Underpricing effect in Poland, Hungary and Czech Republic
Under the communistic regime whole economy was controlled by the Central Planning Office. When the communistic regime collapsed the whole economy had to be transformed in order to meet open market standards. One of these standards is privatisation process. Hungary, Czech Republic and Poland choose a different approach to this issue, because they implied different strategies. Actually you can speak about three different privatisation scenarios.
Alle drei Länder haben 1989 am gleichen Startpunkt angefangen, sie mussten nämlich Marktwirtschaftreformen und Privatisierung durchführen. Kurz nach dem Start haben sich aber ihre Wege getrennt. Nach 17 Jahren kann man von über 3 verschiedenen Privatisierungsbeispielen sprechen. Dieses Thema ist ziemlich unfangreich, deshalb möchte ich mich nur auf den Underpricingeffekt in Polen, Ungarn und Tschechien konzentrieren. Meine Ergebnisse zeigen, dass dieser Effekt in diesen 3 Ländern unterschiedlich stark ist und die Privatisierungsmethode ihn beeinflussen könnte. Auf der ungarischen und polnischen Börse kann man die „heißen“ und „kalten“ Phasen erkennen. Ziemlich unüblich ist, dass man den „money left on the table“-Effekt in Polen beobachten kann, aber die Geldsummen minimal sind.
LIST OF TABLES AND GRAPHS
2. TRANSFORMATION PROCESS
2.1. A FEW WORDS ABOUT PLANNED ECONOMICS
2.2. PRIVATISATION IN POLAND
2.3. PRIVATISATION IN CZECH REPUBLIC
2.4. THE PRIVATISATION IN HUNGARY
3. MOTIVES FOR GOING PUBLIC
3.1. VALUE MAXIMIZING PRINCIPLE
3.2. TECHNOLOGICAL INNOVATION
3.3. MARKET TIMING THEORY
3.5. POLITICAL REASONS
4. THE UNDERPRICING IN LITERATURE
4.1. SHORT-TERM UNDERPRICING
4.1.1. The Winner’s curse theory
4.1.2. The information cascade theory
4.1.3. Bookbuilding theory
4.1.4. Lemon problem
4.1.5. Insurance against legal liability
4.2. LONG-TERM UNDERPRICING
4.2.1. Stockownership and IPO
4.2.2. Impressario hypothesis
4.2.3. Marketing in IPO process
5. SAMPLE AND METHODOLOGY
6. DESCRIPTIVE ANALYSIS
6.1. PRAGUE STOCK EXCHANGE
6.2. BUDAPEST STOCK EXCHANGE
6.3. WARSAW STOCK EXCHANGE
6.3.1. The unusual year 1993
7. RESULTS ANALYSIS
7.1. UNDERPRICING IN CZECH REPUBLIC
7.2. UNDERPRICING IN HUNGARY
7.3. UNDERPRICING IN POLAND
APPENDIX A - GERMAN SUMMARY
APPENDIX B - ENGLISH SUMMARY
List of tables and graphs
Table 1: Descriptive statistics of IPO returns in Czech Republic
Table 2: Average return on Czech stock exchange on yearly basis
Table 3: Regression results on Praque Stock Exchange
Table 4: Descriptive statistics of IPO returns in Hungary
Table 5: Average return on Hungarian stock exchange on yearly basis
Table 6: Regression results on Budapest Stock Exchange
Table 7: Descriptive statistics of IPO returns in Poland
Graph 1: The number of IPO on yearly basis in Poland
Table 8: Average return on Polish stock exchange on yearly basis
Graph 2: Money left on the table
Graph 3: The old vs. new industry
Graph 4: Small vs. big caps
Graph 5: Growth vs. value stocks
Table 9: Regression results on the 3 months return
Table 10: Regression results on the 6 months return
Table 11: Regression results on the 9 months return
Table 12: Regression results on the 3 years return
Table 13: Summary of underpricing effect
Table 14: Underpricing around the world
Table 15: Short term underpricing on yearly basis in Czech Republic
Table 16: Long term underpricing on yearly basis in Czech Republic
Table 17: Short term underpricing on yearly basis in Hungary
Table 18: Long term underpricing on yearly basis in Hungary
Graph 6: The number of IPO on yearly basis
Graph 7: Money left on the table
Table 20: Short term underpricing on yearly basis in Poland
Table 21: Long term underpricing on yearly basis in Poland
17 years ago no one would have thought that democracy and capitalism could be created behind the “iron curtain”. The dreams of modern financial markets and initial public offering were only in science fiction literature. The fall of communism in Eastern Europe was a big surprise for everybody, because no one expected that it was possible. The “new democracies” faced many political and economical challenges that had to be solved quickly, for example, how to deal with state-owned companies. One of the strategies to deal with this challenge was reorganisation, restructuring and initial public offering.
