Transcript FEEM PPT Template - Cuhk Business School

Reluctant Privatization
Bernardo Bortolotti
(Università di Torino and FEEM)
Mara Faccio
(Vanderbilt University)
Background
 From 1977 to 2004, US$1.26trn revenues and
4,500+ privatization deals in more than 100
countries
 Global State-owned Enterprise (SOE) value
added (% GDP) decrease from 9% to 6%
 SOE market capitalization US$3,310bn
Source: Privatization Barometer
2
Background
3
Two basic questions
 Did governments give up control in
privatized firms?
 If they did not, does governments’
reluctance affect firm value?
4
Definition
We define Reluctant Privatization as:
A privatization of a State-owned Enterprise (SOE)
characterized by the trasfer of ownership rights
without a (corresponding) transfer of control
rights
5
Reluctant Privatizations, Italy
 In December 2003, the Italian MEF corporatized
Cassa Depositi e Prestiti (CDP), a public financial
institution, and then trasferred stakes in Eni, Enel,
Poste Italiane, and STM to CDP.
 30% of CDP was privatized to a consortium of
Italian banking foundations.
 €13.1bn privatization revenues cleared by
Eurostat to amortize public debt.
6
Reluctant Privatizations, Italy
MEF
Private banking
Foundations
70,00%
30,00%
Cassa Depositi e
Prestiti
10,30%
50,63%
Enel
10,00%
20,32%
Eni
35,00%
65,00%
32,33%
Poste Italiane
Finmeccanica
10,30%
6,65%
ST
Microelectronics
7
Reluctant Privatizations, Italy
MEF - Department of Treasury, Direct shareholdings* and Control Rights
Companies
Direct shareholdings (%)
Control Rights (%)
Pre CDP
Post CDP
Pre CDP
Post CDP
Cassa Depositi e Prestiti
100,00
70,00
100,00
70,00
Enel
60,98
50,63
60,98
60,98
Eni
30,32
20,32
30,32
30,32
Finmeccanica
32,33
32,33
32,30
32,30
Poste Italiane
100,00
65,00
100,00
100,00
0,00
0,00
16,95
16,95
STMicroelectronics (via Finmeccanica)
Sources: MEF, CDP and Privatization Barometer
*These shareholdings are limited to stakes involved in transfer to CDP
8
Research Design
 Did governments give up control in privatized
firms?
– We analyze empirically the evolution of ultimate
control rights (from end-1996 to 2000) in privatized
companies as opposed to a control sample.
 If they did not, does governments’ reluctance
affect firm value?
– We estimate the (adjusted) performance of
privatized companies as a function of
(government) control rights.
9
Theoretical Predictions
The political interference theory
(Shleifer and Vishny, QJE1994)
Governments run SOEs to achieve political
objectives (high employment, high wages, etc.)
and forgo maximizing profits.
H0: Government control rights are not negatively
discounted in market values.
10
Novelty
 Huge literature on performance of privatized
companies (Megginson and Netter JEL02
survey).
 To our knowledge, our paper is the first to study
in combination
– ultimate control (La Porta et al JF02, Tian
WP02)
– additional control devices (golden shares)
– adjusted performance using a control sample
at the company level (Dewenter and Malatesta
AER01, Lopez-de-Silanes QJE96)
11
Data
 141 companies privatized by public offerings
before 31/12/1996 in OECD countries
 Complete ownership data for 1996 and 2000
 104 privatization prospectuses to identify statutory
constraints and additional control devices
 Balance sheet data for the period 1996-2000
Main sources: SDC Platinum, WordScope,
Datastream, national exchanges, etc.
12
Measuring Control Rights

We rely on ultimate control (voting) rights
(weakest link concept, 10% cut off)

Six types of ultimate owners:
− a family or an individual
− the State
− a widely-held financial institution
− a widely-held corporation
− a miscellaneous investor
− a cross-holding
(A company that does not have a controlling
shareholder at the 10% cut-off is classified as widelyheld).
13
Examples: Lufthansa AG, 1996
Deutsche Lufthansa AG
1.03%
Deutsche
Postbank AG
100%
0.4%
Deutsche
Bahn AG
100%
37.45%
KfW
Govt ultimate control rights:
50.7%
10.05%
MGL
80%
Federal Republic
Govt. direct ownership:
1.77%
1.77%
State of North
Rhine-Westphalia
44.5%
Bayerische
Landesbank
Girozentrale
50%
State of
Bavaria
50%
Association of
Bavarian Saving
Banks
44.5%
Dresdner
Bank AG
100%
Allianz AG
14
Examples: SGS-Thomson Microelectronics, 1996
SGS Thomson Microelectronics NV
Govt. direct ownership:
0%
69.4%
SGS Thomson Micr. Holding BV
100%
Govt ultimate control rights: SGS Thomson Micr. Holding NV
100%
50%
50%
FT2CI
MEI Srl
49.9%
50.1%
Thomson-CSF SA
58%
Thomson SA
51%
CEA Industries
100%
SOGEPA
100%
CEA
100%
50.1%
FT1CI
100%
49%
France
Telecom
49.9%
IRI
100%
Comitato SIR
100%
Italian Government
100%
French Government
15
The control sample
 First-best: a) country b) sector and c) +30%
range of market cap

68% of cases
 Second-best: a) sector and b) +30% range of
market cap

30% of cases
 Third-best case: a) country and b) +30%
range of market cap

1 case
16
The largest shareholders in privatized companies
Panel A: Privatized Firms
Time period
Number
of firms
State
Family
Widely
held
corp.
