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

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

These studies mostly address privatization pricing and distribution in countries with well-developed capital markets and few studies address privatization in countries without well-developed capital markets. More specifically, there are very few studies of the conditions in the Czech mass privatizations where many firms are being privatized simultaneously with an auction process in an environment of relatively little reliable business information. Nevertheless, even this limited literature may provide some guidelines in selecting variables that may be useful in understanding the price and demand characteristics of enterprise shares in the Czech voucher privatization and similar auctions.

C. Share Pricing in Mass Privatizations

The literature on the financial and price discovery aspects of the privatization auctions still seems to be relatively sparse, especially with respect to voucher mass privatization plans. In a pioneering study, Hingorani, Lehn, and Makhija (1997) document that share demand in the Czech mass privatization auction was related to inside ownership, measures of financial distress, and proxies for agency costs. Claessens (1997) and Claessens, Djankov, and Pohl (1997) found that for the Czech mass privatization program, a more concentrated ownership structure was related to higher privatization and post-privatization share valuations, return on assets, and Tobin's Q. However, Harper (2001) finds that operating efficiency and profitability decreases following privatization in the auction process. Similarly, Dewenter and Malatesta (2000) find that much of the firm performance improvements occurs over the three years prior to the privatization and performance measures are lower in the five years following privatization . As this brief review indicates, there is much need for additional research on privatization. Indeed, prior research does not address how pricing and trading volume might change in the various rounds of the Czech mass privatization auction process even though price discovery and informational content of trades in the developed capital markets have been a major focus of recent research. [3]

Using an expanded set of firm characteristics and outcomes of each of the sequential auction rounds as independent variables, this study contributes to the literature by focusing on the determinants of share prices and trading volumes in each of the auction rounds on a "frame by frame" basis in the Czech mass privatization program. Although the number of trades that occur in this setting is smaller than in most microstructure studies, much greater detail on each auction round is available, allowing special insights into the price formation process. This study uses specific information revealed in each round of a sequential auction, the Czech mass privatization voucher auction, to examine price formation in a series of trades. Thus, this study not only adds to our understanding of the pricing of firms in privatizations, but it also provides insights on the microstructure of the price discovery process in a multiple round auction.