Privatization has been a popular method to transfer the ownership of state-owned enterprises (SOEs) to the private sector. It not only provides a large body of revenues for government but it also improves the profitability and operating efficiency of privatized firms. Previous literature provides evidence that the profitability and operating efficiency of privatized firms are significantly improved after privatization. This paper aims to investigate the effect of privatization on loan conditions using a sample of 67 partially and fully privatized firms from 1993 to 2007. We find that implicit government guarantee is an important factor for bank loans during the privatization process. Credit risk of borrowing companies is more likely reflected through price terms conditions but not through non-price term conditions. Besides, loan spreads and fees decrease when governments release control right after privatizations. On the contrast, loan spreads and fees increase when governments refuse to release control right after privatizations.
The default risk and cost of debt of privatized firms may increase as government guarantee decreases; although decreasing government ownership leads to positive impact on profitability and operating efficiency. The results imply that credit risk of privatized firms is more important for lender banks. Both governments and managers of privatized firms have to consider the impact of implicit government guarantee on loan conditions during privatization process if privatized firms are expected to have well relationship with banks or they are expected to finance through bank loans after privatizations.