Privatization and the Rise of Global Capital Markets

The dynamics of privatization, the legal environment and stock market development

“…Notable exceptions in the literature are Boutchkova and Megginson (2000), Perotti and van Oijen (2001) and Laeven and Perotti (2002). For instance, Boutchkova and Megginson (2000) analyze the evolution of privatizations through public share issues in several markets, and show that they contributed significantly to the growth of the local market capitalization. In order to assess the impact of privatization on market liquidity, the authors regress the turnover ratio on the number of privatization deals per year for each country.…”

“…In the same vein, Bortolotti et al (2003) show that privatization is more likely to be implemented in countries with developed stock markets. Finally, Boutchkova and Megginson (2000) recognize that a general framework that considers the endogenous relationship between SMD and privatization would provide more rigorous conclusions.…”

“…Another proxy for market size is the market capitalization ratio (i.e. the value of listed domestic shares divided by GDP), which reflects the stock market size relative to that of the economy (Boutchkova & Megginson, 2000;Levine & Zervos, 1998a, b;Perotti & van Oijen, 2001). The number of listed companies can also be used as a measure of market size (Demirgüç-Kunt & Levine, 1996;Perotti & van Oijen, 2001).…”

“…Governments that privatize through share issues also aim to create an equity culture and a large shareholders' base (Boutchkova & Megginson, 2000). In the same vein, Laeven and Perotti (2002) and Perotti and van Oijen (2001) show that privatization contributes to SMD in emerging markets through the gradual resolution of policy risk.…”

“…The benefits of privatization and the legal environment materialize as time goes by, especially in emerging markets where investors' confidence builds over a longer horizon compared to developed countries. This can be explained by the fact that the resolution of policy risk following privatization (Laeven & Perotti, 2002;Perotti & van Oijen, 2001) and the process of promoting an equity culture (Boutchkova & Megginson, 2000;Subrahmanyam & Titman, 1999) are gradual, and take more time in relatively more uncertain environments (i.e., emerging markets).…”