THE IMPACT OF PRIVATIZATION ON CAPITAL MARKET DEVELOPMENT

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

3 rd FIBV GLOBAL EMERGING MARKETS CONFERENCE & EXHIBITION Istanbul Convention & Exhibition Center April 5 -7, 2000

13 th 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

The One Growth Area In Banking: Syndicated Lending

World Stock Market Capitalization, 1983 -98 $US Trillion

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

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

Value (In $US Billion) Of Worldwide And U. S. Security Issues In 1999 Versus 1990

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

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 (JF 99)

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

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

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

Privatizations As Equity Issues • 25 Largest Share Offerings Are All SIPs – 35 0 f 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

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 – World. Scope 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 All 1 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 Non. Privatized Companies Over A 9 Year Period 1. 6 <100, 000 1. 4 All 1. 6 1. 4 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 1990 s – 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