انتخاب بین بازارهای سرمایه خصوصی و دولتی: اهمیت استانداردهای افشا و نظم حسابرس برای کشورهایی که شرکت های دولتی را نادیده می گیرند

For a sample of 1866 privatizations from 37 countries, we estimate the impact of disclosure standards and legal institutions that discipline auditors on the method chosen to divest state-owned enterprises. The agency conflict between minority and controlling shareholders can impede a government from privatizing by selling its stake to diffuse investors in the public capital market with a share-issue privatization (SIP) that typically generates important spillover economic benefits, rather than an asset sale to a small group of buyers. However, prior research implies that accounting transparency plays a natural role in preventing controlling shareholders from siphoning corporate resources by helping minority investors identify any diversionary practices. After controlling for firm-level and other country-level characteristics, we find that SIPs become more likely when countries mandate strict disclosure standards, although this result is sensitive to model specification. In comparison, we provide strong, robust evidence that SIPs are more likely in jurisdictions that relax the burden of proof in civil lawsuits and criminal prosecutions against auditors, leading to more credible financial statements. From a policy perspective, our cross-country research suggests that investors value reforms that subject auditors to more severe private and public enforcement over several other legal determinants, including enhancing disclosure standards.

In cross-country research, we estimate the importance of several determinants of accounting transparency to the choice between public versus private capital markets’ financing. More specifically, we rely on the high information asymmetry environment of the privatization of state-owned enterprises (SOEs) to analyze whether better disclosure standards and legal institutions that discipline auditors in the event of financial reporting failure facilitate privatizing with a share issue, rather than an asset sale to a small set of investors.1 Governments typically prefer share-issue privatizations (SIPs), which can involve millions of domestic investors, to generate major spillover benefits for their economies.2 In the interest of developing their capital markets by enhancing liquidity and broadening equity ownership, privatizing governments often gladly sacrifice some proceeds from the transaction by underpricing these securities. For example, Boutchkova and Megginson (2000) report evidence that large-scale privatization programs were instrumental in stimulating financial markets worldwide, particularly for governments with the political objective of cultivating an “equity culture” by persuading individuals and institutions to actively trade in those markets. McLindon, 1996 and Subrahmanyam and Titman, 1999 argue that SIPs can precipitate a snowball effect with countries enjoying impressive growth as the greater stock market liquidity and efficiency becomes a catalyst for firms to go public. However, consistent with Megginson et al.’s (2004) evidence, Dyck (2001, p. 77) explains that countries are routinely forced to resort to: “…asset sales rather than share issues in privatization programs when formal governance chains are weak. Asset sales are usually associated with the sale of a majority stake to a single investor or to a consortium of investors that have been approved under some pre-qualification screening process…Among countries with relatively weak formal protections, very few countries use share issues for a large proportion of privatizations.” Smaller investors may refuse to participate in SIPs when they sensibly anticipate that insiders have strong incentives to exploit their positions to divert resources, which they hide by manipulating financial statements to suppress information about underlying firm performance. Dyck and Zingales (2004) find that in countries with large private benefits, measured by the premium paid in control transactions, governments tend to divest state-owned enterprises by negotiating asset sales instead of floating a SIP. Similarly, Megginson et al. (2004) show that a strong legal tradition and good protection of minority shareholders raises the likelihood that the government will elect to privatize through a SIP. We focus on the choice between share issues and asset sales to analyze whether outside investors value country-level institutions that strengthen accounting transparency given that the siphoning of corporate resources requires self-dealing dominant shareholders to conceal their diversionary practices by distorting the financial statements (La Porta et al., 1998 and Dyck and Zingales, 2004). The major role that reliable financial reporting plays during the transition from state to private ownership is well known. For example, Hingorani et al. (1997) provide evidence from the first round of the Czech Republic’s mass privatization in 1991 that even highly imperfect financial statements were informative to minority investors. In his influential discussion on the steps a government should take before proceeding with a privatization, Gibbon (1997) stresses the importance of providing investors with credible accounting data on the SOE being divested. Bushman et al. (2004) document in country-level regressions that financial transparency suffers when government share ownership is higher, reinforcing that information asymmetry is worse in these situations. After highlighting the governance gap between SOEs and public firms, the OECD (2005) implores countries to improve corporate governance by subjecting state-run firms to high-quality accounting and auditing policies. Moreover, Bushman and Piotroski (2006) provide evidence that firms in countries with more state involvement in the economy have less conservative earnings. Guedhami and Pittman (2006) find evidence supporting Bushman and Smith’s (2003) argument that regime