THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT AND INDIVIDUAL SHARE OWNERSHIP - PowerPoint PPT Presentation

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THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT AND INDIVIDUAL SHARE OWNERSHIP

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Title: THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT AND INDIVIDUAL SHARE OWNERSHIP


1
THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET
DEVELOPMENT AND INDIVIDUAL SHARE OWNERSHIP
Presented by
William L. Megginson Professor Rainbolt Chair
In Finance The University of Oklahoma
USA wmegginson_at_ou.edu http//faculty-staff.ou.edu/
M/William.L.Megginson-1
2
3rd FIBV GLOBAL EMERGING MARKETS CONFERENCE
EXHIBITION
Istanbul Convention Exhibition CenterApril
5-7, 2000
3
13th MEETING OF THE OECD ADVISORY GROUP ON
PRIVATISATION (AGP)
Organization of Economic Cooperation and
Development Paris, France
September 22-23, 1999
4
Talk Will Focus On Four Key Aspects of
Privatization Capital Market Development
  • Will First Examine Whether Capital Markets Are
    Prospering Relative To Commercial Banks In
    Financing Corporations
  • Markets Have Prospered Banks Have Stagnated
    Since 1990
  • Then Document Role Of Share Issue Privatizations
    (SIPs) In Stock Market Development Since 1983
  • SIPs The Largest Capitalization Stocks Largest
    Offerings
  • Ask Whether SIP Investors Have Earned Positive
    Excess Returns Over Short Long-Run Holding
    Periods
  • Research Finds That Investors Have Done Very Well
  • Conclude By Examining Privatizations Impact on
    Individual and Institutional Shareholdings
  • Has Revolutionized Share Ownership In All Non-US
    Markets

5
Part I The Rise Of Capital Market Finance
  • The (Stable) Role Of Commercial Banks In Modern
    Economies
  • The Rapid Growth In Stock Market Capitalization
    And Trading Volume Since 1983
  • The Dramatic Surge In Securities Issuance Volume
    Since 1990
  • The Surge In Mergers And Acquisitions Worldwide

6
Domestic Credit Provided By The Banking Sector As
A Percent of GDP, 1990 vs 1998
7
The One Growth Area In BankingSyndicated Lending
8
World Stock Market Capitalization, 1983-98
US Trillion
9
The Growth Of World Stock Market Trading Volume,
1983-1998 (Value Traded Billion)
10
Capital Markets Have Grown Enormously--Both
Absolutely As Percent Of GDP
11
Value (In US Billion) Of Worldwide And U.S.
Security Issues In 1999 Versus 1990
12
Total Value Of Announced U.S. Mergers And
Acquisitions, 1990-1999 (US Billions)
13
Part II Privatizations Impact On Stock And Bond
Market Development
  • Total Proceeds Raised By Privatization Programs
    Since 1977
  • Privatizations Impact On Non-U.S. Stock Market
    Capitalization And Trading Volumes
  • Privatizations Impact On International
    Investment Banking Practices

14
Annual Privatization Revenues For Divesting
Governments, 1988-1999 (US Billions)
15
Privatizations Success Has Become Critical For
Many Divesting Governments
  • Cumulative Value Of Privatization Revenues
    Received By Governments Exceeded 1 Trillion In
    1999
  • Money Retained By Government, So Success Very
    Important
  • Most Proceeds From Share Issue Privatizations
    (SIPs)
  • SIP Programs Designed To Attract Favor Domestic
    Investors--Most Of Whom Are First-Time Investors
  • Favor Citizens To Promote Reform, Win Votes
  • Study Examines Offering Terms In SIPs
  • SIPs Protect Citizens Interest Better Than
    Voucher Schemes
  • Large-Scale SIP Program Drastically Increases
    Stock Market Capitalization Liquidity And
    Number Of Individual S/Hs
  • Leads To Demand For Effective Securities Laws,
    Regulation
  • Initially Create Many Individual S/Hs Later
    Institutional S/Hs

