The Intra-Industry Effects of Privatization of the Bank Mellat of Iran
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World Applied Sciences Journal 21 (7): 1042-1049, 2013
ISSN 1818-4952
© IDOSI Publications, 2013
DOI: 10.5829/idosi.wasj.2013.21.7.2591
The Intra-Industry Effects of Privatization of the Bank Mellat of Iran
Sayyed Morteza hozhabrossadati
Department of Management, Neyshabur Branch,
Islamic Azad University, Neyshabur, Iran
Abstract: The government of Iran began to privatize state-owned banks and financial institutions after new
interpretation of the Article 44 of the Iranian constitution. The Privatization of the bank Mellat of Iran as first
public bank which is divested to private sector, happened in 4 phases to be fully privatized. This paper aims
to provide a comprehensive analysis of the effects of the privatization of the BMI on the daily return of
non-privatized bank and insurance companies in Tehran Stock Market. Our findings show that rival banks
reacted differently to the privatization announcements. Their general reaction is significantly negative in first
and third announcements while it is significantly positive in the final (full) privatization announcement.
Moreover, insurance companies had a negative reaction to the privatization of the BMI. The results show that
investors have a positive attitude towards privatization of financial institutions in Iran.
JEL Classification: G14 G21
Key words: Privatization Rival Financial Institutions Daily Return Tehran Stock Market
INTRODUCTION 23 developed countries) to examine the effects of
privatization. Following privatization, firms significantly
Privatization, defined as the transfer of ownership increase profitability, output per employee and real sales.
rights of State-owned enterprise (SOE) to the private The new privatized firms also achieve these performance
sector, is a major trend all over the world. Privatizing improvemetns without reducing average total
state-owned enterprises (SOEs) is considered the main employment. They also identify a significant positive
vehicle to reinforce and improve private sector relation between government ownership and capital
performance. In fact, during the past three decades, spending and a significant negative relation between
privatization has become an important global foreign ownership and capital spending. Compare Their
economic phenomenon. This phenomenon is well findings to those of the Boubakri et al. [6] study of post-
documented for several developed and developing privatization performance improvements in developing
countries around the world. The empirical literature has countries, It appears that several factors affecting post-
provided systematic evidence that privately-owned privatization performance differ between developed and
companies outperform SOEs and that privatization developing economies. Most evident is that institutional
enhances the financial and operating performance of factors (such as the degree of trade or financial
firms [1-3]. liberalization) are more often significant in the developing
Ben Naceur, Ghazouani and Omran [4] analyze 95 countries.
newly privatized firms (NPFs) in four Middle Eastern and In addition, Sun and Tong [7] evaluate the
North African countries (Egypt, Morocco, Tunisia and performance changes of 634 state-owned enterprises
Turkey). They find that these firms experienced significant (SOEs) listed on China’s two exchanges upon share
increases in profitability and operating efficiency and issuing privatization (SIP) in the period 1994-1998. They
significant declines in employment and leverage. find that SIP is effective in improving SOEs’ earnings
D_Souza, Megginson and Nash [5] find evidence that, ability, real sales and workers’ productivity but is not
after privatization, firms become more profitable and successful in improving profit returns and leverage after
efficient. Specifically, They use a sample of 130 firms (in privatization.
Corresponding Author: Sayyed Morteza hozhabrossadati, Department of Management,
Neyshabur Branch, Islamic Azad University, Neyshabur, Iran.
1042World Appl. Sci. J., 21 (7): 1042-1049, 2013
Due to the positive externalities generated by listing This study differs from previous studies on
decisions, privatization initial public offerings (IPOs) may privatization in a number of ways. First, unlike
jumpstart an economy’s stock market by improving privatization of non-financial firms where a reasonably
investors’ diversification opportunities [8]. Moreover, large number of research exists, very little research exists
SIPs involving the floating of shares in both domestic and on bank privatization. Second, a d more importantly, this
international exchanges (SIPs with cross-listings) reduce is the only study that examines rival firms reaction to
informational barriers to foreign investment and enlarge privatization announcements in Iran despite the fact it is
firms’ shareholder base [9, 10] thereby boosting liquidity the second greatest economy in middle east with more
in the domestic market. Also Brotolotti et al. [11] provide than 330 billion $ GDP. Third, the BMI is one of the few
evidence of a positive spillover of SIP on the liquidity of privatized banks where state ownership is eliminated after
private companies. Four subsequent offerings following the initial partial
A partially privatized firm may continue to pursue privatization.
