National Taiwan University May 24-25, 2002
The Choice of Public Versus Private Capital Markets: Evidence From Privatizations William Megginson University of Oklahoma Global Advisory Committee on Privatization (Italy) Robert Nash Wake Forest University Jeffry Netter Annette Poulsen University of Georgia
Issues Studied by Privatization Research • How much privatization has actually occurred? • Why have governments embraced privatization? • Has privatization improved firm performance? • How have governments chosen to privatize? • How do political considerations impact terms of privatizations? • Privatization impact on stock market development? • Have investors benefited from SIPs? • What are the key lessons of privatization? • Studies surveyed in Megginson and Netter, JEL 2001.
A Brief History Of Privatization • FRG’s Adenauer government actually first (1961) • Small British Petroleum, other sales (1977) • First Thatcher government (1979-83) • The Turning Point: British Telecom (Nov 84) • Chile shows privatization possible in DCs (80-85) • French Chirac Government (1986-88) • Privatization spreads to Asia (NTT 1987-88) • Telefonos de Chile pioneers ADRs (1990) • Fall of communism CEE; voucher privatization (1991) • European SDs embrace privatization (since 1993) • Privatized firms key to European Capital market transformation (1998-2000)
The Economic Impact of Privatization • Has significantly reduced State’s role in OECD • SOEs effectively eliminated from UK economy • Rapidly shrinking role in Western Europe, Asia • Transition economies have been transformed • SOE role cut up to two-thirds in eastern Europe • Russia privatized, but not commercialized • Much less change in developing countries • Little change in Africa, Latin America thru 1991 • Non-OECD Asia has actually increased • Much has probably happened since 1991 • Little impact thus far in China, India
Why Have Governments Embraced Privatization? • Poor economic performance of SOEs • State ownership often highly inefficient & politicized • Chronic under-investment due to PSBR • Unending need for SOE subsidies • Up To 10% Of GDP in some countries • Pervasiveness of soft budget constraints • Empirical support for private ownership • Revenue govts can raise from privatization • Fiscal impact of privatization very positive • SIPs’ impact on capital market liquidity & capitalization
Governments Use Three Methods To Privatize • Sale of State Owned Enterprises to the public • Share Issue Privatization: sale in public capital market to retail and institutional investors • Asset sale: sale in private market to existing private firm or small group of investors • Voucher: broad distribution of shares to the public (like SIP) but at very low cost • Tremendous variation within each type
Which Method To Use? • Governments consider both political and economic factors in selecting divestment method • Must balance multiple objectives including garnering political support and raising revenue • Jones, Megginson, Netter, and Nash (1999) and others show how political factors influence the design (and underpricing of SIPs) • Boycko, Shleifer, Vishny argue that unique environment in Eastern Europe made voucher privatization only feasible method of privatization
Public Or Private Capital Markets? • We examine the choice between using a public capital market (SIP) or a private (asset sale) transaction • Choice helps us understand privatizations and the use of markets • Also important corporate finance implications for public (capital market) vs private market financing
Choice Between Private and Public Capital Markets • We hypothesize that the choice is a function of three types of economic, political and firm-specific factors • Market Considerations • Political and Legal Environment • Firm-Specific Characteristics
Market Considerations • Degree of market development has several potential effects on choice of privatization method • If primitive, it is difficult for SIP to work -- hard to find buyers, hard to price • However, privatizations can develop markets • SIPs create shareholders and make development of the market irreversible • Income distribution can also affect market choice: The more unequal, the more costly is use public capital markets
Political and Legal Environment • Refers to the degree of legal protection of property rights and shareholder rights • Government’s protection of property rights (from itself and other parties) and long-term viability of contractual relationships affect choice of market • Hypothesize that greater respect for property rights and more stability of contracts make it more likely privatization is through an asset sale. It is much more difficult to engage in post-transaction opportunistic behavior with a SIP
Firm-Specific Factors • Characteristics of the firm will affect the choice between public and private capital markets • Information effects: a well-developed literature examines the impact of information asymmetries on the choice of how to raise capital • Expected post-performance of the firm: SIPs are publicly traded and firms; governments very interested in assuring that they perform well after privatization • SOE’s industry: governments are sensitive to privatizing firms in strategic industries. They may want to exercise control over the buyer.