16
Research Documenting Importance Of Capital Market
Development Privatization
  • Researchers Have Documented Direct Relationship
    Between Size Of Capital Markets And Economic
    Growth
  • Levine (JEL 97), Levine Zervos (AER 98),
    Demirguc-Kunt Maksimovic (JF 98), Rajan
    Zingales (AER 98)
  • Vast Literature On Merits Of Banks Vs Capital
    Markets
  • Growing Literature Showing Superiority Of Private
    Vs State Ownership Performance Improvements In
    Privatization
  • Ownership Boardman Vining (JLE 89) Dewenter
    Malatesta (AER 2000)
  • Privatization Megginson, Nash, and Randenborgh
    (JF 94), Boubakri Cosset (JF 98) DSouza
    Megginson (JF99)

17
Privatizations Impact On Stock Market
Capitalization
  • Total World Market Cap Rose From 3.38 Trillion
    In 1983 To 26.5 Trillion In 1998, 38.7 Trillion
    in 1999
  • Market Cap Of SIPs Rose From lt50 Billion To
    2.44 Trillion
  • 84 of 1999 Business Week Global 1000 Are SIPs
  • SIPs 10 Of Total, 21 Of Non-US Market Cap
  • 49 of BW Top 200 Emerging Markets Firms SIPs
  • Five Largest--And 7 Of 8 Largest--Firms All SIPs
  • Under-states True Importance Of SIPs
  • Play Very Important Bellweather Role
  • SIPs Usually A Countrys Largest Cap Firm
  • Also Most Actively Traded--Usually By Wide Margin

18
SIPs Often The First, Second, And/Or Third Most
Valuable In A Nations Stock Market
19
Market Value Market Capitalization of
Privatized Firms (BW Global 1000)
20
Market Value Country Rank of Privatized Firms
(Emerging Markets)
21
Privatizations As Equity Issues
  • 25 Largest Share Offerings Are All SIPs
  • 35 0f 39 Largest Are SIPs
  • 29 SIPs Larger Than 5.5 bn UPS IPO (Nov 99)
  • 750 SIPs Have Raised gt 700 bn Since 1977
  • 125 SIPs Have Raised More Than 1 bn
  • Differences From Private-Sector Issues
  • Typically Pure Secondary Offerings
  • Highly Politicized Offer Terms Share
    Allocations
  • SIPs Almost Always Nations Largest Share Issue
  • True For Every Major Country Except U.S.

22
The Largest Share Offerings In Financial History
Are All SIPs
23
Part III The Initial And Long Term Return To
Investors In SIP Programs
  • Initial (First Day) Returns To Investors In Share
    Issue Privatization (SIP) Programs
  • Long Term (1,3, And 5-Year) Excess Returns Earned
    By Investors In SIP Programs

24
Academic Studies Documenting Significant
Underpricing of Privatization IPOs (PIPOs)
  • Menyah Paudyal (1996) 40 British PIPOs
  • Dewenter Malatesta (1997) 109 Firms From 8
    Countries
  • Huang Levich (1998) 507 SIPs From 39 Countries
  • Paugyal, Saadouni Briston (1998) 18 Malaysian
    PIPOs
  • Jones, et al. (1999) 630 SIPs, 59 countries
  • Su Fleisher (1999) 308 Chinese PIPOs, 940
    Return
  • Jelic Briston (2000) 25 Hungarian PIPOs
  • Choi Nam (2000) 185 PIPOs From 30 Countries

25
How Politicized Are Pricing Share Allocation
Terms In SIPs?
  • Governments Have Learned How to Achieve Political
    And Economic Objectives In SIP Programs
  • Balance Revenue Maximization Vs. Political
    Objectives
  • Jones, Megginson, Nash Netter (JFE 99) Test
    Perotti (AER 95), Biais Perotti (WP 97) Models
  • Find SIPs Significantly Deliberately
    Underpriced
  • Govts Almost Always Choose Fixed Price Offers
  • Allocate Shares To Citizens, SOE Employees
  • Govts Almost Never Sell 100, Rarely Sell Control
  • Often Have Control Restrictions (Golden Share)
  • IR Directly Related To Capital Offered, Gini
    Coeff
  • IR Negatively Related To Govts Populism
  • IR Not Significantly Related To Firm Size (Not AI)

