Tuesday, December 2, 2008

A different kind of privatisation

What does it say about the stock market when publicly-listed companies choose to go private? I have written in my Knol that the stock market has the following basic functions within a modern economy:
  • Mobilizing and directing savings to their most productive uses;
  • Providing a mechanism for price discovery through the stock exchange mechanism and the evaluation of market information;
  • Facilitating the management and pricing of risk;
  • Assisting potential investors in assessing and making investment decisions by reflecting risk in the pricing of shares and other equity instruments; and
  • Facilitating capital raising by corporations.
When publicly-listed companies choose to reject their listing status at Bursa Malaysia it means that any or, all, of the above factors are not in play.
It also shows 2 things:
  • A stock market is a good time buddy. The stock market is active only during the good times when there is plenty of money.
  • A stock market is an inefficient price- and value-identifying mechanism when sentiment is weak or, there is no confidence.
Thus, when people say that the stock market is a barometer of economic confidence we have to take that statement with huge doses of salt even if it leads to high blood pressure.

For, stock markets are a poor barometer of confidence. Real confidence lies in the real economy.

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