Widely
held
financial
Miscell.
Crossholdings
Widely
held
End of 1996
141
34.75
16.31
2.84
17.02
1.42
0.00
27.66
End of 2000
141
29.79
19.86
4.26
9.93
4.96
0.71
30.50
-4.96 b
3.55
1.42
-7.09 b
3.55 b
0.71
2.84
Diff ’00-‘96
Panel B: Matching Firms
Time period
Number
of firms
State
Family
Widely
held
corp.
Widely
held
financial
Miscell.
Crossholdings
Widely
held
End of 1996
141
0.00
35.46
2.13
19.86
4.96
0.00
37.59
End of 2000
141
0.00
28.37
8.51
11.35
8.51
1.42
41.84
0.00
-7.09 c
6.38 b
-8.51 b
3.55
1.42
4.26
Diff ’00-‘96
Panel C: Difference between Privatized and Matching Firms
Time period
State
Family
Widely
held
corp.
Widely
held
financial
Miscell.
Crossholdings
Widely
held
Diff end 1996
34.75 a
-19.15 a
0.71
-2.84
-3.55 c
0.00
-9.93 c
Diff end 2000
29.79 a
-8.51 c
-4.26
-1.42
-3.55
-0.71
-11.35 b
17
Control rights in privatized vs control sample
Panel A: Privatized Firms
Country
End of 1996
End of 2000
Number of
firms
Mean
Median
1st quartile
3rd quartile
Government
Control Rights
141
141
27.80
25.51
19.99
16.16
0.00
6.02
51.00
42.15
51.27 (N=49)
52.18 (N=42)
Diff ’00-‘96
-2.29
Panel B: Matching Firms
Country
End of 1996
End of 2000
Number of
firms
Mean
Median
1st quartile
3rd quartile
Private Control
Rights
141
141
21.10
26.37
11.92
13.40
0.00
5.90
31.60
33.35
15.67 (N=49)
17.76 (N=42)
5.27 b
Diff ’00-‘96
Panel C: Difference between Privatized and Matching Firms
Country
All Firms (Mean)
Government- Controlled Firms
Diff end 1996
6.70 b
35.50 a
Diff end 2000
-0.86
34.42 a
18
Golden Shares
Governments may enjoy control power in partially or
even in fully privatized firms through golden share
provisions (GSP)
GSP typically involve:
 Special powers to the public shareholder (veto or
agreement on M&A, representatives in BoD, etc.)
 Statutory constraints in the company bylaws to curb
private ownership rights (ownership limits, voting
caps, national control provision, etc.)
19
Golden Shares
GSP are widespread in several countries, highly
correlated, and tend to persist overtime.
Not surprisingly, they are typically concentrated
in “strategic” sectors, such as aerospace and
defence, oil and gas, and utilities.
The rationale is the protection of relevant
national interests (the “public” counterpart of
poison pills).
20
Golden Share Provisions
N
(%)
Non-gov’t controlled
1996
2000
N (%) N
(%)
104
62.50
65 66.15 71 64.79
Special Powers:
104
39.42
65 46.15 71 45.07
Ownership Limit
Voting Cap
Foreign Ownership Limit
Foreign Voting Cap
National Control
Location/Directors’ Nationality
99
99
99
97
105
104
33.33
24.24
12.12
7.22
9.52
9.62
61
60
61
60
66
65
All Privatized Firms
Golden share
Of which:
42.62
25.00
14.75
8.33
9.09
12.31
67
66
67
66
73
72
40.30
22.73
13.43
7.58
8.22
11.11
21
Main results on control rights (Summary)
 In 2000, the government is the largest ultimate
shareholder in 30% of privatized companies.
 These companies are much more tightly controlled
than their private peers.
 In 2000, the government controls “directly” (through
stakes) or indirectly (through GSP) 62% of privatized
companies (65% in 1996).
 Thus, governments privatized SOEs but did not
relinquish control
  Reluctant privatization
22
Market valuation
 Does govt. reluctance affect valuation?
