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Determinants of Privatization Prices

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  • Florencio Lopez-de-Silane

Abstract

Generating government revenue is a common objective in privatization. This paper asks: what determines privatization prices? Pursuing this query helps resolve the current controversies about the bearing of speed and the role for government actions prior to privatization. The data, gathered from primary sources, encompass 361 privatized Mexican companies in 49 four-digit industry codes. The determinants of auction privatization prices are divided into three groups: (1) company performance and industry parameters; (2) the auction process and its requirements; and (3) the prior restructuring actions taken by the government. Controlling for company and industry effects reveals the significant impact of the costs and characteristics of the labor force. Minority control packages carry large discounts. Auction requirements that allow foreign investors result in higher sale premia, while restrictions constraining participation or payment forms reduce net prices. The speed of privatization substantially influences net prices: the longer it takes to put the company on the block, the more severe the deterioration in performance, and the lower the premium obtained. Pre-sale reductions in labor force, and particularly the firing of CEOs, lead to significantly higher premiums. Debt absorption, investment, and performance improvement programs do not increase the net price, while de-investment measures prove more beneficial. Overall, the results show increased premia for government actions that stimulate bidder participation and expedite the privatization process.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5494.

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Date of creation: Mar 1996
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Publication status: published as Quarterly Journal of Economics, November1997, forthcoming.
Handle: RePEc:nbr:nberwo:5494

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  1. David E. M. Sappington & Joseph E. Stiglitz, 1987. "Privatization, information and incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
  2. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(435), pages 309-19, March.
  3. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 779, Cowles Foundation for Research in Economics, Yale University.
  4. Vuylsteke, C., 1988. "Techniques Of Privatization Of State-Owned Enterprises -," Papers, World Bank - Technical Papers 88, World Bank - Technical Papers.
  5. Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1995. "Privatization in the United States," NBER Working Papers 5113, National Bureau of Economic Research, Inc.
  6. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268 National Bureau of Economic Research, Inc.
  7. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  8. Alberto Chong & Florencio Lopez-de-Silanes, 2004. "Privatización en México," Research Department Publications, Inter-American Development Bank, Research Department 4374, Inter-American Development Bank, Research Department.
  9. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
  10. Megginson, William L & Nash, Robert C & van Randenborgh, Matthias, 1994. " The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance, American Finance Association, American Finance Association, vol. 49(2), pages 403-52, June.
  11. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262720116, December.
  12. Vining, Aidan R & Boardman, Anthony E, 1992. " Ownership versus Competition: Efficiency in Public Enterprise," Public Choice, Springer, Springer, vol. 73(2), pages 205-39, March.
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