Privatization in the European Union: A study of the cost of debt and information asymmetry

This dissertation examines the impact of privatization in the European Union (EU). The first part explores whether retained government ownership affects the cost of debt for privatized companies. The sample includes both fully and partially privatized companies over the period 2001-2005 to test the effect of state ownership on the companies' cost of debt. The analysis is performed in an unbalanced panel setting, using year and industry fixed effects, after controlling for both bond-specific and firm-specific variables. On average, a decrease in government ownership by one percentage point leads to an increase in the credit spread, used as a proxy for the cost of debt, by one-half of a basis point. However, partially privatized companies exhibit higher credit spreads when compared to fully privatized companies. European Monetary Union (EMU) companies have a lower cost of debt compared to non-EMU firms. Also, firm-specific variables are more effective in predicting the variation in the cost of debt than bond-specific variables. The second part of the dissertation discusses the relationship between privatization and market microstructure measures. The study is performed in a cross-sectional setting, using high frequency Euronext data from the first quarter of 2007 for an EU sample of privatized and privately-owned firms. In particular, it directly compares the levels of information asymmetry between privatized firms and their privately-owned counterparts. The analysis uses the adverse selection component of the bid-ask spread to measure information asymmetry as well as the probability of informed trading (PIN) following EKOP (1996). The main finding of the study is that partially privatized firms, i.e. firms in which the government still retains a stake, exhibit lower levels of information asymmetry and PINs, after controlling for firm characteristics. Additionally, an event-study methodology based on the earnings announcement date reveals that partially privatized firms have consistently lower levels of asymmetry on the day of the event, five days before, and five days after the event date, relative to privately-owned firms.