shifts within a country like privatization provide rich terrain for examining the impact of financial reporting credibility determinants on economic outcomes. More recently, Guedhami et al. (2009) exploit the discrete change in ownership surrounding privatization to study the dynamics of auditor choice during this transition. Increasing power for our analysis, the conversion from state to private ownership is beset by major agency problems between outside investors and corporate insiders; e.g., Coffee, 1999, Denis and McConnell, 2003, Boubakri et al., 2005a and Boubakri et al., 2005b. Consistent with their arguments, prior research implies that initial returns on privatization IPOs far exceed those on private-sector IPOs. Ljungqvist et al. (2003) report that privatization IPOs are systematically more underpriced—in the vicinity of 14%—than are private-sector IPOs. In absolute terms, Jones et al. (1999) estimate that the mean (median) level of underpricing is 34% (12%) for initial share-issue privatizations and 9% (3%) for seasoned ones; Keloharju et al. (2008) find similar evidence. Our analysis mainly sheds light on which auditor characteristics shape perceptions of privatized firms’ accounting transparency evident in the government’s choice between financing with a share issue versus an asset sale. We primarily contribute to extant research by exploiting country-level data to help empirically resolve whether criminally and civilly penalizing auditors for issuing clean opinions on materially misleading financial statements induces higher-quality financial reporting. The privatization phenomenon that began with the Thatcher government in the UK in the early 1980s has raised more than $1 trillion worldwide from the sale of state-controlled enterprises to private investors in over 100 countries (Gibbon, 2000). However, Dyck (2001, p. 59) warns that recent research suggests that these transactions: “…have allowed profits to be diverted to the grabbing hands of insiders in privatized firms.” According to Shleifer and Vishny, 1997 and La Porta et al., 2002b, the primary agency conflict in firms outside the US and the UK remains the expropriation of minority investors by controlling shareholders, rather than professional managers failing to internalize the interests of all shareholders (Berle and Means, 1932 and Fama and Jensen, 1983).3 Internationally, dispersed ownership structures are the exception rather than the norm with concentrated ownership becoming a rational substitute when laws protecting investors are poor (La Porta et al., 1998, Boubakri et al., 2005a and Boubakri et al., 2005b). Extensive cross-country research implies that weak corporate governance engenders the information asymmetry between minority and controlling shareholders that is behind heavy ownership concentration around the world; e.g., La Porta et al., 1998, La Porta et al., 1999a and Claessens et al., 2000. This serious agency problem can deter privatizing countries eager to divest state-owned enterprises from implementing share-issue privatization (SIP) programs. Besides that the severe information asymmetry that accompanies the transfer from state to private ownership presents a fertile testing ground for our predictions (Denis and McConnell, 2003 and Dyck, 2001), identifying privatization method determinants is inherently interesting since governments in most emerging markets and industrialized countries have initiated major privatization programs that are expected to intensify (World Bank, 2001).4 Indeed, Bortolotti et al. (2004), among others, explain that the proliferation of these programs has made privatization a separate field of empirical capital markets research.5 Importantly, Megginson and Netter (2001, p. 17) observe that although researchers: “…have learned much about selling assets in well-developed capital markets, we still have a limited understanding of the determinants of the privatization method for state-owned assets.” Reinforcing the valuable policy implications of our results, Shleifer and Vishny, 1997 and Dyck, 2001 hold that the success of privatization programs largely hinge on whether the emerging ownership structure in the formerly state-owned firm is compatible with the country’s legal institutions. We also respond to Bushman and Smith, 2001 and Bushman and Smith, 2003 call for evidence on the role of countries’ information infrastructure—including whether more rigorous audit regimes reduce distortion in corporate disclosures—in the efficient allocation of capital. Similarly, Ball (2001) points out that despite its economic importance international accounting research on expropriation is scarce. We help fill this void by evaluating whether legal institutions that may determine financial reporting credibility improve the plight of minority investors susceptible to controlling shareholders indulging in private benefits at their expense. Recent research highlights that apart from the characteristics of the to-be-privatized firm, governments recognize the importance of the economic, political, and institutional environments to the success of their privatization programs (Megginson et al., 2004, Boubakri et al., 2005a and Boubakri et al., 2005b). In particular, governments are more reluctant to divest state-owned enterprises in the public capital market with a share-issue privatization when the information asymmetry that enables controlling shareholders’ to divert corporate resources is worse. After controlling for firm-level and other country-level characteristics in a sample 1866 privatizations from 37 countries, we document that share-issue privatizations are more likely when countries mandate strict disclosure standards, although this result is sensitive to model specification. In contrast, we provide strong, robust evidence that this probability is higher when countries rely on legal institutions that genuinely discipline auditors to alleviate the agency conflict between minority and controlling shareholders, consistent