higher leverage than privately owned firms. The low cost of loans received by SOEs may come from either government-subsidized credits or quasi-government features that grant them lower interest expenses. These loans allow SOEs to invest more in capital expenditures that, in return, allow them to own a large amount of assets, generally in form of fixed assets. Hence, those larger investments will give more opportunity to SOEs to harvest more earnings and profits than privately owned firms. In addition, the low cost of the loans allow SOEs a safe interest expense that then allows them to make a higher net income. Therefore, if we measure the profitability performance of SOEs using net income measures in the forms of return on sales, return on assets, and return on equity, SOEs will be more profitable compared to privately owned firms.