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The Choice between Private and Public Capital Markets: The Importance of Disclosure Standards and Auditor Discipline to Countries Divesting
State-owned Enterprises
Omrane Guedhami, Memorial University of Newfoundland
Jeffrey A Pittman, Hong Kong University of Science & Technology
ABSTRACT. For a sample of 1,866 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), rather than an asset sale to a small group of buyers. However, prior research implies that accounting transparency deters controlling shareholders from siphoning corporate resources. After controlling for other 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.
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