After 17 years of transformation there are very few working papers about initial public offerings in Eastern Europe. Scholars have concentrated more on economical transformation than on the underpricing effect. The only paper that I have found about the share’s undervaluation was written in 1998, which was before the time when all the stock exchanges were reaching their highs and nobody even imagined that 2 years later there would be a crash. That is why I have chosen to investigate this effect and make the reader familiar with the underpricing in this part of Europe. It is particularly interesting, because my sample contains data from 1991 until 2006. It means that you can observe several economical cycles in this part of Europe and how differently the stock exchanges reacted. It is also worth mentioning that the best know how was directly implemented into these markets. It not only allowed the time costly financial market’s development phase to be skipped, but, through this information transfer, the system’s imperfection was copied too. If the markets were perfect, you would not be able to observe the underpricing effect. It cannot be forgotten that in 2004 Hungary, Poland and the Czech Republic entered the European Union. This historical event is very important for investors, because it showed that these countries had successfully completed the difficult transition process. For investors it was a positive sign, because the political risk was minimized and these countries, especially Poland, were significant markets. EU enlargement also had another positive effect. A different group of investors decided to invest their money in these stock exchanges. Yuce and Simga-Mugan (2000) describe in their paper that the investors used these 3 stock exchanges for diversification. According to de la Rosa and Crawford (2004), Poland not only with the other 10 countries increased the EU members to 25, but brought along with itself one of the most modern security trading systems among the new members countries. The authors claim, that the size of the market will bring financial and political stability to the EU. During these 17 years of the financial market’s existence you can observe not only how international events like the Russian debt crisis, the internet bubble and world depression influenced the number of IPO and the underpricing effect, but how the market behaved in a totally new open market condition.
After this small introduction I briefly describe my work. In the first theoretical section I describe how the economy worked under the communist regime. I also make the reader familiar with the privatisation process in Hungary, the Czech Republic and Poland. In the last part of this theoretical section I present the theories that try to explain underpricing in the short and long run. After this theoretical part the reader should have a broad overview about the economy and privatisation process in these 3 countries and different theories about the underpricing. The next section is an empirical section. In this part I show what methods I used in order to measure the undervaluation. I analyse and describe the results using statistical methods. In the last section I compare the theory with the results and draw the conclusions.
2. Transformation process
In order to understand the financial market in this part of Europe and its characteristics, I will make some small excurse about the background of the economy under the communistic regime and about the privatisation process in Hungary, the Czech Republic and Poland. The first sub-chapter about the planned economy is based on Aslund’s book called “Building Capitalism: The Transformation of the Former Soviet Bloc ”. The second sub-chapter is about a privatisation case in Poland. I decided to describe it chronologically. You can find more detailed information in the following papers: Jelic and Briston (2003), de la Rosa, Crawford (2004) and Cultler, Paszkowska (1996). The next part is about privatisation through a voucher program. A very good description of this can be found Hanousek and Kocenda (2003). In the last part you can find out about an unusual privatisation case in Hungary. This sub chapter is based on the Bornstein’s (1999) paper.
