Share Issue Privatizations as Financial Means to Political and Economic Ends

Abstract

This paper analyzes the use and terms of "share-issue privatizations (SIPs)" during the period 1961-1994. We present a theory of SIPs implying their terms are designed to build the political support necessary to privatize a state-owned enterprise (SOE). We then investigate the extent to which the terms of our sample SIPs deviate from terms observed in share offerings by publicly-held corporations. Our sample includes 168 SIPs made by 137 companies from 34 countries, with a total market value exceeding one-quarter trillion dollars. SIPs tend to be very large ($1.552 billion average), and typically restrict foreign ownership levels. Most SIPs explicitly favor employees and small investors in share allocations and pricing, and the degree of underpricing is related to share allocations. Furthermore, privatizing governments often retain veto power over firm decisions, though they design SIPs to establish an ownership structure that discourages state interference in ordinary business affairs. Overall, the terms of SIPs appear designed to meet both political and economic objectives.

JEL Classification: D23, G15, G24, L33, P21, P16