Hidden Government Influence Over Privatized Banks

Abstract

This article uses Israel’s ongoing process of bank privatization to explore the link between privatization programs and ownership structure of public companies. Our thesis is that concentrated ownership provides regulators with a platform for exerting informal influence over corporate decision-making. This platform serves regulators as a safety valve when all else fails, especially when they would like firms to terminate senior executives or board members. Communicating with controlling shareholders increases the likelihood that both the regulatory intervention and the reasons underlying it would remain confidential. Moreover, controlling shareholders can make swift decisions and implement them quickly, with no need for formal group deliberation. When informal influence is important – as in the case of banks – the government may prefer firms with controlling shareholders to widely held firms. The government may therefore prefer selling a control block in the firm undergoing privatization to distributing its shares through the stock market.

JEL Classification: E58, G20, G21, G28, G30, G38, K20, K22, K23, L33