2.1. A few words about planned economics
In the communistic system money was viewed as an accountancy figure without any meaning, because in an equal society you do not need money to satisfy your needs. This was the main role of the government, but you still have to count goods. This seems very strange and unrealistic, but that was the official communistic ideology. Under the communistic dogma, private property was not allowed, because it made the distribution of wealth unequal among the society. All industry and real estate assets in the country belonged to the citizens and in theory there was no need for private property. So under such a system there was no need for stock exchanges or stock corporations. On the other hand if something is a common good no one actually cares about it. According to planned economy theory it is possible to replace the price mechanism by a central planning process.
The main task of the central planning office was to set how much of a certain good had to be produced. Each factory manage]r received a production plan on a yearly basis from this office and he had to adhere to it and later report the production progress. However no one actually checked if the reported figures were correct or if the plan was being kept to, because there was a lack of incentives for the managers. In reality the planned production did not satisfy the needs of the consumers, which caused shortages of goods on the market. In the end, consumers had to buy products even if the quality was poor, because there was no other alternative. As the money was meaningless the prices were fixed by the central government. The output price was counted as cost plus a regulated mark up. The commodities, like raw materials and energy, were subsidised by the government. So there was no incentive to invest in new energy and less resource intensive technologies. There were not only shortages of goods on the consumer markets, but industry also had problems with raw materials and the spare parts. That is why the companies tried to maintain a high stock of the materials needed and spare parts. The investment decision about new machinery was also made by the central planning committee and companies had to wait sometimes years in order to get new equipment. Under the communistic regime there was officially no unemployment. Therefore in the companies there were too many employees and as a result, high personnel costs, but no one in the government actually cared about the financial condition of state-owned enterprises. As everything was constant, inflation did not officially exist, but in reality, prices did not represent the real value of different goods, because they were not controlled and set by the market forces. In the communistic system there was not any exchange rate and the holding of other currency and shares was restricted. The decision of purchasing another currency was planned and made centrally. This meant that world prices did not affect the prices of domestic goods.
A very important element of every economy is fiscal policy. In the communistic system nobody cared about it, because the Central Bank and the Ministry of Finance was subordinated to the Planning Committee. In that scheme, instead of controlling the budget policy these institutions were forced to do whatever the Committee told them. Independent funds existed too; these had their own revenues and expenses, and were not controlled by anyone. In the communistic budget there was no fiscal discipline. This caused expenditures to be higher than planned and there was not enough revenue to cover them. So to solve that problem the revenues were overestimated, restrictions were imposed on investment or the Central Bank printed the money. This is a broad overview about the planned economy under the communistic system.
The new government had not only to start the transformation of political systems, to make preparation for the first democratic elections, but also to start to introduce capitalism as a major economical system. That is why the Planning Committee was abolished and managers got the power to decide about day-to-day operations. The government started to implement a privatisation strategy and prepare the first companies into initial public offering. Of course each country chose different privatisation strategies. Later in the theoretical part I will explain in more detail which strategies are available. One of the main tasks of the new government was to establish a stock exchange as a sign for investors that the transition process had started.
