DP4449 Privatization and Stock Market Liquidity

Author(s): Bernardo Bortolotti , Frank de Jong , Giovanna Nicodano , Ibolya Schindele

Publication Date: June 2004

Keyword(s): privatization , financial market development , international finance

JEL(s): F30 , G14 , L33 , O16

Programme Areas: Financial Economics , Institutions and Economic Performance , Transition Economics

Link to this Page: www.cepr.org/pubs/dps/DP4449.asp

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.