Does Debt Discipline State-Owned Firms? Evidence from a Panel of Italian Firms

This paper investigates whether financial pressure has an impact on the performance of state-owned firms. By combining different theoretical frameworks, we explore the conditions under which debt discipline becomes effective even for state firms. Using a panel of 1318 Italian state and private manufacturing companies, for the period 1977-1993, we estimate total factor productivity and employment equations, allowing for the financial factors to have a different effect under quot;softquot; and quot;hardquot; budget constraint regimes. Consistently with the theoretical predictions, the results show that state firms do respond to financial pressure by increasing total productivity and reducing employment in a quot;hardquot; budget constraint environment