non-commercial goals or the government may interfere The rest of the paper is organized as follows. In
with the operations and management of the company. Section 2,we present Political economy of bank
Hence, partial privatization of an inefficient SOE may not privatization. Section 3 introduces Iranian banking
produce the catalyst needed to improve its efficiency. system. Section 4 describes the data. The research design
Consequently, the rival firms may react differently to is section 4. Section 5 shows panel unit root test. Section
partial and full privatization announcements, with the 6 presents empirical results and section 7 provides a
latter announcement expected to elicit stronger market summary and conclusion.
reaction from the rivals since it is likely to be more
informative about the competitiveness and efficiency of Political Economy of Bank Privatization: The role of state
the privatized firm. banks in economic development has been the subject of
An information transfer effect is the change in the a number of studies. Megginson [15] presents informative
value of a firm that can be attributed to firm-specific literature of bank privatization. Generally, there are two
announcements made by other firms. We argue that broad views regarding government ownership of
privatization can have positive information effects or banks, namely, the development and political views.
competitive effects on rival firms. Under the competitive The development view asserts that in countries where the
effect hypothesis, rival firms would react negatively to financial system is not well developed for private banks to
privatization announcements if investors believe that play the crucial developmental role of channeling capital
there is now a more efficient, aggressive and rejuvenated into productive sectors, governments step in, through
competitor in the industry whose operations can lead to their ownership of banks, to perform the role of
falls in product prices and, hence, erode the profitability development banks by collecting savings and directing
of the rival firms. On the other hand, under the information them towards strategic, long term projects [16]. The
effect hypothesis, privatization announcements could political view sees government ownership of banks as a
signal positive information about the industry rivals if for tool to achieve political objectives through the provision
example privatization is accompanied or preceded by of employment and subsidies to supporters in return for
deregulation [12]. In this paper we examine rival banks political contributions (Shleifer and Vishny, 1994). This
reaction to privatization announcements. view suggests that government ownership of banks and
Prior studies have found that privatization of state- the resulting politicization of resource allocation would
owned enterprises (SOEs) improves the firm performance. slow down financial development. La Porta et al. [16]
For example, Megginson et al. [13] and Boubakri and provide empirical evidence to support the view that
Cosset [14] document strong performance improvements government ownership of banks makes the financial
for their sample of privatized firms in developed and system less efficient.
developing countries respectively. Unlike privatization of Until the past few decades, middle- and low-income
non-financial firms where a reasonably large number of countries had near-monopoly banking system where state
research work exists, empirical work on bank privatization banks, acting as development banks, provided project
in middle-east is only beginning to emerge. Also, finance to SOEs that were once the commanding heights
unanswered in previous research is whether there is a of the economy. As it turned out, the projects that were
significant information transfer effect associated with funded by government finances were inefficient, perhaps
privatization. because of the conflicting economic, social and political
1043World Appl. Sci. J., 21 (7): 1042-1049, 2013
goals. Consequently, a large number of state enterprises privatization of state banks and not even some prodding
have been privatized. With the role of SOEs in most from the SAP sponsors have led to large scale full
countries significantly curtailed and the enterprises privatization of banks in middle- and low-income
privatized, so too have the banks that provided the countries.