Data & Empirical Analyses • Sample: 2,447 privatizations, worth $1.19 trillion, from 1977 through 2000 • Privatization International plus World Bank Privatization database (supplemented by contacts with privatization and exchange officials) • 938 SIPs, worth $745 billion • 1539 asset sales, worth $445 billion
Exclusions • We do not analyze vouchers or data from communist or formerly communist countries • Voucher data is very limited • Theoretically, communist and formerly communist countries are so different they should not be included in regression analysis (See Megginson and Netter (2001)) • Our results are robust if we include the data from the communist and formerly communist countries on SIPs and asset sales
Tables 2, 3, 4 – Summary Statistics • We provide details on the sample based on the year of privatization, industry of the SOE, region of the world • Privatizations increased dramatically in the 1990s: • Telecoms privatizations are 40.9% of the assets but 7% of the transactions. They are 46% of the value of assets sold through SIPs and 32% of asset sale value • Utilities and manufacturing, mining and service represent about 20% of the value each • Western Europe is 55% of the value (29% of number) • Asia/Australia is 26% of the value (18% of the number) • South America is 12% of the value (22% of number)
Regression Analysis • For ease of exposition, we place each explanatory variable into one of three categories: market characteristics, political and legal characteristics, firm-specific characteristics • We estimate logit regression where the dependent variable is 1 if the SOE is privatized through a SIP and 0 through an asset sale • We perform numerous tests of robustness (various samples, specifications, etc.)
Market Characteristics • Considering the importance of the degree of market development and socio-economic conditions • Turnover ratio (value of shares divided by market capitalization) is the proxy for degree of market development • GNI (PPP adjusted) per capita proxies for overall development and income • Gini coefficient measures income distribution: lower numbers more equal income distribution • Market Index proxies for hot market
Market Characteristics: Results • Turnover Ratio coefficient and GNP per capita coefficients are negative; less developed more likely to use SIP. Turnover coefficient sometimes significant, GNP per capita coefficient is always significant • This is consistent with Subrahamanyam and Titman (1999) that SIPs are used to develop capital markets • The GINI-coefficient coefficient is significantly negative -- more unequal income less likely to use SIP. This is consistent with Biais and Perotti (2001) that SIPs are more costly when income is more unequal • Market Index positive and significant – hot market more likely SIP
Political and Legal Environment • There are a host (and more all the time) of variables attempting to measure the political, legal, and cultural characteristics of a country and its legal system. • We use these to measure: • the respect for property rights, • the enforceability of contracts and • the ability of government to credibly commit to these in the future.
Political and Legal Environment (Continued) • Right Wing government • higher value, more government respect for property rights • Stability of government Index • higher value, more ability to commit, less likely SIP • Shareholder rights index • legal protection of minority shareholders • more shareholder rights, more likely SIP
Political and Legal Environment: Results • Note variables are correlated and one must be careful with signs • Right Wing variable: more respect for property rights, less likely to choose SIP • Stability of government: insignificant • Shareholder rights index: never significantly different from zero • Inclusion of any index does not affect the impact of other variables.
Firm Specific Characteristics • Log of firm size • Bigger the firm, the more likely to choose SIP • Return on Sales of SOE • Governments would choose SIP for most profitable firms • Strategic Industry • Governments might be reluctant to sell strategic firm in public market
Firm Specific Characteristics: Results • Log of firm size • larger firms more likely to use SIP • Return on Sales of SOE • higher return on sales more likely to use SIP (relatively few observations however) • Strategic Industry • never significant
Summary • Choice between public and private capital market: • Governments are more likely to use public market when public market is less developed, and when income is relatively equal • Right Wing Governments are more likely to use private capital markets • Governments use public capital markets for the larger and more profitable SOEs
Growth of World Stock Market Trading Volume, 1983-1999 (Value Traded $Bn)
Capital Markets Have Grown Enormously--Both Absolutely & As Percent Of GDP
SIPs Often The First, Second, And/Or Third Most Valuable In A Nation’s Stock Market
<100,000 All >100,000 >500,000 >250,000 Relative Number of Shareholders Over A Six Year Period After A Share Issue Privatization 1.6 1.4 1.2 1.2 1 1 0.8 0.8 0.6 0.6 0.4 Year 0 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Relative Number of Shareholders Of Non-Privatized Companies Over A 9 Year Period 1.6 1.6 <100,000 1.4 1.4 All 1.2 1.2 >100,000 1 1 >250,000 0.8 0.8 0.6 0.4 Year 0 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Year +7 Year +8 Year +9