Equity Valuation in the Czech Voucher Privatization Auctions - Statistical Data Included

Financial Management (Financial Management Association), Winter, 2000 by Raj Aggarwal, Joel T. Harper

Another theme has to do with the speed of reform. Conventional economic thought and literature recommends a slow transformation from a state economy to a market economy. Slow transformation allows countries to continually evaluate the progress of policies and privatized firms and make necessary changes and adjustments. The disadvantages to a slower process are that it becomes more politicized and there is a threat of a start-stop process with changes in economic policies and in governments (e.g., Sachs, 1993). Consequently, several countries in Eastern Europe, such as Hungary, Poland, and Russia, chose a fast, "big-bang" approach to economic reform and privatization. These countries feared that a slow process would take too long and would be too easily reversed. Arguably, the fastest reform policies were these of Czechoslovakia and the succeeding Czech Republic (Mertlik, 1997).

B. Share Valuation and Privatizations as IPOs

In one branch of the previous literature, privatization has been compared to an IPO, an initial public offering (e.g., Dewenter and Malatesta, 1997; Perotti and Guney, 1993). It has been widely noted that the valuation of newly public firms is an inexact science even in countries with well-developed and mature financial markets. The pervasive underpricing found in IPOs in most countries is one indication of the difficulty of pricing new issues (see Ibbotson, 1975; Kunz and Aggarwal, 1994; Logue, 1973; and Miller and Reilly, 1987). Indeed, Jenkins and Meyers (1994) and Morgan Stanley (1997) document that privatization IPO underpricing has been larger than in typical private firm IPOs. [2]

Perotti and Guney (1993) examine privatizations as corporate IPOs issued by governments of countries with well-developed capital markets and they suggest that because relatively more information is known about the public firms about to be privatized, the underpricing should not be as great. Instead, they find that underpricing is generally greater in privatizations than in other IPOs. However, Dewenter and Malatesta (1997) do not support these findings and find that underpricing in privatizations is not systematically different than that in IPOs. Perotti (1995) theorizes that a government committed to the complete eventual transfer of control to private owners for a firm initially being partially privatized, may use underpricing as a credible signal of its promises. There may also be other reasons why governments may underprice privatization IPOs. For example, they may do so to ensure the political success of privatization programs, to reflect the asymmetric information advantage of the government, and to ref lect the risk aversion and higher capital costs of private investors (e.g., Bel, 1998). Jones et al. (1999) find that most governments operate under a constrained revenue maximization objective when privatizing firms. This objective leads to some underpricing of shares, favors the use of a fixed price offerings, the selection of domestic investment bankers, and the distribution of shares to employees and domestic investors to achieve political goals in a privatization.