finances for these SOEs. The reforms in middle and Since the relationship with the government is not
low-income countries, which are sometimes recommended completely severed, partially privatized banks may
and financially supported by the IMF and the World Bank continue to subsidize former debtors by granting them
as part of Structural Adjustment Programs (SAP), have concessionary loans. Perotti and Guney [21] argue that
made ownership of banks by governments less attractive. banks in certain emerging economies have strong, but
Bank privatization in middle- and low-income countries is perverse, incentive to continue to fund former SOEs,
thus considered as a major step in the painful process of although these enterprises are more risky than private
disengaging the state from complete control of the firms. By doing so, they gain the potential of repayment
economy. of previous debt granted to the SOEs when the bank was
Given the significant role of state-owned banks in owned by the government. This suggests that debt
resource allocation/misallocation however, their overhang could affect the performance of the privatized
privatization becomes a challenging task for governments, banks; hence examining the performance of these banks
especially those in developing countries where relative to that of rival banks with a view to ascertaining
privatization occurs as part of the transition to a more whether or not performance improves after privatization is
market-based economic system. From the perspective of interesting in its own right.
the political view, bank privatization results in the
beneficiaries of government misallocation of resources Iranian Banking System: The Iranian state plays a key
losing their spoils, including subsidized loan, employment role in the economy with large public and quasi-public
and other benefits [18]. enterprises, which have a large presence in the
As a result, bank privatization generates serious manufacturing and commercial sectors. Over 60 percent of
opposition from interest groups and the community at the manufacturing sector’s output is produced by the
large. In addition, economic restructuring in these state-owned enterprises. In June 1979, Iranian banks were
economies generates a high degree of political instability nationalized and banking regulations changed with the
because of the uncertainties associated with the transition approval of the Islamic banking law (interest free) and the
from state-apparatus to market-based economies, thus role of banks in accelerating trade deals, rendering
making bank privatization even more difficult. As services to clients, collecting deposits, offering credits to
Verbrugge et al. [19] argue opposition from entrenched applicants on the basis of the CBI's policies and so on
parties makes bank privatization as important a tool of was strengthened. In short nowadays there are
political economy as it is a mechanism for banking reform. currently around seventeen commercial banks in Iran, of
Although the role of state enterprises in economic which eleven are state-owned and six are privately owned.
development in middle- and low-income countries has All the banks must follow Islamic banking principles
decreased and the benefits associated with owning a whereby usury is forbidden and, rather than average
poorly performing bank have become less attractive than interest rates (AIRs). Profit rates are set on deposits and
before, government ownership of banks in developing expected rates of profit on facilities on loans [22]. After
countries is widespread. This is because SOEs continue several years, the first private bank was established in
to play a significant role in the development of these 2002. Now, the financial sector is dominated by both
countries and credits or direct grants from the government private and state-owned banks. the Government started
are considered important lubricants for economic privatizing state-owned enterprises to increase efficiency
development. Under these circumstances, governments of them [23]. But Progress in privatization was moving
feel reluctant to fully privatize state banks. Berglof and very slowly It was not until July 2006 that the Government
Roland [20] argue that the unwillingness of governments announced a major privatization program whereby large,
to allow troubled SOEs to go bankrupt and/or workers to strategic industries and financial institutions mandated to
be laid off as a result of the restructuring suggests how be state-owned by Article 44 of the Constitution could be
painful true banking reforms could be. Hence, political privatized. These include, among others, the downstream
pressure or economic reasons belie the partial oil sector, the utilities sector, a large proportion of the
1044World Appl. Sci. J., 21 (7): 1042-1049, 2013
financial sector and the large industrial and commercial privatization announcements. 3 insurance companies
sectors. The stock exchange has been the main way of were added to The Tehran Stock Exchange list before
privatization and more than 75% of sold shares have been last tranche. As result, 4 rival banks as well as 3
sold through this organization. The implementation of the insurance institutions were included in the analysis
program is continuing as planned. In the latest of the final privatization announcement. The adjusted
privatization developments, the government is reducing daily stock prices and the market index for the Tehran
its share in banking industry. The Bank Mellat of Iran, one Stock Exchange (TEDPIX) were collected from
of the greatest commercial banks, was chosen to be Datastream.
