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

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

II. Czech Voucher Privatization Auction

The mass privatization program of the Czech and Slovak Federal Republic (CSFR) and the subsequent Czech Republic was not an economic experiment held in a vacuum. The politics of the country helped shape the economic policy and the form of privatization. The finance minister of the CSFR, Vaclav Klaus, who later became the Prime Minister of the Czech Republic, advocated strong free market reforms. His ideas won out over rivals that advocated slower paced reform and less radical transformation. These differences about the pace of reform and economic policy were echoed in the election of leaders in the Czech Parliament and the Slovak Parliament. The Czechs elected market reform minded leaders while the Slovaks elected officials that favored slower reforms and more social democratic ideals. These differences eventually came to a head in the middle of 1992 (during the voucher auction) and led to the "velvet divorce" and the separation of the CSFR into two independent countries beginning January 1, 1993. Table I pre sents a timeline of the voucher auction and political events surrounding the auction.

As Finance Minister, Klaus began a series of economic reforms, which included price liberalization, opening of markets, and a restrictive fiscal policy. As a result, inflation increased, growth slowed, and the economy entered into a recession. In addition to these traditional reforms, the Czech system used privatization as the centerpiece of these economic reforms. During 1990 and 1991, many small firms were restored to their original owners or sold to other owners, and managers of large state owned firms (especially those slated to be privatized) were given more discretion in running the state owned enterprises with profits becoming a primary concern for these businesses (e.g., Aggarwal and Mejstrik, 1992).

Firms in the first wave of voucher privatization typically had clearer property rights and liability claims. Firms with more significant problems, such as significant unresolved restitutional or bankruptcy claims, firms with unapproved privatization plans, and firms in industries such as pharmaceuticals, mining, and chemicals were scheduled to be privatized in later waves. For firms privatized in the first wave, managers would continue to have autonomy and decision making power after privatization. Soft budget constraints could possibly continue in the form of bad debts, but subsidies did not continue after privatization (Mertlik, 1997).

A. Czech Auction Process

Auctions have been shown to efficiently allocate resources and assets. Auction processes are used in stock exchanges, and in markets for Treasury securities, foreign exchange, debt instruments, and other commodities (McAfee and McMillan, 1987; Klemperer, 1999). A recent and innovative use of an auction process was implemented by the Czech Republic (with Slovakia) in their mass privatization program. This unique voucher auction designed to privatize large firms included all citizens that wished to participate and included multiple rounds with shares (equity claims on assets) for many firms and many bidders. While similar to auctions that take place in security markets, the Czech mass privatization auction also had some unique characteristics and was one of the first mass privatization auctions in ex-communist countries (e.g., Boycko, Schleifer, and Vishny, 1994; Mejstrik, 1997).