Privatization and Finance

Abstract:     
This paper summarizes research examining how privatization programs implemented by governments over the past three decades have changed the size and efficiency of global financial markets, altered the practice of corporate finance in economies that experienced large privatizations, and impacted the returns earned by individual investors who purchased stock in a privatized company. We show how sales programs have changed during the three historical eras of privatization: 1979-1990, 1992-2000, and 2002-2008, describe the principal methods that governments use to sell state-owned enterprises to private investors, and examine how governments choose between selling SOEs directly to existing operating companies or investor groups through direct sales (asset sales) or selling stock to investors through share issue privatizations (SIPs). We document and examine the role privatization has played in increasing the total market capitalization of global stock exchanges from $3.2 trillion in 1983 to over $62 trillion in 2007 - and to $45 trillion in late 2009 - and increasing the total value of shares traded increased from $1.2 trillion to $111 trillion over much the same period. SIPs have been the largest share offerings in history, particularly in emerging markets, and divestment programs have been so impactful that (fully and partially) privatized companies now account for roughly half of the entire market capitalization of non-U.S. stock markets. Privatized companies also dominate share trading in many non-U.S. markets, especially China - which now has the second highest annual value of shares traded. We show that investors have benefited from purchasing SIP shares, both in the short and long term, and attempt to answer the critical question: “what do governments have left to sell?” EU governments alone hold stakes in partially privatized firms worth over $650 billion, and emerging market governments (especially China’s) hold two to three times as much more.

Number of Pages in PDF File: 36

Keywords: Cross-listing, Privatization, ADR

JEL Classification: G15, G32, G38, L33

working papers series