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

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@ou.edu http://faculty-staff.ou.edu/M/William.L.Megginson-1.

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

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  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@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 Privatization’s 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 Banking:Syndicated 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: Privatization’s Impact On Stock And Bond Market Development • Total Proceeds Raised By Privatization Programs Since 1977 • Privatization’s Impact On Non-U.S. Stock Market Capitalization And Trading Volumes • Privatization’s Impact On International Investment Banking Practices

  14. Annual Privatization Revenues For Divesting Governments, 1988-1999 ($US Billions)

  15. Privatization’s 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); D’Souza & Megginson (JF99)

  17. Privatization’s 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 <$50 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 Country’s Largest Cap Firm • Also Most Actively Traded--Usually By Wide Margin

  18. SIPs Often The First, Second, And/Or Third Most Valuable In A Nation’s 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 > $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 Nation’s 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 Govt’s “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: <2% Of All Firms Have >250,000 S/Hs; 915 Have <50,0000 • 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 <100,000 1.2 1.2 1 1 All 0.8 0.8 >100,000 >500,000 0.6 0.6 >250,000 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 <100,000 1.4 1.4 All 1.2 1.2 >100,000 1 1 >250,000 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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