2.2. Privatisation in Poland
The privatisation process in Poland officially started in 1991, but the government had to solve some problems before. This country had a very high foreign debt and the assistance of the International Fund, the World Bank and the United States Agency of International Development was required. These high loans were made by thy communist government in the 80’s, and later the repayment was stopped. That is why Poland needed international aid in order to have funds for the transformation process. The second problem that the new government was facing was very high social expenses. This was the legacy of the communist regime. The new government had to use drastic cost cuts in order to stop this huge deficit and receive the international aid. One of the expensive posts was energy, capital and raw materials subsidies. For some companies this was a big shock and in some cases this cut of cheap input caused insolvency. The other problem that government was facing was how to privatise the companies. Economical advisors proposed two solutions: transform state-owned companies into JSC, in which the State Treasury will hold shares or privatise them fully. The advocates of the first possibility claimed that the “rationalisation of management” could be made without privatisation. It is worth mentioning the fact that in this scenario the government could choose 2/3 of members of the supervisory board and 1/3 would be selected by employees. The main task of such a supervisory board was the selection and monitoring of management, allocation of profit and investment and decision about the sales or lease of the company’s assets. Although the position of the workers in the board was weaker, because they had smaller influence on decisions and the employee’s council would be eliminated, they received some incentives. They did not have to pay tax on excessive wage growth (JSC were excluded from this tax) and they received job guarantees. Opponents of this idea argued that only the transformation from state-owned companies into JSC was not enough and privatisation was required. They argued that there was no difference in the role of state-owned enterprises and JSC. The opponents were concerned that these boards chosen by the ruling party would not have the ability to make tough and unpopular decisions. They believed that only privatisation could provide the urgently needed infusion of financial, human and physical capital, which would help the restructuring process. The early post-communist government decided to transform state- owned corporations into JSC without privatisation, because it would improve corporate governance and companies would be better prepared for privatisation within the next 2 years.
Towards the end of 1990 the government started part of the privatisation program using private placements. The idea behind this partial sale was testing the interest and willingness to invest in Poland. By the end of 1991 the first 7 companies had been sold to international investors. One of the first investors was Fiat to whom a 51% stake of Polish car manufacture for $ 800 million was sold. In April
1991 the initial public offering of the so-called “First Five” began. These 5 companies were placed simultaneously on the stock exchange. This IPO was also an exception, because the enterprises were sold directly through financial markets by-passing the phase when the company was operating in the private sector. Later all IPO came through this step. The reason for such an unusual decision was the willingness to attract international investors and establishing an operating stock exchange. The change in the ruling party due to the election in 1993 brought a shift in privatisation politics. The new cabinet favoured mass privatisation. In 1995 Parliament passed new legislation that allowed corporations without privatisation and privatisation in branches like energy, telecommunication and banking, which required the government’s special approval. This legislation was vetoed by President Walensa. After his defeat in the presidential elections, the parliament passed the Law on the Commercialisation and Privatisation of State- Owned Enterprises in 1996, which modified privatisation rules. The new legislation made the transformation of state-owned companies into corporations easier, because the agreement of managers and workers was not required any more. However it allowed the change of SOE legal form without privatisation.
2.3. Privatisation in Czech Republic
At the beginning of the privatisation process in the Czech Republic there was some opposition from the managers of state-owned enterprises and some government officials. They wanted to slow down this process and make only selective privatisation, but they did not succeed. The government decided to make a full-scale privatisation program which consisted of 3 sub-programs: restitution, small-scale privatisation, large-scale privatisation.
In 1948 the communist regime nationalised all companies and real estate assets by force. After the regime fell, the new government wanted to settle all liabilities with the former owners. The amount of money used for the restitution program was very imprecise, because the government had to negotiate with representatives from former owners in each case. There were 200,000 claims for agricultural land and about 70,000 buildings had to be returned to former owners. The problem with the former factory owners was solved in the following way: During the communist era some of the companies were merged together and therefore it was not economically wise to split them. That is why stakes were proposed to the former owners in newly privatised companies. In addition they could buy additional shares on preferable conditions. The favourable conditions were: the shares were priced on the basis of book value and former owners did not have to compete with other buyers.
The small-scale privatisation applied for small companies, shops, restaurants, that were sold through public auctions. The bidding process was restricted only to Czech citizens or corporations founded by such citizens. Buyers were prohibited to transfer their ownership to foreigners. There was also no limit to the size of the company, but most business came from the retail branch. By the end of 1992
22,000 business entities sold had been sold. In 1993 the program was officially terminated. Until then the privatisation value had reached 30. 4 billion Czech crowns.
