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
3rd FIBV GLOBAL EMERGING MARKETS
CONFERENCE & EXHIBITION
Istanbul Convention & Exhibition Center
April 5-7, 2000
13th MEETING OF THE OECD ADVISORY
GROUP ON PRIVATISATION (AGP)
Organization of Economic Cooperation and Development
Paris, France
September 22-23, 1999
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
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
Domestic Credit Provided By The Banking
Sector As A Percent of GDP, 1990 vs 1998
Countries
1990
1998
Low Income
60.0
86.0
Middle Income
57.9
52.9
High Income
140.0
140.4
Germany
108.5
145.8
Japan
266.8
137.4
United States
114.6
162.8
125.2
126.2
World
The One Growth Area In Banking:
Syndicated Lending
Year
Total Value
All Loans $Bn
Total Value, M&A
Loans, $Bn
M&A As % Of
Total
1980
$83
$0.7
0.8%
1985
189
22
11.4
1990
420
60
14.2
1995
1,130
171
15.1
1997
1,705
274
16.1
1999
1,734
529
30.5
Total
$12,169
$2,123
18.2%
World Stock Market Capitalization, 1983-98
$US
Trillion
The Growth Of World Stock Market Trading
Volume, 1983-1998 (Value Traded $Billion)
Total Value Of Shares Traded, $Bn
Countries
1983
1989
1995
$1,203
$6,297
$9,170
$20,917
United States
797
2,016
5,109
13,148
Japan
231
2,801
1,232
949
United Kingdom
43
320
510
1,167
25
1,171
1,047
1,957
$1,228
$7,468
Developed Countries
Developing Countries
Total World
1998
$10,216 $22,874
Capital Markets Have Grown Enormously-Both Absolutely & As Percent Of GDP
Stock Mkt Capitalization As % Of GDP
1990
1998
10.9%
8.2%
Middle Income
19.4
37.1
High Income
56.4
95.0
France
26.3
46.0
Germany
22.9
38.9
Japan
98.2
54.2
United Kingdom
87.0
158.0
United States
55.1
142.8
51.8
81.6
Low Income
World
Value (In $US Billion) Of Worldwide And U.S.
Security Issues In 1999 Versus 1990
Security Type
Value 1999
Value 1990
Worldwide Total
$3,288
$504
1,394
184
139
7
$2,103
$313
1,196
109
Common Stock
177
14
Initial Public Offers
71
5
International Debt
International Equity
U.S. Issuers
Investmt Grade Debt
Total Value Of Announced U.S. Mergers And
Acquisitions, 1990-1999 ($US Billions)
1800
1600
1400
1200
1000
800
600
400
200
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
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
Annual Privatization Revenues For Divesting
Governments, 1988-1999 ($US Billions)
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
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)
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 $2.44 Trillion
• 84 of 1999 Business Week Global 1000 Are SIPs
– SIPs 10% Of Total, 21% Of Non-US Market Cap
• 49 of BW Top 200 Emerging Markets Firms SIPs
– Five Largest--And 7 Of 8 Largest--Firms All SIPs
• Under-states True Importance Of SIPs
– Play Very Important “Bellweather” Role
• SIPs Usually A Country’s Largest Cap Firm
– Also Most Actively Traded--Usually By Wide Margin
SIPs Often The First, Second, And/Or Third
Most Valuable In A Nation’s Stock Market
Country
Australia
Britain
Denmark
France
Germany
Italy
Japan
New Zealand
Portugal
Singapore
Spain
Largest
x
x
x
x
x
x
x
x
x
x
x
Second
Third
x
x
x
x
x
x
x
x
Market Value & Market Capitalization of
Privatized Firms (BW Global 1000)
Company
BP Amoco
NT & T
Deutsche Telekom
British Telecom
NTT DoCoMo
France Telecom
Telecom Italia
Telstra
Telefonica
Country
United Kingdom
Japan
Germany
United Kingdom
Japan
France
Italy
Australia
Spain
Mkt Cap
173,870
156,770
115,023
107,142
106,140
79,925
66,446
63,890
51,150
Market Value & Country Rank of Privatized
Firms (Emerging Markets)
Company
Name
Telmex
China Telecom
Gazprom
Korea Elec Power
YPF
Korea Telecom
Petrobras
Hellenic Telecom
Country
Mexico
HK/SAR
Russia
Korea
Argentina
Korea
Brazil
Greece
BW
Rank
1
2
3
5
7
8
10
14
Mkt Cap
($ mm)
33,305
25,294
24,502
19,752
15,146
14,731
13,317
10,926
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.
The Largest Share Offerings In Financial
History Are All SIPs
Nov 87
Oct 88
Nippon Tel & Tel
Nippon Tel & Tel
$40.3 bn
22.4
Nov 99
ENEL
18.9
Oct 98
Oct 97
NTT DoCoMo *
Telecom Italia
18.4
15.5
Feb 87
Nov 99
Nippon Tel & Tel *
Nippon Tel & Tel
15.1
15.0
Nov 96
Oct 87
Deutsche Telekom *
British Petroleum
13.3
12.4
Nov 97
Telstra *
10.5
Nov 98
France Telecom
10.5
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
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
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)
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
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
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
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
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
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