Why Do Governments Privatize Abroad?

Abstract

Privatization through global equity market placement has largely contributed to financial market development and integration. Despite the relevance of the fact, the reasons underlying governments' choice to sell shares of privatized companies abroad are still poorly understood. This paper presents new evidence for a sample of 233 share issue privatizations in 20 OECD countries, showing that redistribution concerns and the objective of domestic financial market development make domestic privatization more likely. However, if budget constraints are binding, governments tend to sell abroad a larger quantity of shares, particularly when corporate governance at home is weak.

Privatization in the presence of foreign competition and strategic policies

“…In stage three, the governments set the product tax/subsidy rates that maximize their country's welfare. In stage four, the two …rms set their output levels simultaneously 7 . We solve the game through backward induction.…”

“…where q x m and q x p are given by (8) and x m given by (7). Maximizing with respect to t x f yields:…”

The choice of ADRs

“…This is particularly relevant in privatization transactions in which the government is the divesting shareholder. Very often, especially when local stock markets are neither developed nor liquid enough, governments choose liquid foreign stock markets to sell state-owned firms and maximize privatization proceeds (Bortolotti et al, 2002). Similarly, controlling shareholders of foreign firms that face domestic stock market constraints seem to use a cross-listing on a US stock exchange to make a change in ownership and control easier (Ayyagari and Doidge, 2010).…”

Privatization and the Rise of Global Capital Markets

“…Domowitz, Glen and Madhavan (2000) examine the dynamics of external corporate financing choices and find that privatization activity is initially followed by foreign equity issuance, but eventually leads to a higher level of domestic bond issues. Bortolotti, Fantini and Scarpa (2000) examine governments' choices between selling privatization share offerings domestically versus externally. While both of these studies examine the impact of privatization issues on subsequent external financing, and the Bortolotti, et al paper indirectly measures privatization's impact on stock market development, the current study focuses much more directly on privatization's role in market development and patterns of stock ownership.…”