The large-scale privatisation was started in 1991. The corporations not submitted to the first two sub-programs were classified into the following groups:
- firms to be privatized in the first and second turn
- companies to be privatized later (after 5 years)
- enterprises to be liquidated
Half of all the suitable companies were assigned to mass privatisation in the first wave, which started in June 1991. Each of these corporations had to present its own privatisation program and submit it by end of October 1991. The managers of enterprises could choose their privatisation strategy freely. Such a strategy could involve more than one option of privatisation. The managers could choose from the following ways of privatisation: direct sales to domestic or international investors, public auction, and public tender offer, privatisation through stock exchange, and transfer to workers or participation in vouchers program. The privatisation program should also additionally include a solid business plan including operational expenses, future investment, profit or lost forecast and foreign trade during the period 1989-1991. The third parties, like investment banks or consulting companies, could also submit their own privatisation plans to the Ministry of Privatisation. It was also possible to make the privatisation program for parts of companies. The founding ministry and the Ministry of Privatisation decided which of the competing programs would be accepted. The sales to foreign investors required additional acceptance from the government. The number of all privatisation programs submitted was about 1.5 times the number of companies privatised. The management projects accounted for about 20-25 of all programs. Half of which was approved by the ministry. The second most commonly submitted plans were purchasing the whole or part of companies. 998 of 2044 enterprises decided to allocate their shares into a voucher program. The majority of companies distributed more than half of their shares through a voucher program. The Czech voucher program was strongly supported by the government as the fairest distribution of shares to the society. According to this privatisation strategy each citizen above 18 years of age received a voucher, which could be exchanged for a certain amount of shares. At the end of 1996 most enterprises were privatized and the railways, postal service and national airlines were in state-owned hands. The banking, telecommunication and utility sector was fully in private hands, however the state still had a minority in these enterprises.
2.4. The privatisation in Hungary
The transition process in Hungary is a bit unusual, because during the communist era some open market mechanisms were working. Some of the economical reforms started in 1968 during the Hungarian revolution. The government introduced a new economical program called the New Economic Mechanism. It abolished the annual output assignments and allocation of resources to enterprises. Without any restrictions the companies could decide about the output, input qualities and price policy. The incentives received by workers and managers were linked to the profit. However the companies operated in a highly regulated market where the state-owned companies could exercise their power and intervened in different ways into enterprise activity. On the other hand, this program created incentives for small companies that could operate on the market where the state-owned corporations performed poorly or there was a lack of goods and services. Until the fall of communism the program was modified many times. Some of these changes represented a step forwards or backwards, but the main idea that allowed the operation of small companies was not changed. In the mid 80’s the idea of ownership changed. In 1984 the Enterprise Act was introduced, which granted the company’s councils the right to create joint ventures with other state-owned corporations or private companies. 4 years later a new so- called Company Act, which allowed creating commercial companies by state-owned enterprises, was passed. Some of the state-owned corporations founded companies that operated some of the plants, and the other state-owned corporations became holding companies for these new corporations. In 1989 the Transformation Act was passed, that allowed state-owned companies to convert into joint stock companies JSC. The government retained only part of the shares. Some of the shares were sold to other Hungarian companies, individual investors and to international investors. Up to 10% of the shares were sold on a preferable condition to employees of the companies. The whole privatisation process in Hungary was based on partial privatisation, the foundation of corporation and the exchange of inter- enterprise ownership.
3. Motives for going public
Companies go through several life cycles as they grow. One of them is IPO. Several theories try to explain why companies decide to go public. Companies reach a certain point in which additional capital is needed for further growth and one of the many possibilities is initial public offering. However the privatisation or deregulation process can also be a trigger for IPO.
Until 1980 IPO was seen as a stage in the growth process of companies. The financial market gave the evidence that this theory is not true. In the 80’s in the US large numbers of big mature companies went private and were delisted. The trigger of this big delisting was the leverage buyout wave. Kapplan (1991) finds that only 50 % of delisted companies went public again. He found out that 7% of this sample went private again.