divested to private sector. The Bank Mellat divesture
through Tehran Stock Market happened in four phases. Research Design: Conventional event studies usually
This study aims to analyze the effects of the privatization examine the stock market response to an event by
of the Bank Mellat on daily return of rival financial focusing on the significance of the residuals (abnormal
institutions in Tehran Stock Market. returns) in the event period using the event study
method. The problem of violation of the assumption of
Source of Data: The data period of this study is from 25th independent and identically distributed residuals is
November 2008 (2 months before the first event in the exacerbated when the securities are clustered along a
study) to 24th January 2010 (2 months after the IPO of the further dimension such as industry [12]. The method
BMI). assumes that the residuals are independent and
Rival firms included in the study are banking and identically distributed, but this assumption is likely to be
insurance firms that were listed on the Tehran Stock violated when firms have contemporaneous event days in
Exchange at the time of the privatization announcements. calendar times or when a regulatory event like
daily stock prices from 2008 to 2010 be available. The privatization affects a number of firms
sample consisted of 4 banks and 3 insurance companies contemporaneously. To overcome these problems, we
(Table 1). employ Zellner’s [24] seemingly unrelated regression
The announcement dates (reported in Table 2) for the (SUR) method to analyze the rival firm's reaction to the
privatization were identified from the databases of Iranian privatization announcements. The major advantage of the
privatization organization and Tehran Stock Exchange. we SUR methodology is that contemporaneous dependence
also checked the news agencies archives to ensure that of the disturbance terms is explicitly incorporated into the
none of the firms made significant announcements during hypothesis tests [25]. Additionally, the approach allows
the event periods. consideration of return effects due to an event. We use
Only rival firms that had complete stock price data the following SUR model to estimate the rival’s reaction to
during the sale of each tranche of share were included the BMI’s privatization announcements:
in the analysis of the privatization announcements.
Four rival banks were included in the analysis of the all Rit = i + i1 Rmt + i2 Rmt-1 + i Dt + eit (1)
Table 1: Events related to the privatization of the Bank Mellat of Iran
Date Event description
2009-February 18-19 The Bank Mellat of Iran opened the initial sales to investors
2009-June 2-3 Offering 10% of shares
2009-September 29 Offering 4% of shares
2010-January 20-26 Offering remained shares
Table 2: List of rival financial institutions
Code Name Category
ENB Eghtesade Novin Bank Bank
PBI Parsian Bank Bank
KARF Karafarin Bank Bank
SBI Sina bank Bank
AIC Alborz Insurance Company Insurance Company
AI Asia Insurance Insurance Company
DIC Day Insurance Company Insurance Company
1045World Appl. Sci. J., 21 (7): 1042-1049, 2013
The SUR model consists of i equations estimated Empirical Results of the Reactions of the Rival Financial
from days -60 and +60 surrounding the announcement Institutions to the Announcement of Privatization of the
date. Rit is the return of firm i on day t, Rmt is the return Bank Mellat of Iran: To examine the announcement
on the market index on day t, Dt is a dummy variable that effects associated with the sale of each tranche of shares,
equals one during the event period and zero otherwise. Eq. (1) is run separately for all the banks and the
The dummy variable, Dt, captures abnormal returns of rival insurance companies. The results are reported in Table 4
firms. Eq. (1) includes control and event variables and and 5. We consider both specific coefficient for each
parameters that are used to capture the rival firm's reaction institution and common coefficients for general reaction
to the privatization announcement. The control portion of each panel. The empirical results indicate that the
consists of Rm and is represented by i + i1 Rmt + i2 Rmt-1 banks in Tehran stock Market are not significantly
+ i3 Rmt-1. The variable R mt is used to control for general impacted by the privatization of the BMI in all events.
stock market movements and we include its lag and lead In first, third and fourth events, they earn abnormal
variables as independent variables to correct for non- returns of -0.9%, -1.2% and 0.7%, respectively around -1
synchronous trading. The market returns are obtained to +2 days surrounding events whereas, in second event
from the TEDPIX. The daily market return is defined as the reaction is not statistically significant. However, in
lnTEDPIXt-lnTEDPIXt-1 [26]. fourth events, insurance companies show significant
The remainder of Eq. (1) is the event portion and negative reaction to the privatization generally. Based on
consists of variables and parameters that measure the high nonperforming loan level and a number of other
changes in risk and return. The event parameter i problems faced by the BMI, maybe the other banks
captures the rival firm i’s reaction (abnormal returns) to expected that in the short-term, its privatization would not
change the industry structure, especially considering that
the privatization announcements. The coefficient is
it is only partially privatized at first.
