Information and price determination under mass privatization

The valuation of enterprises has been a major stumbling block to privatization in transitional economies. Data on the performance of state-owned enterprises under central planning is plentiful, but that information is not worth much in a market economy, especially one in which much progress has been made in price and trade liberalization. One of the author's privatization schemes have emerged as a politically attractive alternative; the valuation problem is overcome through a decentralized system of bidding, while shares are efficiently allocated through an auction. But nobody has analyzed how these information markets function or how prices emerge from bidding rounds. One of the authors presents econometric evidence on the functioning of information markets and on the process by which prices emerged for enterprise shares under the Czech and Slovak mass privatization scheme. The results indicate that public information about enterprises'past performance clearly mattered, especially in the early rounds when private information had not been revealed. But such historical information alone never explained more than 29 percent of the variation in the ultimate equilibrium price. Instead, information about enterprises'prospects revealed through the bidding process explained about 85 percent of the variation in prices by the final rounds. Private or"insider"information about enterprises'prospects played a gradually diminishing role as participants learned quickly from each other's bidding behavior. Other mass privatization schemes rely more heavily on the secondary market to generate an appropriate valuation of shares, rather than on the initial valuations emerging from the primary market. But if improved information is the first step toward efficient asset markets and corporate governance, participation in the Czech and Slovak mass privatization scheme have a head start on other transitional economies.