Privatization: Underpricing and the role of the derivative securities markets

Abstract

The British Government has been criticised for privatizing publicly owned enterprises too cheaply. In this article the authors show, first of all, that the large premia observed in recent privatizations are partially a consequence of the deliberate misallocation of shares by the Government, as part of the policy of encouraging wider share ownership. They go on to demonstrate that the existence and use of an equity options market, through its risk transference function, amplifies the price effect of the initial misallocation.