The contribution of this paper to the existing literature is fivefold. First, it offers a cross-country approach and employs a harmonized definition that ensures comparability using the new World Bank’s Businesses of the State (BOS) database (Dall'Olio, et al., 2022). Second, it studies the differences in firm performance by the type of sector and potential opportunity costs of state ownership in sectors where the economic rationale is less clear by implementing the World Bank BOS sector taxonomy (Dall'Olio, et al., 2022b). Thus, we differentiate the role of state ownership in competitive sectors such as the manufacturing of textiles or accommodation services vis-à-vis natural monopolies (e.g., electricity transmission) and partially contestable sectors (e.g., extraction of gas). Third, this study shows how performance differential varies by the level of state participation and how mixed and private ownership can explain better financial and operational outcomes vis-à-vis cases where the state is the sole owner. Fourth, this paper unveils performance differentials between directly and indirectly owned BOS and explores to what extent a higher degree of separation or autonomy from the state can drive better operational and financial results. Finally, we explore how POEs and BOSs respond to economic shocks in the short-term (e.g., COVID-19).

The remainder of the paper is organized as follows. Section 1 discusses the analytical framework of principal-agent theory to understand the role of state ownership in firms’ operational and financial performance. Section 2 presents the review of the existing literature. Section 3 presents the data sources followed by some descriptive statistics in section 4. Section 5 describes the empirical methodology. Our empirical results are presented and examined in Section 6, followed by Section 7, which discusses policy implications and concludes.

**1. PRINCIPAL-AGENT THEORY TO UNDERSTAND THE ROLE STATE OWNERSHIP IN FIRMS’ PERFORMANCE**

The principal-agent problem proposed by Jensen & Meckling (1976) underscores potential issues that can arise when one or more principals engage an agent to perform a service on their behalf. The delegation of decision-making authority from the principal (owner of the enterprise) to the agent (enterprise's management) creates an agency problem due to differing interests between the two parties. Discrepancies in incentives can emerge as the agent is motivated by utility maximization, which may not always align with the best interests of the principal (Jensen & Meckling, 1976). This divergence in interests can result in poor performance and suboptimal decision-making in enterprises.

While both BOSs and POEs can experience these issues, the literature suggests that firms with state participation are more vulnerable to be captured by certain interest groups, notably political parties (Boycko, Shleifer, & Vishny, 1996); (Campos & Esfahani, 1996). Some issues might stem from the appointment of board members, who can relate to political parties or decision-making that serves the interests of certain politically connected firms. Furthermore, appointments linked to political patronage can cause financial costs related to severance payments, loss of experienced personnel, discontinuation of projects, and sudden changes in management strategies, and investment plans (Totleben & Kardziejonek, 2019). These factors can result in lower financial results, reduced competitiveness, and uncertainty for the firm and its partners.

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