3.1. Value maximizing principle
Zingales (1995) says that the decision to go public is based on the value maximizing principle, because the owner wants to sell his company at the highest possible price. According to his explanation the initial owner changes the distribution of cash flow and controlling rights by sharing them with potential buyers. This is a bargain process between new shareholders and owners. The owner will try to maximize his utility function, lose as little control as possible and sell shares at the highest price. Since the market of corporate control is not competitive the owner has to adjust his utility function in order to make a placement. The author identifies two sources of the buyer’s higher valuation that he tries to measure: cash flow and control. These two sources have a different nature. Cash flow is distributed among all shareholders. The amount of cash received is proportional to the size of equity. The market for cash flow rights is fully competitive for small shareholders, because the ownership can be easily changed. For the incumbent it is most profitable to sell shares to small, dispersed shareholders. The market situation for controlling blocks is different, because there are few institutional investors that have the resources to acquire the rights and they have more bargaining power. For the incumbent it will be difficult to sell his ownership with maximal value through the bargaining process. The author concludes that IPO gives a fair value for the owner without the bargaining process. According to Zingales the value maximizing principle is to hold the company private and bargain with a potential buyer. The only reason why an owner is willing to sell his company is the value maximizing principle.
3.2. Technological innovation
Maksimovic and Pichler (2001) examine the technological innovation and its influence on IPO. They find out that in the sector where there is a significant entry-risk there will be large amount of IPO, because the first initial public offering in a particular branch will attract other similar companies at the same time. The authors claim that if in the industry, the technological risk is big, financial markets will be able to support only a few IPOs. In this situation only the industrial pioneers will be able to make IPO. Non-industry pioneers have to wait until the technological risk decreases and this will attract new IPO. The authors conclude that the decision about initial public offering is a strategic decision due to the fact that it requires the company to disclose some information about the product, research and development. It is possible that potential rivals may acquire vital information from this and in the future this could reduce the company value. The amount of disclosed information may also affect the amount of potential new initial public offerings. According to the authors the underpricing effect is different in different industries. This theory is rather applicable for a new industry, because the technological edge amongst the competitors is crucial and disclosure rules may reduce it.
3.3. Market timing theory
Lucas and McDonald (1990) develop an asymmetric information model. The main idea behind this model is that the managers know the current earnings of the company and this information is unknown to the market. After the earnings announcement two situations are possible. If the enterprise was under valued, the stock price will rise. If the company was over valued, the share price will fall. The managers act in the interests of the shareholders and in order to finance a project, wherefore the equity issue is necessary. According to the authors, if the project is seen in the long-term, and no waiting costs connected with postponing the project exist, the enterprise can delay the issue until the undervaluation is corrected by the market. On the other hand if the shares are overpriced, the enterprise will quickly issue equity, because postponing may induce a loss of funds that are needed or a market correction could occur. (The price will fall). Ritter and Welch (2002) propose the following explanation for the market timing theory. It is not based on the asymmetric information assumption. The entrepreneur through day to day involvement can more or less estimate the value of his company without the influence of financial markets. The sudden changes of the share price of listed companies do not quickly influence the judgment of the entrepreneur’s company value. After a certain period of time the owner makes the adjustment. In the end if the financial markets are influenced by irrational motives or the entrepreneur’s judgment about the company’s true value is influenced by sentiments, the entrepreneurs are more willing to sell their company only when the value is increased in the public markets.
In Eastern Europe the privatization process was the essential step required in order to transform the economy and it can be seen as the motive to go public. Under the communist regime private property was not allowed. For this reason the owners of factories, mines, and large real estate had to give up their ownership with small or no compensation. It was common that the government forced the owner to give up their owner’s rights. According to the communist ideology all enterprises and real estate were in the government hands. One of first problems was how to privatize the state-owned companies. This issue was urgent, because the government was anxious that the privatization would be stopped by the managers or the managers would try to snap up some of the most valuable assets. At the beginning there were some practical problems that had to be solved before the state-owned companies could be sold. The most important was how to evaluate a company that had poor accounting standards, and sales and costs figures which were unreliable. Therefore it was hard to estimate the residual value. The other problem was that households did not have sufficient funds to buy shares of the newly privatized companies. The banking system was also too poorly developed and was not prepared to provide loans for the citizens.
