2 minutes with Marlene Plumlee: What needs to be considered in the government’s IPO program

With governmental companies bracing themselves to be publicly offered on the Egyptian Exchange (EGX), the stock market’s role in advancing Egypt’s economic reform program has become even more essential. In order to optimize that role, efficiency and stellar governance are key pillars to the equation.

Business Forward spoke to University of Utah’s professor at the David Eccles School of Business Marlene Plumlee about how to increase the stock market’s efficiency via good governance throughout the government’s initial public offering (IPO) program, and the economic effect of lowering interest rates.

Plumlee specializes in accounting disclosure and stock market efficiency, has been published in a number of high-ranking academic journals and is the author of “International Financial Reporting Standards”.

After a three-year delay, the government embarked on listing public-sector companies on the EGX to increase market cap. What other countries have made similar decisions and what can we learn from them?
The best analogy in the United States (US) would be public utilities. In the US, a lot of public utilities are regulated by the government although they are not state-owned. A government board sets the price consumers should pay for each utility, such as electricity or heat. However, these utilities are publicly traded on the stock market. Typically, these entities are lower risk entities – they are regulated and everybody needs them, so one does not have to worry about losing money. Hence, I think the Egyptian government plan is reasonable, if it can help reduce the threat.The question is how are these companies governed? When you publicly list companies, there is always more pressure from investors to make more profit. They care about the current stock value, not the value of the underlying asset. Hence, strong governance mechanisms are much needed.

How can the stock market play a role in enhancing “good” governance practices?
Economies that suffer from a lack of transparency usually have an issue with governance. Here, this includes auditing financial statements, having a CEO that does not have complete power, and checks and balances. Strong governance immensely improves liquidity because it reduces uncertainty and riskiness.

In terms of obliging firms to disclose certain information, the stock market has to come up with a set of rules and standards, and monitor their implementation within the companies. Some markets, for instance, require independent board members along with an audited set of financial statements. The auditor has to be picked by independent board members, because power needs to be separated from money.

Additionally, institutional investors need to be included into the mix, thus enhancing governance because they would never invest in companies that are not well-governed.

The Central Bank of Egypt (CBE) decided to cut interest rates in February to encourage more foreign inflows before setting them on hold in March.To what extent do you think lowering interest rates can help revive the stock market?
Interest rates can be abused, which is problematic. The reason why interest rates in the US have been so low was because of the global financial crisis in 2008/2009. It was very easy for people to borrow money because it was not costly. But if people are still worried, even lower rates are not going to tempt them into doing it. Lowering interest rates to encourage investments in riskier assets, like the stock market, seems like an abnormal thing to do because inherently, equity is riskier than debt.

If the interest rates in Egypt are higher than everywhere else in the world, you would think that foreign investors would come and invest in Egypt. But if the rates are low, then that suggests that it is very risky to invest.


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