22 state as a partial owner is very often passive and allows the other owners to take control.<sup>5 2</sup> Indeed, our data indicate that when the state is the largest shareholder, proxy votes accrue to the second largest owners, but in all other cases they accrue to the largest owner.

If the hypothesis of state passivity is correct, it suggests that the performance of privatized firms in which the state is the largest owner has less to do with the state itself than with its largest private partners. To verify this, we re-estimated equation (2), splitting firms in which the state was the largest owner by the identity of the second largest owner (they were in all cases either privatization funds or domestic nonfinancial companies).<sup>53</sup> The privatization effects for the split grouping are given in Table 3 below.

**TABLE** 3 **IMPACT OF PRIVATIZATION WHEN STATE REMAINS THE LARGEST OWNER**

||f<br>Pnvate shareholder|Privatization<br>effec<br>the largest owner|t when the**private shareholder**<br>is<br>the second largest owner (next to the state)|
|---|---|---|
|Privatizationfind<br>|2d.|33|**24.92***|
|<br>Domestie nonfnancialfffm<br>|.S8|<br>**|4.10|
|*p <0.05;_**_p <0.10|||

These results confirm our conjectures. The performance of privatized firms in which the state as the largest owner is accompanied by a particular private party as the next largest owner is statistically indistinguishable from the performance of firms in which the same private party is the largest owner.<sup>54</sup> When the state is aligned with privatization funds, which are generally strong performers, the revenue performance picks up significantly. But when it is joined by weak 52 Indeed, even with respect to enterprises in which the state is the sole owner, neglect is often the rule. But whereas the state as a partial owner can free-ride on the efforts of other owners, the firms controlled by state as the sole owner suffer from the absence of monitoring. For the behavior of the state as a partial owner in Central Europe, see Pistor and Turkewitz (1996).

**53** The important question here is whether the identity of the owners other than the state determines the performance of a partially privatized firm. Whether it is always the _second_ largest owner -- rather than some furither coalition of private owners -- that is decisive for the firm's performance might depend on who the other owners are.

**54** The difference between the privatization effect for firms in which state is the largest owner and privatization funds the second largest owner (24.92 when performance of state firns is evaluated over 1990-93 period, with a standard error 9.10 ) and finms in which privatization funds are the largest owner (28.33 with a standard error of 6.32) is insignificant regardless of the time period over which the performance of state firns is evaluated: the F-statistics for the test of equality of the privatization effects are F,,,, = 0.08 (p=0.<sup>7 7</sup> ), F,11 6 = 0.09 (p=0.76), and FI **166** = 0.09 (p=0.76) for each of the three periods, respectively. The same is true for the difference between the privatization effect for firms in which state is the largest owner and private nonfinancial companies the second largest owner (4.09 when performance of state finns is evaluated over 1990-93 period, with a standard error of 11.41 ) and firms in which private nonfinancial companies are the largest owner (8.88 with a standard error of 4.9 1): the F-statistics for the test of equality of the privatization effects over the three periods are F, ,, = 0.16 (p=0.69), F1 6=0.18 (p=0.67), and F1 = 0.19 (p 0.66) for each of the three periods, respectiyely.