expected to be less than zero if the privatization has
The results of estimating specific coefficients for each
negative effects on the rival firm’s future profitability. A
bank show that in the first event only ENB has negative
four-day event window day (-1,+2) is used for the first and
abnormal return following the first IPO’s tranche. it has a
second tranches while an 8-day window is used for final
2.2% daily loss surrounding first event which is
privatization announcement because this tranche lasted
significant at 1% level. In the second event, which is the
five days. We hypothesize that rival banks would react
offering of two blocks of the BMI’s shares, three banks
negatively to the privatization announcement and that
have no significant reactions and only SBI has a 1.5%
this reaction would be greater and more significant when
loss over these days which is statistically significant at
the BMI is fully privatized than when it is partially
the 5% level. Also Table 4 shows PBI reacted significantly
privatized.
and negatively to the fourth BMI’s share block in the
third event. The abnormal return of the PBI in third event
Panel Unit Root Test: Testing for unit roots in time series is -1.6%, which is significant at the 10% level. Moreover,
studies is now common practice among applied KARF has a 2% daily loss surrounding event days. In the
researchers and has become an integral part of fourth event, only PBI has a significant and negative
econometric courses [27]. reaction, with abnormal returns of 1.7% around event
In Table 3, the results of two panel unit root tests are days, which is significant at 1% level.
reported to establish their stationarity properties. All the The results mentioned in Table 5 show that among
tests have a null hypothesis of a unit root. The tests of three insurance institutions, only AI reacted negatively
Levin et al. [28] and Breitung [29] assume that there is a and significantly to the final IPO’s tranche. It has an
common unit root process that is identical across the abnormal return of 1.9% daily loss over the event days.
cross section units. The tests of Im et al. [30], Maddala The size and market power of the BMI is obviously
and Wu [31] and Choi [32] allow the unit root processes going to have a major impact on that part of the financial
to vary across the cross-section units. The tests by services industry.
Maddala and Wu [31] and Choi [32] are also known as the For the investors in Iran, privatization not only has
ADF-Fisher and PP-Fisher tests, respectively. For the the potential to create a more efficient competitor for non-
most part, the results indicate no unit root process. privatized banks, but more importantly is also a signal or
The null hypothesis is rejected by all five tests and All the an indication that the government of the IR Iran is going
panel series are I(0). to further deregulate the whole financial services industry.
1046World Appl. Sci. J., 21 (7): 1042-1049, 2013
Table 3: Results of Panel unit root tests
Panel unit root test Panel A (banks) Panel B (insurance institutions)
Null: Unit Root (assumes common unit root process)
Levin, Lin and Chu -49.5456 (0.0000)*** -21.8916 (0.0000)***
Breitung -22.8094 (0.0000)*** -10.9345 (0.0000)***
Im, Pesaran and Shin -35.9965 (0.0000)*** -17.3827 (0.0000)***
ADF - Fisher 758.648 (0.0000)*** 233.025 (0.0000)***
PP - Fisher 812.737 (0.0000)*** 229.860 (0.0000)***
Note: Figures in parentheses are p-values. *** denotes significance at the 0.01 level. All unit root tests are based on an equation with intercept, except for
interest rate where a time trend is included in the test equation. For unit root tests that involve regressions on lagged difference terms (Levin, Lin and Chu,
Breitung, Im, Pesaran, and Shin, Fisher-ADF), the optimal lag length is chosen according to the Schwarz information criterion. For the tests involving kernel
weighting (Levin, Lin, and Chu, and Fisher-PP), the Bartlett kernel is employed with Newey-West selected bandwidth. Probabilities for Fisher tests are
computed using an asymptotic Chi-square distribution.
