Abstract:

In this paper, we examine whether labor protection determines the decision to retain a golden share in privatized firms. Using a sample of firms privatized in developing and industrialized countries, we find that the likelihood of observing a golden share is lower in countries with stronger labor protection. Furthermore, we find that golden shares help mitigating the adverse effects of labor protection on the cost of equity, consistent with the soft budget constraints hypothesis. Overall, our results underline the importance of labor protection for an important government control mechanism, namely golden shares, as well as for equity financing costs of privatized firms.