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

THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT AND INDIVIDUAL SHARE

OWNERSHIP

William L. MegginsonProfessor & Rainbolt Chair In Finance

The University of Oklahoma [email protected]

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

Presented by:

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

World 125.2 126.2

The One Growth Area In Banking:Syndicated Lending

Year Total ValueAll Loans $Bn

Total Value, M&ALoans, $Bn

M&A As % OfTotal

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

$USTrillion

The Growth Of World Stock Market Trading Volume, 1983-1998 (Value Traded $Billion)

Total Value Of Shares Traded, $Bn

Countries 1983 1989 1995 1998

Developed Countries $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

Developing Countries 25 1,171 1,047 1,957

Total World $1,228 $7,468 $10,216 $22,874

Capital Markets Have Grown Enormously--Both Absolutely & As Percent Of GDP

Stock Mkt Capitalization As % Of GDP

1990 1998

Low Income 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

World 51.8 81.6

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

International Debt 1,394 184

International Equity 139 7

U.S. Issuers $2,103 $313

Investmt Grade Debt 1,196 109

Common Stock 177 14

Initial Public Offers 71 5

Total Value Of Announced U.S. Mergers And Acquisitions, 1990-1999 ($US Billions)

0

200

400

600

800

1000

1200

1400

1600

1800

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 Largest Second ThirdAustralia x xBritain x xDenmark xFrance xGermany xItaly x x xJapan x xNew Zealand xPortugal x x xSingapore x xSpain x

Market Value & Market Capitalization of Privatized Firms (BW Global 1000)

Company Country Mkt CapBP Amoco United Kingdom 173,870NT & T Japan 156,770Deutsche Telekom Germany 115,023British Telecom United Kingdom 107,142NTT DoCoMo Japan 106,140France Telecom France 79,925Telecom Italia Italy 66,446Telstra Australia 63,890Telefonica Spain 51,150

Market Value & Country Rank of Privatized Firms (Emerging Markets)

CompanyName Country

BWRank

Mkt Cap($ mm)

Telmex Mexico 1 33,305China Telecom HK/SAR 2 25,294Gazprom Russia 3 24,502Korea Elec Power Korea 5 19,752YPF Argentina 7 15,146Korea Telecom Korea 8 14,731Petrobras Brazil 10 13,317Hellenic Telecom Greece 14 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 Nippon Tel & Tel $40.3 bnOct 88 Nippon Tel & Tel 22.4Nov 99 ENEL 18.9Oct 98 NTT DoCoMo * 18.4Oct 97 Telecom Italia 15.5Feb 87 Nippon Tel & Tel * 15.1Nov 99 Nippon Tel & Tel 15.0Nov 96 Deutsche Telekom * 13.3Oct 87 British Petroleum 12.4Nov 97 Telstra * 10.5Nov 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

0.4

0.6

0.8

1

1.2

1.4

1.6

Year 0 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

<100,000

All

>100,000

>250,000>500,000

0.6

0.8

1

1.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Year 0 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Year +7 Year +8 Year +9

All

<100,000

>100,000

>250,000

Relative Number of Shareholders Of Non-Privatized Companies Over A 9 Year Period

0.8

1

1.2

1.4

1.6

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