26
Academic Studies Documenting Significant Positive
Long-Run Excess Returns For SIPs
  • Levis (1993) 12 British PIPOs
  • Menyah, Paudyal Inganyete (1995) 40 British
    PIPOs
  • Paudyal, Saadouni Briston (1998) 18 Malaysian
    PIPOs
  • Boubakri Cosset (1999) 126 SIPs, 26 Developing
    Nations
  • Jelic Briston (2000) 25 Hungarian PIPOs
  • Perotti Oijen (2000) 22 Developing Countries
  • Choi, Nam Ryu (2000) 204 PIPOs From 37
    Countries
  • Megginson, et al. (2000) 158 PIPOs From 33
    Countries
  • Dewenter Malatesta (2000) 102 Large SIPs
  • Boardman Laurin (2000) 99 SIPs, Multiple
    Countries

27
Part IV The Impact Of Privatization On
Individual Institutional Shareholdings
  • The Impact Of Privatization Programs on
    Individual Share Ownership
  • The Impact Of SIP Programs on Institutional
    Ownership Of Privatized Firm Shares

28
Share Issue Privatization And Individual Stock
Ownership
  • Many Governments Try To Create Equity Culture
  • Design Offer Terms To Maximize Number Of
    Individual S/Hs
  • Allocate Shares To Favor Citizens Over
    Foreigners, Encourage Individual Ownership
  • Large SIPs Often Create 1 Million Shareholders
  • France Telecom 3.9 Mn, Deutsche Telecom 3 Mn,
    Credit Lyonnais 3.4 Mn, Telecom Italia 2 Mn,
    Endesa 2 Mn
  • New S/Hs Often Own Shares In Only One Company
  • Must Create A Governance System That Protects
    S/Hs
  • Democratic Governments Very Sensitive To Small
    S/H Losses
  • Major Problem In CEE--Especially Russia

29
Share Issue Privatization And Individual Stock
Ownership (Continued)
  • Boutchkova Megginson (Current Study) Compare
    Number Of Shareholders In SIPs To Those In
    Private Firms With Closest Market Capitalization
  • WorldScope Disclosure 6,400 Firms With S/Hs
  • Number Of S/Hs Highly Skewed lt2 Of All Firms
    Have gt250,000 S/Hs 915 Have lt50,0000
  • 55 Of 89 Non-U.S. Firms 500,000 S/Hs Are SIPs
  • SIPs Have Significantly Larger Of S/Hs Than
    Private Firms
  • Key Finding Large Numbers Of S/Hs Not Stable
  • Firms With 250,000 Initial S/Hs Decline By 20
    In 6 Years
  • Apparently Individuals Sell To Institutional
    Investors
  • Foreign Investors Now Own Half Of Many European
    SIPs
  • May Help Over Time To Create Funded Pension System

30
Relative Number of Shareholders Over A Six Year
Period After A Share Issue Privatization
1.6
1.4
lt100,000
1.2
1.2
1
1
All
0.8
0.8
gt100,000
gt500,000
0.6
0.6
gt250,000
0.4
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
31
Relative Number of Shareholders Of Non-Privatized
Companies Over A 9 Year Period
1.6
1.6
lt100,000
1.4
1.4
All
1.2
1.2
gt100,000
1
1
gt250,000
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
32
Summary Conclusions
  • Capital Markets--Especially Stock Markets--Are
    Winning The Battle To Dominate Corporate
    Finance
  • Market Cap, Trading Volume Tripled During 1990s
  • Volume Of Securities Issuance Up Six-Fold
  • Privatizations Have Played Key Role In Stock
    Market Growth
  • Usually Largest Cap Stocks, Always Largest Share
    Issues
  • Investors In SIPs Have Benefited In Short Long
    Run
  • PIPOs Deliberately Underpriced High Initial
    Return
  • Significantly Positive Long-Run Excess Returns
    (1,3, 5-Yr)
  • Privatizations Have Dramatically Increased Number
    Of Individual Investors In Non-US Markets
  • Very Large Number Of S/Hs Not A Stable Ownership
    Pattern
  • Future Looks Very Bright For Stock Markets
    Privatization
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