Brada (1996) describes the methods of privatization used in Eastern Europe. The first method is privatization through restitution. The restitution means that the previous owner can regain his past ownership from the state. Normally the restitution involves buildings, land and real estate. The speed of this process depends on the ability to identify the previous owners and the political attitude. Theoretically when the previous owner gets his land, he can decide freely what he wants to do with it, but in practice, politicians impose some restrictions; for example: the owner has to continue the farming production. In the case of bigger properties like mines and factories the restitution problem was a bit more complicated due to the fact that some of the previous owners were dead and the heirs had to be identified. In order to start the privatization process all legal matters considering the previous owners have to be settled. These problems were solved by giving the former owners cash or vouchers.
The next method is privatization through the sale of state property. If the previous owners were unknown, the government could sell the stakes in newly privatized companies to workers, management or investors at a fair price. This method sped up the restructuring process of enterprises, lured international investors and produced tax revenues for the government. The politicians often discussed if it would not be better to first capitalize the state-owned enterprises and sell them later for a higher price. This strategy was used in the United Kingdom and Argentina, but the situation in Eastern Europe was different. There were a lot of state-owned companies and the government wanted to sell them as quickly as possible. The most successful part of privatization was selling small enterprises like shops, restaurants and service entities, because it helped to create small business. In Hungary the state-owned companies were required to convert themselves into corporations and sell their shares to a government agency called State Property Agency (SPA). It prepared and selected the companies for initial public offerings, management buyouts and it made negotiations with the potential international investors. The state companies were also allowed to find investors themselves. According to OECD report, up until end of 1993, 30% of SPA capital was privatized. The foreign investors played a major role in this time, because they brought capital, technology and know-how. The author also identifies some of the problems of the implementation of this method. This process is very slow. The reality showed that SPA was very inefficient, because it only passively controlled the state-owned companies without proper control over the managers in these companies. The managers were very often engaged in dubious privatization process, because they used their position to snap up profit from the sales of the enterprise. The political struggle between the parties was also visible in SPA, because the people in the key positions were very frequently changed and this constant reorganization influenced the speed of the privatization process. After 1995 the best companies were already sold and it was hard to attract new foreign investors to acquire the rest. That is why the revenue from the privatization sharply declined.
The next method is a voucher or a mass privatization. The voucher is the right to get a one-unit share in a privatized company. In this program the vouchers are distributed among citizens at no cost or at a nominal value. In Czechoslovakia (later the Czech Republic) state-owned companies were required to transform themselves into a corporation and the selected ones had to prepare the privatization plan. The government allowed outside parties to prepare such plans for the state-owned enterprises. This option was very popular by outside investors and for each privatized company there were 4 different plans given by outside parties. Due to this some of the enterprises were privatized on a non-voucher basis. In order to participate in the bidding process for the enterprises the citizens had to buy booklet of coupons for $1.25 and then register for $35. Then the bidding process took place in rounds, five for the first round, and six for the second round. Before bidding the citizens could put their booklet into the Investment Privatization Fund, who would bid for the investors. Generally, the privatization was very successful, because between 60 and 90 percent of all state-owned enterprises were held in private hands. Potentially the problem which could arise is with investment funds. According to the author, the 14 largest funds manage about 55 percent of all vouchers. Most of the funds were founded by banks. This central share-holder model is very similar to the German and Japan shareholder structure where the banks have a certain influence over the companies. This method was used in Poland too. The voucher privatization started in 1994. The National Investing Fund (NFI) was founded and 33 percent of shares in privatized companies were transferred to this fund and it obtained four of the nine seats in the supervisory board too. This entity was organized as a close-ended mutual fund. Each citizen received one voucher, which is a share of NFI. The draw back of this method in Poland was that each individual citizen had too little power to influence the decision made by NFI. After the distribution of voucher in Poland there very quickly appeared individuals who bought the vouchers in order to consolidate the dispersed ownership.
