The optimal timing of initial public offerings in the course of privatization: Theory and an illustrative application Josef C. Brada a, * , Chia-Ying Ma b a Department of Economics, W.P. Carey School of Business, Arizona State University, Box 873806, Tempe, AZ 89287-3806, USA b Soochow University, Taiwan Received 2 February 2006; received in revised form 1 October 2006; accepted 1 November 2006 Abstract Privatization has been studied primarily from the standpoint of the post-privatization performance of state-owned firms (SOEs) or of various ways of valuing and privatizing them, but little attention has been paid to the timing of privatization. In this paper we use real options analysis to consider a situation where the government has the option to delay a planned privatization in the expectation that exogenous events may make the firm more valuable to outside investors in the future. In addition to considering the theoretical aspects of the problem, we apply our model to Taiwan’s privatization program to add to the understanding of the role of option value in an actual privatization program. Our results suggest that the (mis)timing of privatization represents significant losses for the government and for investors. # 2007 Elsevier B.V. All rights reserved. JEL classification : D92; G12; G32; L33 Keywords: Privatization; Initial public offerings; Real options 1. Introduction Governments intent on privatizing state-owned enterprises (SOEs) face a timing problem. Delay in privatization may result in an increase in the market value of profit-making SOEs over their value at the inception of the privatization program. The government, by waiting, may be able to privatize the firms under more favorable market conditions. For example, the market www.elsevier.com/locate/ecosys Economic Systems 31 (2007) 121–137 * Corresponding author. Tel.: +1 480 965 6525; fax: +1 480 965 0748. E-mail address: josef.brada@asu.edu (J.C. Brada). 0939-3625/$ – see front matter # 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2006.11.001