Designing a compatible model of share issue privatization for Tehran stock exchange (TSE) development

Article history: Received October 1, 2011 Received in Revised form December, 10, 2011 Accepted 12 December 2011 Available online 14 December 2011 In this research, we conduct a reverse study to design a compatible model of share issue privatization for Tehran stock exchange (TSE) development. Privatization and stock market development are known as two representatives of economic growth. Governments use these two economic means to achieve their development goals. In this study, the impact of share issue privatization on stock market development is studied and an optimal model of share issue privatization for Tehran stock exchange (TSE) development is introduced. To study the effect of share issue privatization on key market development variables panel data of privatization index(IPIX), transaction volume, turnover velocity ratio and closing price of each TSE listed company are entered in co integration and error correction models (ECM) during March 2008June 2011. The result of statistical studies shows a significant relation between privatization index (IPIX) growth and the growth of each of Tehran stock exchange development proxies. Then to design a compatible model of share issue privatization for Tehran stock market development, Delphi survey following Schmitt approach during 4 phases is implemented. © 2012 Growing Science Ltd. All rights reserved.

In this research, we conduct a reverse study to design a compatible model of share issue privatization for Tehran stock exchange (TSE) development.Privatization and stock market development are known as two representatives of economic growth.Governments use these two economic means to achieve their development goals.In this study, the impact of share issue privatization on stock market development is studied and an optimal model of share issue privatization for Tehran stock exchange (TSE) development is introduced.To study the effect of share issue privatization on key market development variables panel data of privatization index(IPIX), transaction volume, turnover velocity ratio and closing price of each TSE listed company are entered in co integration and error correction models (ECM) during March 2008-June 2011.The result of statistical studies shows a significant relation between privatization index (IPIX) growth and the growth of each of Tehran stock exchange development proxies.Then to design a compatible model of share issue privatization for Tehran stock market development, Delphi survey following Schmitt approach during 4 phases is implemented.

Introduction
The Privatization as a method of reallocating assets and functions from the public sector to the private sector appears to be a factor that could play a serious role in the quest for growth (Filipovic, 2005).Public offering of shares, or share issue privatization (SIP), involves the sale of some or a government's entire stake in an enterprise through public share offering.(Dezhbakhsh, 2004).All factors influencing development of stock markets are outcomes of programs, policies and decisions made in macroeconomic and political levels.Privatization as a tool for economic management is executed in various methods and different levels.Directly and indirectly, privatization efficiently helps stock market development and invigoration.The Article 44 of Iranian Constitution about privatization argues sale of some of the nationalized and state-owned enterprises to the private sector.
The below table shows the most frequently used method of privatization in Iran is share issue privatization through Tehran stock market.The result of study shows a significant relation among TSE development proxies and, privatization IPOs index, IPIX.Then it suggests a share issue privatization model for TSE development.The organization of this paper is as follows.We first study privatization and privatization models.Then previous research works are considered.Methodology of research is presented in section 2.The results of statistical studies are presented in section 3. Discussions, concluding remarks, research limitations and recommendations are given in section 4 to summarize the contribution of this paper.