 First, we study the evolution of the adjusted
market valuation (market-to-book ratio) in subsamples of govt vs non govt controlled
privatized companies.
 Second, we perform panel data estimation of
M/B as a function of government’s (residual)
control rights.
23
Market valuation (M/B): descriptive analysis
Year
1996
1997
1998
1999
2000
Panel A: Whole Sample
Privatized firms
Matching firms
Difference Means (A) – (B)
T-stat
1.72
1.92
2.39
2.62
2.21
2.96
-1.20 a
-5.46
3.31
-1.38 a
-4.93
3.51
-1.12 a
-3.15
3.91
-1.28 a
-2.93
2.82
-0.61 c
-1.74
Panel B: Gov’t Controlled (as of end ‘96) vs. their Peers
Gov’t Controlled
Matching firms
Difference Means (A) – (B)
T-stat
1.73
1.97
2.16
2.39
2.00
2.28
-0.55 a
-2.86
2.49
-0.52 c
-1.99
2.80
-0.63
-1.56
2.98
-0.59
-0.90
2.48
-0.48
-1.19
Panel C: Non-Gov’t Controlled (as of end ‘96) vs. their Peers
Non-Gov’t Controlled
Matching firms
Difference Means (A) – (B)
T-stat
1.72
1.43
1.90
1.66
2.52
2.00
2.73
2.10
2.32
2.00
3.22
2.37
-1.50 a
-4.95
3.71
2.92
-1.81 a
-4.64
3.91
2.64
-1.39 a
-2.76
4.36
3.05
-1.63 a
-2.86
3.00
2.31
-0.68
-1.36
24
xit
Market valuation (M/B): econometric analysis
Govt. controlled firms have higher (adjusted) M/B
than firms privatized more fully. A thorough
empirical test needed.
We estimate the following model:
MBit   i   t   ' xit  STATEit  SPECIALi   it
Where STATE is the covariate for government
ultimate control rights, SPECIAL is a GSP dummy,
and xit a vector of (pair-specific) control
variables
25
OLS results (random effects)
(1)
(2)
ΔMB
(3)
(4)
(5)
ΔDEBT
-0.375
(-1.27)
-0.388
(-1.32)
-0.591b
(-2.25)
-0.381
(-1.29)
-0.604b
(-2.30)
ΔCAPEX
-0.014
(-1.57)
-0.014c
(-1.61)
-0.003
(-0.36)
-0.014c
(-1.67)
-0.004
(-0.47)
ΔASSETURN
2.246a
(4.07)
2.158a
(3.9)
3.431a
(5.32)
2.039a
(3.60)
3.398a
(5.24)
ΔSIZE
3.505a
(6.11)
3.539a
(6.17)
3.598a
(6.28)
3.538a
(6.13)
3.630a
(6.32)
1.902
(1.36)
3.044b
(2.18)
2.075
(1.47)
3.100b
(2.21)
Dependent variable
STATE
SPECIAL
0.726
(0.76)
-0.207
(-0.19)
PETROLEUM
0.327
(0.23)
0.703
(0.45)
TRANSPORTATION
-1.145
(-0.91)
-2.314c
(-1.61)
UTILITIES
0.548
(0.57)
1.032
(0.87)
Yes
355
0.184
68.34
0.000
11.74
0.228
Yes
275
0.281
97.50
0.000
2.63
0.977
YEAR DUMMIES
Nobs
R-sq: within
Wald 2
Prob.
Hausman χ2
Prob.
Yes
355
0.183
65.01
0.000
6.53
0.588
Yes
355
0.185
66.86
0.000
8.75
0.461
Yes
275
0.281
92.54
0.000
3.96
0.914
26
Endogeneity of market valuation
 Abnormal market performance typically drives
privatization, especially when govt. is in financial
distress.
 2SLS estimation relaxing the exogeneity of govt.
stakes.
 Choice of IV: Political-institutional variables
(majoritarian vs consentual pattern of
democracy), the partisan orientation of privatizing
governments, public finance conditions.
 These IV are valid: strongly correlated with
stakes, but uncorrelated with the error term.
