Leaving money on the table: evidence of underpricing in the Brazilian privatization auctions

Abstract

The Brazilian privatization program raised about US$100 billion as a result of the sale of state-owned firms and assets over the period 1990 to 2001. Despite official claims that the privatization auctions were successful in revenue raising, statistical evidence suggests that the buyers, not the government, profited from the auctions. Using an event-study methodology and financial market data, I estimated the abnormal returns realized by the winning bidders on the days of the Brazilan privatization auctions. Statistically significant evidence suggests that the acquirers accrued, on average, positive 0.70% abnormal returns on those days. In other words, if the privatization auctions had been able to extract the entire surplus from the buyers, the Brazilian government could have raised another US$ 13 billion. This finding contrasts with two branches of literature related to mergers and acquisitions in the private sector and to the privatization programs in other countries