A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Megginson, William L.; Netter, Jeffry M. Working Paper From State to Market: A Survey of Empirical Studies on Privatization Nota di Lavoro, No. 1.1999 Provided in Cooperation with: Fondazione Eni Enrico Mattei (FEEM) Suggested Citation: Megginson, William L.; Netter, Jeffry M. (1999) : From State to Market: A Survey of Empirical Studies on Privatization, Nota di Lavoro, No. 1.1999, Fondazione Eni Enrico Mattei (FEEM), Milano This Version is available at: http://hdl.handle.net/10419/154955 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu FROM STATE TO MARKET: A SURVEY OF EMPIRICAL STUDIES ON PRIVATIZATION Prepared by: William L. Megginson Professor & Rainbolt Chair in Finance Michael F. Price College of Business The University of Oklahoma and Jeffry M. Netter Associate Professor of Finance and Adjunct Professor of Law Terry College of Business University of Georgia For presentation at: GLOBAL EQUITY MARKETS A joint conference of the SBF Bourse de Paris and the New York Stock Exchange Le Grand Hotel Inter-Continental Paris, France December 10- 11, 1998 Current Draft: December 17, 1998 Comments encouraged This paper was developed with financial support from the SBF Bourse de Paris and the New York Stock Exchange, and the assistance and comments of George Sofianos, Bill Tschirhart, Jean-Claude Cosset, Kathy Dewenter, Ranko Jelic, John Nellis, Rob Nash, Marc Lipson, Harold Mulherin, and Annette Poulsen is gratefully acknowledged. Earlier drafts of the authors’ privatization works cited herein have benefited from comments received from participants at the 1993 National Bureau of Economic Research corporate finance conference, the 1994-1998 American Finance Association annual meetings, the 1994 American Economic Association meeting, the 1994 Political Economy Research Center Privatization Forum, the 1995-1998 Financial Management Association annual meetings, the 1995 European Finance Association meeting, the 1997 NYSE Cancun Conference on Global Equity Issuance, and seminars at the Copenhagen Business School, the Norwegian School of Management, the University of Chile, the Federal Reserve Bank of New York, Emory University, the University of Georgia, Florida State University, Virginia Tech, Indiana University, The University of Houston, and Tulane University. All remaining errors are the authors’ alone. Please address correspondence to: William L. Megginson Price College of Business 307 West Brooks, 205A Adams Hall The University of Oklahoma Norman, OK 73019-4005 Tel: (405) 325-2058; Fax: (405) 325-1957 e-mail: [email protected] From State to Market: A Survey of Empirical Studies on Privatization Abstract: This study surveys the academic and professional literature examining the privatization of state- owned enterprises (SOEs), with a focus on empirical studies. The paper is written from the perspective of a policy-maker weighing the adoption of a national privatization program, who seeks answers to the following questions: (1) How large an impact have privatization programs actually had thus far on state involvement in different national economies?; (2) Has the decision to privatize been based on dissatisfaction with the economic performance of SOEs, and is there a viable policy alternative to divestment?; (3) Have privatization programs significantly improved the operating and financial performance of the companies divested?; (4) Once the decision to privatize is made, how do governments select the appropriate method and sequencing of selling state-owned assets?; (5) How do governments price the SOEs they wish to sell and how do they decide which potential buyers to favor?; and (6) Have investors who purchase the shares of privatized firms experienced positive short and long-term returns? Privatization has been instrumental in reducing state ownership in many countries and had a transforming effect on global stock markets, although the role of SOEs in many other countries is similar to what it was two decades ago. Those countries that have adopted large-scale privatization programs have done so primarily for different reasons: first, the conclusive evidence that privately-owned firms outperform SOEs and, second, the empirical evidence clearly shows that privatization significantly (often dramatically) improves the operating and financial performance of divested firms. Further, governments have raised significant revenues through the sale of SOEs. While the choice between privatization via public share offering versus through asset sales is still imperfectly understood, factors such as firm size, government fiscal condition, and the state of national economic development are important influences. Further, those countries which have chosen the mass (voucher) privatization route have done so largely out of necessity--and face ongoing efficiency problems as a result. Governments have great discretion in pricing the SOEs they sell, especially those being sold via public share offering, and they use this discretion to pursue political and economic ends. While raising revenue through setting high offering prices for SOEs is important to governments, many trade this objective off in favor of targeting sales to preferred buyers in direct sales and allocating shares to domestic investors (particularly SOE employees) in share offerings. On average, investors who purchase the shares of firms being privatized earn significantly positive excess returns both in the short-run (due to deliberate underpricing of share issues by the government) and over one, three, and five-year investment horizons. From State to Market: A Survey of Empirical Studies on Privatization 1. Introduction It is rare for a completely new economic policy to move from novelty to global orthodoxy in the space of two decades. Nonetheless, this has occurred for the political and economic policy of privatization, defined as the deliberate sale by a government of state-owned enterprises (SOEs) or assets to private economic agents. Both the term and the modern policy of privatization were coined by Britain’s Thatcher government in 1979, and it was then met with great skepticism by the public and by professional economists. Twenty years later, privatization has been accepted as a legitimate--often a core--tool of statecraft by the governments of more than 100 countries. This paper surveys the academic and professional literature that studies privatization, attempts to frame and then answer the key questions this stream of research has addressed, and then describes a few key lessons that have been learned about the promise and perils of selling off state-owned assets. Throughout this survey, we adopt the perspective of an advisor to a government policy-maker who is wrestling with the practical problems of whether and how to implement a privatization program. The policy maker asks: “what does the research literature have to tell us about this aspect of privatization as an economic policy?” Since these same issues would face (1) the manager of a multinational corporation weighing the purchase of an SOE in an asset sale program, (2) an investment banker charged with advising a government on the design of a privatization share offering or advising investors on the merits of purchasing stock of a newly-private firm, or (3) an academic researcher examining the interface between state and market, our approach is actually quite general. This paper is organized as follows. Section 2 provides a brief historical overview of privatization programs, defines the different types of transactions which are called “privatization” in different regions, and examines the impact that privatization programs have had to date in reversing SOE involvement in the economic life of developed and developing countries. Section 3 surveys the recent theoretical and empirical research on the relative economic performance of state-owned versus privately-owned firms and concludes that this debate has now largely been resolved in favor of private ownership. This section also examines whether less radical methods of improving the performance of SOEs (such as deregulation or allowing greater competition) can be as effective as outright privatization. The vital issue of whether--and by how much-- privatization programs have actually improved the economic and financial performance of divested firms is examined in section 4. We survey two types of empirical studies