Title: THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT AND INDIVIDUAL SHARE OWNERSHIP
1THE 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
23rd FIBV GLOBAL EMERGING MARKETS CONFERENCE
EXHIBITION
Istanbul Convention Exhibition CenterApril
5-7, 2000
313th MEETING OF THE OECD ADVISORY GROUP ON
PRIVATISATION (AGP)
Organization of Economic Cooperation and
Development Paris, France
September 22-23, 1999
4Talk 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
5Part 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
6Domestic Credit Provided By The Banking Sector As
A Percent of GDP, 1990 vs 1998
7The One Growth Area In BankingSyndicated Lending
8World Stock Market Capitalization, 1983-98
US Trillion
9The Growth Of World Stock Market Trading Volume,
1983-1998 (Value Traded Billion)
10Capital Markets Have Grown Enormously--Both
Absolutely As Percent Of GDP
11Value (In US Billion) Of Worldwide And U.S.
Security Issues In 1999 Versus 1990
12Total Value Of Announced U.S. Mergers And
Acquisitions, 1990-1999 (US Billions)
13Part 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
14Annual Privatization Revenues For Divesting
Governments, 1988-1999 (US Billions)
15Privatizations 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
16Research 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)
17Privatizations 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
18SIPs Often The First, Second, And/Or Third Most
Valuable In A Nations Stock Market
19Market Value Market Capitalization of
Privatized Firms (BW Global 1000)
20Market Value Country Rank of Privatized Firms
(Emerging Markets)
21Privatizations 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.
22The Largest Share Offerings In Financial History
Are All SIPs
23Part 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
24Academic 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
25How 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)
26Academic 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
27Part 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
28Share 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
29Share 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
30Relative 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
31Relative 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
32Summary 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