Table 4: Rival Banks share price response to the BMI privatization announcements
Firm-specific (SUR) parameter estimates
----------------------------------------------------------------------------------------------------------------------------------------------------------
First Event Second Event Third Event Fourth Event
ENB -0.0227* -0.0029 -0.0068 0.0050
t-Statistics -3.040 -0.432 -0.842 0.861
PBI -0.0051 0.0002 -0.0167*** 0.0170*
t-Statistics -0.649 0.033 -1.916 2.693
KARF 0.0042 -0.0029 -0.0202*** -0.0014
t-Statistics 0.409 -0.313 -1.800 -0.178
SBI 0.0014 -0.0159** -0.0129 0.0037
t-Statistics 0.162 -1.979 -1.335 0.538
Common (SUR) parameter estimate
All banks -0.0092*** -0.0049 -0.0125* 0.0073***
t-Statistics -1.912 -1.121 -2.367 1.921
Returns, including average daily raw returns, for important events identified from Tables 1 are given in this table. The financial institutions are the banks listed
on the Tehran Stock Exchange. Seemingly unrelated regression estimates of abnormal returns to the banks are obtained based on the equation 1.
*, **, *** Significant at the 1%,5% and 10% level respectively.
Table 5: Insurance companies share price response to the BMI privatization announcements
Firm-specific (SUR) parameter estimates
First Event
AIC 0.0034
t-Statistics 0.301
AI -0.0195**
t-Statistics -2.378
DIC -0.0133
t-Statistics -1.160
Common (SUR) parameter estimate
All banks -0.0131**
t-Statistics --2.044
Returns, including average daily raw returns, for important events identified from Tables 1 are given in this table. The financial institutions are the insurance
companies listed on the Tehran Stock Exchange. Seemingly unrelated regression estimates of abnormal returns to the insurance companies are obtained based
on the equation 1.
** Significant at the 5% level.
The partial privatization of the BMI could be argued the market as a positive signal for further privatization. As
to be consistent with the study by Perotti [21] which the majority of Iranian investors are professional
found that the initial percentage change to partially investors, they could realize the determination of
privatized ownership of a firm may well be considered by government for continuing the privatization program.
1047World Appl. Sci. J., 21 (7): 1042-1049, 2013
COCLUSION Given the above results and analysis, one should
note that more comprehensive analysis of the effects of
The State Owned Enterprises (SOEs) of Iran have privatization of banks in iran will be possible as time
undergone some significant changes over the last two passes and more data becomes available.
decades. The reform of the SOEs manufacturing sector
have had mixed degrees of success. The recent studies Notes
such as nakhaee [33] acknowledge some successes in the Note 1: The economic system of the Islamic Republic of
reform policy of the SOEs in iran. While the world wide Iran shall be based on public, cooperative and private
experiences of privatization of firms are mixed, there is sectors, with proper and sound planning. The public
more empirical evidence to suggest that the full or partial sector includes all large-scale industries, mother
privatization of agriculture and manufacturing sectors industries, foreign trade, large mines, banking, insurance,
have had positive effects on the overall. power supply, dams and large irrigation channels, radio
A large number of studies such as Beck and Levine and television, post, telegraph and telephone,
[33] and La Porta et al. [34], brotolitti [11] indicate the aviation, shipping, roads, rails and the like, which are
significant role of efficient, competitive, legally binding public property and at the disposal of the Government.
and/or privately owned financial institutions as important The cooperative sector includes cooperative production
ingredients for ensuring sustained and strong economic and distribution companies and institutions established
growth and liquidity. To this end, reform including the in cities and villages on the basis of Islamic principles.
privatization of the financial institutions in irn could The private sector includes such activities related to
contribute to stronger and more sustained economic agriculture, cattle-raising, industry, trade and services that
growth and make Iran become more competitive in middle- supplement the economic activities of public and
east. cooperative sectors.
This study is an attempt to analyze and discuss the
effects of the announcement of the partial privatization of Note 2: Tehran Exchange Dividend And Price Index
the Bank Mellat of Iran, the first bank in Iran to become
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