Privatization Models
In theory, privatization can result in economic gains, ever in cases where market failure may justify some level of government intervention.In practice, privatization, as an economic growth tools, has increased profitability and efficiency.For instance, Poland as the second most active privatizer among European countries reflects the country's much more robust rate of economic growth and greater financial dynamism as a the results of adapting privatization programs (The Privatization Barometere Report, 2010, pp. 3).Two decades of privatization appears to have changed the focus of the privatization debate from "whether to privatize" to" how to privatize".The most commonly used methods of privatization include public offering of shares or share issue privatization (SIP), private sale of enterprises, sale of enterprise assets to private investors and voucher method.
Public offering of shares, or share issue privatization (SIP), involves the sale of some or a government's entire stake in an enterprise through public share offering.The underwriter may use a fixed price or a tender to determine the initial share value.This method provides investment opportunity to a large class of citizens while also generating more revenue for the government.The theoretical framework and the result of former researches show that, popularly, share issue privatization leads to boost the degree of liquidity as the main market development proxy (Jafari Seresht, 2010).In general, public sale of enterprises appears to have a good track record in Eastern Europe, and particularly in countries where private sector is relatively strong.This method has the potential to be successful in Iran as well because of Iran's long experience with free enterprise and the resolve of the government to expand private ownership through privatization.In addition, Iran has in place a system of property rights and a legal framework for corporate conduct.Therefore, public sale of companies through stock market (offering of shares) or auction appears to be the most appropriate method of privatization in Iran (Dezhbakhsh, 2004).In a research undertaken by Dalsenius (2007), " Effects of Stock Market Liquidity on Growth: Empirics and Theory", the market liquidity is examined and confirmed as a significant capital market development proxy in a sample comprises a group of developed and developing countries.Investors prefer markets with high degree of liquidity.Therefore, liquidity plays a vital role in market growth and development (IOSCO, 2007).Naceur et al. (2007) studied saving rate, participation of financial intermediaries and market liquidity of 12 countries in Middle East and north of Africa.They concluded that these factors play important roles in market development and market development, itself, has a crucial effect on economic growth (Naceur et al., 2007).The average initial public offering outside the United States of America reported in research papers written by Laurent et al. (1994), although differ substantially in different markets and times, but is less than $ 15 million.In addition to being very large according to the standards of the shares offered by the private sector, share issue privatizations (SIPs) are the largest type of privatization through the securities market.Megginson (2001)  A similar increase in the transaction volume suggests that the stock market is gaining the much-needed acceptability by a public that has too few choices for longterm investment.

Privatization Process in Globe
The theoretical sequence of privatization is not mentioned in previous researches.However, according to government of Pakistan, the followings are introduced as general privatization process in globe.
 Identification and an entity for privatization  Cabinet committee of privatization (CCOP)/ cabinet approval In some countries concentrated market making is in use and in the other nonconcentrated.Each of market making methods can be quote driven or order driven.

Methodology of research
To reflect the impact of privatization IPOs on Tehran stock exchange (TSE), initial public offering price index (IPIX) is computed.This index is calculated on the basis of Laspeyres index principles and presents the changes in privatization IPOs during research period.Then, to estimate the relation of share issue privatizations on Tehran stock exchange, some of market development proxies (transaction volume, turn over velocity ratio indicating market liquidity, Tehran stock market price index (TEPIX) and closing price) are used.We tested our research hypotheses using co integration and error correction models.To increase accuracy of study, both panel data and time series of data are entered into econometric models.
Afterwards to design a compatible model of share issue privatization for Tehran stock market development a two round Delphi survey following Schemitt approach in 4 phases was conducted.A sample of 38 financial and economic specialists was selected from experts in securities and exchange organization of Iran (SEO), Tehran stock exchange (TSE), Iranian privatization organization (IPO), Investment banks and finance professors.They all hold master's and doctorate degrees in their disciplines.Prospective participates understood that they would complete two rounds of surveys in one month interval and the study was conducted during 2008-2011.In the beginning, participants received through mail the first questionnaire comprising questions about the relation of share issue privatization and Tehran stock market development and actions during share issue privatization contributing Tehran stock market development.After one month, the second questionnaire was mailed to them, comprising questions about the sequence and degree of importance of share issue privatization steps for Tehran stock market development.
Method of preparation of data and variables, problem discussion, econometric models, research hypotheses and the results of statistical tests are precisely presented in tables given below.

Table 2
Research variables along with their explanations

Privatization Index and TSE Market Development Proxies
In this section of research, to consider the impact of privatization index (IPIX) on key market variables; closing price, transaction volume and velocity of transactions, during March 2008 till June2011, panel data of 202 companies are entered into model.Table 4 demonstrates the description of the variable used in this paper.

Testing for Unit Roots in Panel Data
According to results of unit root test, all of the variables in their level have unit roots.However, they become stationary after differentiation.To consider the interrelation among non-stationary variables, co integration model shall be used.To this end, the below hypotheses are tested.

Research Hypotheses
First Hypothesis: Privatization Index (IPIX) Growth Positively Affects Closing Price Estimation of a vector auto regression model and the number of optimal lags are the steps shall be taken before estimating a co integrated model.The vector auto regression model for the first hypothesis is as below: Closing Price Last Price Estimation of the optimal number of lags in the above auto regression model makes it possible to compute the co integration model by the number of lags.Presence of long-run relationship between two variables is already approved.So, co integration model of closing price and IPIX can be estimated.The results of estimation with evaluation of adjustment factor are as below: , 2 , i , t -i 1 1 Last Price (3)  As it can be seen from calculated quantities related to long-term relation of two variables, IPIX has significant positive effect on closing price of TSE listed companies during research period.