27
2SLS estimates of M/B
(1)
(2)
(3)
(4)
Dependent variables
STATE
ΔMB
STATE
ΔMB
STATE
ΔMB
STATE
ΔMB
ΔDEBT
-0.033
(-1.11)
-0.080
(-0.11)
0.002
(0.08)
0.795
(-1.04)
-0.036
(-1.20)
-0.083
(-0.12)
0.001
(0.05)
-0.868
(-1.15)
ΔCAPEX
-0.0001
(-0.43)
-0.013c
(-1.71)
-0.00006
(-0.17)
-0.003
(-0.43)
-0.0001
(-0.42)
-0.014c
(-1.80)
-0.00004
(-0.10)
-0.004
(-0.51)
ΔASSETURN
-0.029
(-1.35)
1.592a
(3.10)
-0.016
(-0.53)
3.12a
(4.78)
-0.037c
(-1.68)
1.397a
(2.62)
-0.018
(-0.60)
3.089a
(4.73)
ΔSIZE
0.029
(1.29)
3.619a
(6.80)
0.049c
(1.84)
3.59a
(6.10)
0.028
(1.26)
3.600a
(6.74)
0.050c
(1.85)
3.556a
(6.10)
5.862b
(1.95)
STATE
SPECIAL
7.066b
(2.16)
0.067
(1.58)
6.200b
(2.07)
0.320
(0.33)
6.227b
(2.00)
0.054
(1.11)
POLINST
-0.105a
(-7.13)
-0.111a
(-5.75)
-0.107a
(-7.13)
-0.117a
(-6.03)
PARTISAN
-0.016b
(-2.20)
-0.019b
(-2.29)
-0.017b
(-2.34)
-0.020a
(-2.39)
DEBT/ GDP
-0.095
(-1.39)
No
-0.092
(-1.10)
No
-0.100
(-1.45)
Yes
-0.108
(-1.29)
Yes
SECTOR DUMMIES
YEAR DUMMIES
Nobs
Wald
Prob.
Sargan 2
Prob.
Hausman χ2
Prob.
Yes
298
84.00
0.000
No
Yes
298
76.07
0.000
1.431
0.489
9.95
0.354
Yes
228
78.00
0.000
No
Yes
228
85.00
0.000
0.342
0.843
-20.05
Yes
298
94.00
0.000
Yes
Yes
298
78.66
0.000
1.431
0.489
19.07
0.025
Yes
228
87.00
0.000
-0.766
(-0.70)
Yes
Yes
228
90.58
0.000
0.342
0.843
28.95
0.001
28
Summary of results
 Government stakes do matter for valuation. But –
quite surprisingly – higher stakes are associated
with higher valuation differentials.
 Impact not negligible: a 10 percent increase in voting
rights (approx a standard deviation change) brings
about 0.6 (25 percent) increase in adjusted M/B.
 Therefore, fully divested companies appear less
valuable than companies where government owns
large stakes.
29
Robustness test I: agency costs
 Higher performance in government controlled firms may
be explained by lower agency costs.
 State ownership may not be valuable per se, but simply
because the government – as large shareholder –
reduces management entrenchment.
 By the same token, firms privatized more fully may
benefit from lower political interference, but these
benefits may be offset by the costs of ownership
diffusion.
30
Robustness test I: agency costs
We add two variables to control for ownership
concentration by:
 ΔCONC = difference in voting rights of the
largest shareholder (any type) in privatized
and matching firm
 ΔCONC2 to test for non-linear effects
We run cross-section regressions for 1996 and
2000, for which we have complete ownership
data.
31
Robustness test II: IPO effect
Treatment and control sample firms are all
listed but a newly privatized firm may have a
lower valuation than an established private
company with a long history of stock trading.
We control for IPO effects by:
ΔIPO = difference between the calendar year
of the IPO of the privatized and matching
firm
32
Robustness tests: 2SLS results
(1)
1996
(2)
2000
(3)
1996
(4)
2000
ΔDEBT
-0.482
(-0.28)
-2.129
(-1.50)
-1.016
(-0.43)
-1.934
(-1.31)
ΔCAPEX
0.012
(0.73)
-0.080b
(-1.98)
-0.002
(-0.14)
-0.079c
(-1.86)
ΔASSETURN
1.881b
(2.22)
1.469
(1.08)
1.208
(1.32)
0.720
(0.56)
ΔSIZE
1.973
(0.94)
2.957a
(2.67)
6.213b
(1.91)
3.528a
(2.93)
STATE
7.848c
(1.77)
-1.658
(-0.14)
6.931b
(1.99)
3.989
(0.67)
ΔCONC
-0.025
0.011
(-1.04)
(0.21)
0.0002
(0.37)
-0.001
(-0.63)
-0.010
(-0.53)
62
1.88
0.101
0.669
0.715
-0.023
(-1.16)
47
3.22
0.011
0.780
0.677
Dependent Variable: ΔMB
2
Δ(CONC )
ΔIPODATE
Nobs
F-stat
Prob.
Sargan
Prob.
73
1.96
0.074
1.615
0.446
50
3.03
0.011
2.120
0.346
33
Conclusion
 We find evidence broadly consistent with the concept of
“Reluctant Privatization”. Indeed, privatizing government
do not give up control in SOEs.
 Quite surprisingly, government reluctance does not attect
negatively market valuation.
 The null hypothesis on political interference cannot be
rejected.
 Interpretation: “Grabbing hand” story very relevant at the
intial stage of the process. But the government as large
shareholder in privatized firms may also provide benefits
such as contracts, favourable regulation, and stability
34