Transcript The Choice of Public vs. Private Capital Markets: Evidence

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3rd ANNUAL INTERNATIONAL BUSINESS
RESEARCH FORUM
INSTITUTIONS AND
INTERNATIONAL BUSINESS
March 22-23, 2002, Temple University,
Philadelphia
The Choice of Public Versus Private
Capital Markets: Evidence From
Privatizations
William Megginson
Robert Nash
Jeffry Netter
Annette Poulsen
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)
Privatization Proceeds, 1981-2000
($US Billions)
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
SOE Share Of GDP, By Region
18
16
14
12
10
8
6
4
2
0
80
9
1
Low Income
Lower-middles
Income
Upper-middle Income
High Income
86
9
1
92
9
1
98
9
1
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
Table 1: Summary Statistics
Variable
Full Sample
SIPs
Asset Sales
# of Privatizations
2477
938
1539
# Countries
108
78
96
Average (median) % of
Enterprise Sold
59.3%
(55%)
34.8%
(25%)
74.2%
(90%)
Average (median) amount of
offering in U.S. $ million
$480.2
($46)
$794.0
($105)
$288.9
($31)
Average (median) value of
total enterprise in US$ million
$2,149.9
($103)
$4625.9
($476)
$640.8
($45.5 M)
Total Value of All Offerings in
US$ million
$1,189,480
$744,794
$444,686
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
World Stock Market Capitalization, 1983-2000
$US
Trillion
35
30
25
20
15
10
5
0
1983
1986
1989
1992
1995
Developing Countries
Other Developed
United Kingdom
Japan
United States
1999
2000
Growth of World Stock Market Trading
Volume, 1983-1999 (Value Traded $Bn)
Total Value Of Shares Traded, $Bn
Countries
1983
1989
1995
$1,203
$6,297
$9,170
$35,188
United States
797
2,016
5,109
19,993
Japan
231
2,801
1,232
1,892
United Kingdom
43
320
510
3,399
25
1,171
1,047
2,321
$1,228
$7,468
Developed Countries
Developing Countries
Total World
1999
$10,216 $37,509
Capital Markets Have Grown Enormously-Both Absolutely & As Percent Of GDP
Stock Mkt Capitalization As % Of GDP
1990
1999
10.9%
31.7%
Middle Income
19.4
41.1
High Income
56.4
138.7
France
25.9
103.0
Germany
22.2
67.8
Japan
98.2
104.6
United Kingdom
87.0
203.4
United States
55.1
181.8
50.7
119.0
Low Income
World
The Largest Share Offerings In Financial
History Are All SIPs
Nov 87
Nippon Tel & Tel
$40.3 bn
Oct 88
Nov 99
Oct 98
Nippon Tel & Tel
ENEL
NTT DoCoMo *
22.4
18.9
18.4
Oct 97
Feb 87
Nov 99
Jun 00
Telecom Italia
Nippon Tel & Tel *
Nippon Tel & Tel
Deutsche Telekom
15.5
15.1
15.0
14.7
Nov 96
Oct 87
Nov 97
Deutsche Telekom *
British Petroleum
Telstra *
13.3
12.4
10.5
SIPs Often The First, Second, And/Or Third
Most Valuable In A Nation’s Stock Market
Country
Australia
Denmark
France
Germany
Italy
Japan
New Zealand
Portugal
Spain
Britain
Finland
Hong Kong
Largest
x
x
x
x
x
x
x
x
x
Second
Third
x
x
x
x
x
x
x
x
x
x
x
Relative Number of Shareholders Over A Six
Year Period After A Share Issue Privatization
1.6
1.4
<100,000
1.2
1.2
1
1
All
0.8
0.8
>100,000
>500,000
0.6
>250,000
0.4
Year 0
Year +1
Year +2
Year +3
Year +4
Year +5
Year +6
0.6
Relative Number of Shareholders Of NonPrivatized Companies Over A 9 Year Period
1.6
<100,000
1.4
All
1.6
1.4
1.2
1.2
>100,000
1
1
>250,000
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
0.8