Second Hypothesis: Privatization Index (IPIX) Growth Positively Affects Transaction Volume
Estimation of a vector auto regression model and the number of optimal lags are the steps shall be taken before estimating a co integrated model.The vector auto regression model for the second hypothesis is as below: , 2 , i , t -i 1 1 Transaction volume Transaction volume Transaction volume The quantity of coefficient of deviation from equilibrium path is equal to -0. 32.This is statistically significant.It means; approximately 0.32% is deducted from deviation in equilibrium path of two variables in each period.Level of significance of this coefficient tells us these two variables reach to an equilibrium path in long-run.The equation of long-run equilibrium relation of two variables (IPIX and Transaction volume) is shown hereunder: As it can be seen from calculated quantities related to long-term relation of two variables, IPIX has significant positive effect on transaction volume of TSE listed companies during research period.
Third Hypothesis: Privatization Index (IPIX) Growth Positively Affects TSE Liquidity Estimation of a vector auto regression model and the number of optimal lags are the steps shall be taken before estimating a co integrated model.The vector auto regression model for the third hypothesis is as below: Velocity Ratio Velocity Ratio Estimation of above error correction model is summarized in Table 9 as follows, The quantity of coefficient of deviation from equilibrium path is equal to -0.7936.This is statistically significant.It means; approximately 0.79% is deducted from deviation in equilibrium path of two variables in each period.Level of significance of this coefficient tells us these two variables reach to an equilibrium path in long-run.The equation of long-run equilibrium relation of two variables (IPIX and Turn over velocity ratio) is shown hereunder: As it can be seen from calculated quantities related to long-term relation of two variables, IPIX has significant positive effect on turn over velocity ratio of TSE listed companies during research period.
In accordance with the findings of regression analysis, all three research hypotheses are accepted.In other word, closing price, transaction volume and turn over velocity ratio of shares of TSE listed companies increase as privatization IPOs lifts during research period.To design a compatible method of share issue privatization for Tehran stock market (TSE) development Delphi method experts from the required disciplines are first identified and asked to participate in the inquiry.The panel include Iranian privatization organization (IPO) specialists (13.5%), stock market specialists in securities and exchange organization of Iran 21.6%, Tehran stock exchange 21.6%, investment banks, brokerage companies & financial consulting firms and investment and finance professors(43.2%)who are experts in the privatization and stock market functions.The number of Delphi panel is 38.

Delphi Technique
The implementation of Delphi questionnaire follows the Schmitt approach.First Phase Brain Storming to determine a list of share issue privatization processes and activities

Conclusion
We begin by documenting the big impact of privatization IPOs on Tehran stock exchange (TSE).And for this purpose the initial public offering price index (IPIX) is computed.This index is calculated on the basis of Laspeyres index principles and presents the changes in privatization IPOs during research period.Then to estimate the relation of share issue privatizations on Tehran stock exchange, some of market development proxies (transaction volume, turn over velocity ratio indicating market liquidity, Tehran stock market price index (TEPIX) and closing price) are used.We tested our research hypotheses using co integration and error correction models.The results show that implementing a standard share issue privatization model focusing more carefully on corporate restructuring, valuation, market making and road show steps, leads to Tehran stock exchange development.This seems sensible, because a comprehensive corporate restructuring makes the state owned enterprise subjecting to privatization, more efficient and therefore more profitable.Market making activities decline liquidity risk of privatized companies and simultaneously acts as a motivator to target investors.There is a tight correlation between the outputs of due diligence programs and valuation of state owned enterprise.The value determined for enterprise reflects its past performance, future plans and present status and therefore transmits loads of information to potential investors.Road show sessions, as a means to estimate market capacity for new offerings and to stimulate potential investors, plays a critical role in success of a share issue privatization.As it is shown in the table, its importance in success of share issue privatization and stock market development is estimated up to 63% by Delphi panel.However there are some limitations like lengthy process of share issue privatizations in Iran, sanction atmosphere preventing foreign investors to participate in share issue privatizations in Iran and lack of formal due diligence organizations in Iran.The other problem is that although the best method of market making is concentrated quote driven (or price discovery), the dominant market making mechanism in Tehran stock exchange is non-concentrated order driven one.This is due to transaction system of Tehran stock exchange which is Euronext and its software which is PAM.
Proposed research areas are synchronization of regulations of stock exchange and privatization and review of its role in stock exchange development, studying behavioral pattern of investors in share issue privatizations and share offerings of family firms and finally capacity building in capital market to increase share issue privatization.