with Ball, 2001 and Dyck, 2001 predictions. Specifically, our research indicates that share-issue privatizations become more likely when countries relax the burden of proof in civil and criminal cases against auditors, suggesting that investors perceive that firms’ financial reporting is more credible in these jurisdictions. Reflecting the first-order economic influence of our point estimates, these results imply that lowering the variables that gauge the burden of proof in civil and criminal actions against auditors in our tests from the 90th to the 10th percentiles translates into share-issue privatizations becoming 13% and 31% more likely, respectively. Moreover, in horse-race regressions, we find that securities laws that facilitate civil and criminal litigation against auditors dominate the impact of other institutions, including disclosure standards, in explaining privatizing governments’ choice between private and public capital markets in our data. These findings are robust to potential omitted variables bias, endogeneity, and sample composition. From a policy perspective, our analysis provides some preliminary empirical support for the proposition that investors value legislative reforms that expose auditors to more severe private and public enforcement in the event of financial reporting failure. Our evidence on the legal institutions that support high-quality financial reporting is grounded in recent international corporate governance research on the role of securities laws. After assembling a unique cross-country database of rules and regulations governing security issuance, La Porta et al. (2006) document that disclosure liability standards matter to stock market development. We consider another important aspect of stock market development, namely the choice between privatizing with a share issue or an asset sale. In particular, we empirically test Ball’s (2001) claim that legal institutions that discipline auditors affect accounting transparency more than simply imposing extensive disclosure standards. By focusing on the privatization of SOEs, our research intersects with Dyck and Zingales, 2004 and Megginson et al., 2004 evidence that the privatization method choice reflects the amount of private benefits of control and the quality of surrounding institutions. We complement their findings with evidence that the country-level audit regime—laws specifying the burden of proof in civil and criminal litigation against auditors—helps curb the amount of private benefits and, in turn, affects the government’s choice between private and public capital markets. Finally, we extend Guedhami and Pittman (2006), who find that ownership concentration is lower in countries that set a lower burden of proof for auditor discipline. The rest of the paper is organized as follows. Section 2 reviews prior research to motivate the testable hypotheses. Section 3 outlines our research design and reports descriptive statistics. Section 4 covers the evidence, including our sensitivity analysis. Section 5 concludes.

We analyze the impact of legal institutions that shape the credibility of corporate financial reporting on the choice between divesting a state-owned enterprise by selling some or all of a government’s stake to dispersed investors in the public capital market with a share-issue privatization, or in the private capital market by negotiating an asset sale to a small set of buyers. Although governments generally prefer SIPs that prior research suggests generate several important benefits that can drive the development of their economies, the agency conflict between controlling and minority shareholders can frustrate this policy option. Shleifer and Vishny, 1997 and La Porta et al., 2000 argue that the primary agency conflict besetting firms outside the US and the UK is the expropriation of smaller investors by controlling shareholders, rather than the expropriation of all shareholders by managers. Since outside investors are understandably reluctant to participate in share issues when they rationally anticipate that controlling shareholders will exploit their positions to pocket corporate resources, accounting transparency can play a natural role in preventing these insiders from concealing their diversionary practices. Our research provides insight on which financial reporting-related institutions have a chilling effect on insiders’ hiding incentives, which is evident in how a government privatizes a state-run firm. Countries are eager to improve corporate governance to alleviate the agency conflict between controlling and minority shareholders that represents a major obstacle to conducting a share-issue privatization. In a sample of 1866 privatizations from 37 countries, we find that investors value reforms that increase the severity of private and public enforcement against auditors for issuing an unqualified opinion on materially deficient financial statements over several other legal determinants, including adopting better disclosure standards. Economically, we estimate that, on average, share-issue privatizations become 13% and 31% more likely when the variables that calibrate the burden of proof in civil and criminal litigation against auditors in our regressions are lowered from the 90th to the 10th percentiles, respectively. Our evidence that external monitoring of privatized firms improves when countries liberalize their securities laws to impose more discipline on auditors complements recent international research that suggests that institutions that constrain insiders’ discretion over the financial reporting process enhance accounting transparency more than formal disclosure standards; e.g., Ball et al., 2003, Haw et al., 2004 and Guedhami and Pittman, 2006. More generally, we contribute to the expanding literature on the link between countries’ institutions and good corporate governance. However, rather than ascribing causality to our evidence, we caution that our analysis only documents associations.