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Privatization under incomplete information: an analysis of equity sale strategies

Author: Fulghieri, Paolo ; Chemmanur, Thomas J.INSEAD Area: FinanceIn: Advances in International Banking and Finance, vol. 1, 1995 Language: EnglishDescription: p. 107-128.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: We study a situation in which the government privatizes a state owned company by selling equity to outside investors in a setting of incomplete information about firm value. The government has several equity sale strategies avaible: it may auction off the shares to investors, sell them at a fixed price in tranches, or sell the equity in a fixed-price offering using the services of an investment banker. We argue that the choice of a particular equity sale strategy may depend on wether the government or outsiders have private information about the true value of the firm being privatized, the cost to be incurred by outsiders to produce information about the true value of the firm being privatized, and wether the government can make use of credible investment bankers with expertise in pricing firms' equity. Based on insights from auction theory and theoretical models of the pricing of initial public offerings of private firms, we suggest scenarios in which each method of selling equity is appropriate
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We study a situation in which the government privatizes a state owned company by selling equity to outside investors in a setting of incomplete information about firm value. The government has several equity sale strategies avaible: it may auction off the shares to investors, sell them at a fixed price in tranches, or sell the equity in a fixed-price offering using the services of an investment banker. We argue that the choice of a particular equity sale strategy may depend on wether the government or outsiders have private information about the true value of the firm being privatized, the cost to be incurred by outsiders to produce information about the true value of the firm being privatized, and wether the government can make use of credible investment bankers with expertise in pricing firms' equity. Based on insights from auction theory and theoretical models of the pricing of initial public offerings of private firms, we suggest scenarios in which each method of selling equity is appropriate

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