Table 1
Privatization method in Iran in terms of divestiture method Source: Iranian Privatization organization(IPO)The purpose of this research is to design a compatible model for share issue privatization (SIP) of state owned enterprises (SOEs) in a way which leads to Tehran stock exchange (TSE) development.To achieve this objective, initial public offering price index (IPIX) is designed as a barometer to reflect price fluctuations of shares of 19 privatized companies in TSE.To reveal the positive impact of SIPs on TSE, the relation of IPIX and TSE development proxies is statistically considered by the use of E-Views software.To design the optimal model of share issue privatization through TSE, Delphi questionnaires in a two-stage process are distributed among privatization specialists in Iranian privatization organization (IPO), stock market specialists in securities and exchange organization of Iran (SEO), Tehran Stock Exchange (TSE) and professors of investment and finance.The outputs of survey are analyzed by the use of SSPS software.

Table 3
Different approaches along with their methods of evaluation

Table 4
Variable description using panel data(Row Data) Table 5 as follows,The quantity of coefficient of deviation from equilibrium path is equal to -0.001.This is statistically significant.It means; approximately 0.1% is deducted from deviation in equilibrium path of two variables in each period.Level of Significance of this coefficient tells us those two variables reach to an equilibrium path in long-run.The equation of long-run equilibrium relation of two variables (IPIX and Closing Price) is shown hereunder:

Table 7
Estimation of Error Correction Model (ECM)

Table 9
Estimation of Error Correction Model (ECM)


Second Phase: Considering and recognizing different activities, pooling different ideas and shortlist the most contributive ones  Third Phase: Ranking the most contributive activities  Fourth Phase: Repetition to achieve unity in experts' opinions about recognized activities in second phase and the final ranking According to majority of Delphi panel experts' responses corporate restructuring, valuation, domestic road show and market making are the most important steps during share issue privatization process.It means for success of share issue privatization causing Tehran stock market development these steps must be considered, designed and implemented more cautiously.Popularly, change in IPO price discovery from current method (English auction) to other common methods (book building, fixed price with/without underwriting) is known ineffective to design a share issue privatization model with development impact on Tehran stock exchange.The result in second round of Delphi is almost the same as first round.Share issue privatization (SIP) model for Tehran Stock Exchange developed according to the results of round #2 is presented in Appendix.

Table 11 SIP
Method for Tehran Stock Market Development in Rounds# 1 and 2 Outputs of Delphi questionnaire Analysis by Use of SPSS Software To increase accuracy of study, both panel data and time series of data are entered into econometric models.Afterwards to design a compatible model of share issue privatization for Tehran stock market development a two round Delphi survey was conducted.A sample of 38 financial and economic specialists are selected among experts in securities and exchange organization of Iran (SEO), Tehran stock exchange (TSE), Iranian privatization organization (IPO), Investment banks and finance professors.They all hold master's and doctorate degrees in their disciplines.Prospective participates understood that they would complete two rounds of surveys at one month interval.The study was conducted during 2008-2011.In the beginning, participants received through mail the first questionnaire comprising 10 questions about the relation of share issue privatization and Tehran stock market development and 15 questions asking about actions during share issue privatization contributing Tehran stock market development.After one month the second questionnaire was mailed to them, comprising 7 questions about the sequence and degree of importance of share issue privatization steps for Tehran stock market development.The results of statistical study shows that initial public offering price index and Tehran stock exchange development proxies have a correlated positive relation during 2008-2011.To test research hypotheses, panel row data are entered into co integration and error correction models.

Table 12
Distinguished Share Issue Privatization Steps for TSE Development by Delphi Panel#2