Working Paper: CEPR ID: DP4449
Authors: Bernardo Bortolotti; Frank de Jong; Giovanna Nicodano; Ibolya Schindele
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.
Keywords: financial market development; international finance; privatization
JEL Codes: F30; G14; L33; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SIP programs (H53) | retail investor participation (G24) |
| retail investor participation (G24) | market liquidity (G10) |
| SIP programs (H53) | adverse selection (D82) |
| adverse selection (D82) | bid-ask spread (D44) |
| SIP programs (H53) | cross-listing of shares (G15) |
| cross-listing of shares (G15) | market liquidity (G10) |
| SIP programs (H53) | liquidity of private companies (G33) |
| SIP programs (H53) | liquidity of non-privatized firms (G33) |
| SIP programs (H53) | market liquidity (G10) |