The growth of small companies was not only stimulated through privatization but also from start up companies. Managers or workers of state-owned companies started their own companies. Soon they began to lease or buy particular assets from state-owned companies. Some of the state enterprises went into bankruptcy and some entrepreneurs acquired assets this way. Of course there were some cases when the managers of state-owned companies used insider information in order to acquire the most valuable assets for a small percentage of their real value.
3.5. Political reasons
Biais and Perotti (1995) concentrate on the privatization process in their paper, when the rational reason for going public is absent. Such a situation is possible when there is a sudden change in the politics toward the market like in Eastern Europe; where the market structure is changing from a command economy into an open economy. From a theoretical point of view the value maximization method of privatization would be the public tender sales. However the empirical research shows something different. The sales of state-owned Eastern European and British companies reveals following similarities, according to the authors. Firstly, the sales of the stakes are partial and the government retains some control over the company in the form of golden shares or a control stake. Secondly, the privatized companies are sold at a discount compared to the traditional IPO. According to the authors this effect cannot be explained by asymmetrical information over the asset value, because most of the privatized companies are large, well known corporations with a long track record. When a company is state-owned there is always an incentive to relocate some of value to insiders, regardless of their performance. This leads, of course, to the destruction or the loss of a company’s value. However if a company is privately owned, the government is unable to perform such actions without violating the law. Of course it is possible that the government can pass new laws which allow the regaining of control over the private corporations. This political risk is included in the company’s sales price and it is in the government’s interest to maintain clear and unchanged policy toward private companies. With time and with political stability the political risk decreases. The model of Biais and Perotti provides proof that in the privatization process involving several state-owned corporations the government will try to maintain a stabile policy toward private companies in order to get a fair sales price. The authors suggest that under- pricing and a stable policy give positive signals to the investors about the privatization process.
As I previously mentioned, the situation in Hungary, Poland and the Czech Republic was very specific, because the whole economy had to be transformed. As the praxis shows, the privatization process is a very sensitive political issue setting aside the country. Moore (1992) describes the privatisation process in the UK. This process has many similarities with what Hungary, Poland and the Czech Republic experienced, because the politicians faced the same problems in these countries in respect to the inefficiency of the state-owned sector. One of the many problems connected with privatisation is the wide acceptance of this idea among the society. The British government solved this problem by educating the people about the efficiency of capital markets through seminars, speeches, public discussion with journalists, financial experts, people and politicians. According to the author the best way to convince the doubters was to make the whole process quick and transparent. This strategy was very successful, because every UK privatisation of state-owned companies was oversubscribed. The state ownership in UK and in the command economies have shown that it is a very inefficient way of managing companies, because politicians tend to interfere with the day-to-day operations. This influence on the operation is visible by: setting unrealistic prices, making investment decisions using a political key and a lack of control over the expenses. Over the long run such companies lose their competitiveness and the bankruptcy probability rises. On the markets which are dominated by the state-owned companies there is no incentive to develop better products or services to customers, increase efficiency or cut costs, because no one is interested in such actions. In this market there is no motivation to deliver better products or services, because there is no reward or punishment for the service and product performance. For this reason the state-owned enterprises rely on government help and therefore perform poorly. When there is a sudden change in the buyer’s behaviour and the state-owned companies start to lose their market share, they demand that the government should undertake some actions in order to stop that process. In the end there is no innovation or efficiency on the market and this status quo is held from the tax-payers money. There is one more aspect that it is worth mentioning. In state-owned companies virtually every citizen is the owner of it and this means that actually no one can be held responsible for the company.