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Privatization and Stock Market Liquidity

Author

Listed:
  • de Jong, Frank
  • Bortolotti, Bernardo
  • Nicodano, Giovanna
  • Schindele, Ibolya

Abstract

Using panel data of 19 developed economies in the period 1985-2000, we show that share issue privatization (SIP) strongly affects a fundamental aspect of financial development: market liquidity. First, we identify the channels through which a sustained SIP program boosts the liquidity of the overall market. Then, we explicitly test whether SIP has a positive spillover effect on the liquidity of private companies’ shares. Liquidity appears to be sensitive to the amount of shares sold to retail investors, whose trading reduces the adverse selection component of the price impact. The cross-listing of shares exhibits an even stronger effect, suggesting that international offerings eliminate informational barriers and attract foreign investors to the domestic market, thereby reducing its risk premium.

Suggested Citation

  • de Jong, Frank & Bortolotti, Bernardo & Nicodano, Giovanna & Schindele, Ibolya, 2004. "Privatization and Stock Market Liquidity," CEPR Discussion Papers 4449, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4449
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    Keywords

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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