I

Between 13 September 1974 and 29 July 1976, the Portuguese Republic nationalised 253 companies, of which 60 were listed on the Lisbon Stock Exchange. This wave of nationalisations took the weight of the state in the Portuguese economy to levels formerly unseen. Shareholders of the nationalised companies were paid indemnities, which were specified between 1974 and 1979 but settled much later (up to 11 years in some cases). The Portuguese nationalisations of the 1970s are generally regarded as having had strong expropriatory characteristics, although estimates of the wealth transfer triggered by the nationalisations and subsequent compensation are lacking in the literature available. In this article, we compute a set of counterfactually estimated values of the nationalised shares had nationalisations not occurred. The results show that, contrary to common belief, the compensation paid to small shareholders was in fact fair, if not generous. In stark contrast, large shareholders, essentially a handful of families who controlled the biggest Portuguese companies in the late 1970s, were deliberately hurt by the way in which the compensation packages were put together by the post-25 April revolution governments. The structure of the article is as follows. Section II provides a description of the political economy of the Estado Novo regime that prevailed in Portugal from 1926 to 1974. Sections III and IV analyse the nationalisation process and discuss its drivers. Sections V, VI and VII describe data and the sample, compute nationalisation premia, and estimate the magnitude of wealth transfers. Section VIII concludes.

II

From 1932 to 1974, the Portuguese political regime was the Estado Novo (literally, ‘New State’), a right-wing dictatorship and the intellectual creation of António de Oliveira Salazar, prime minister until 1968. After a military coup which followed a rather chaotic period of 44 governments since the establishment of the Republic in 1910, Salazar, a public finance professor at Coimbra University and finance minister since 1928, successfully reorganised Portugal's then severely debt-ridden finances.Footnote ² After World War II, the Portuguese economy entered a path of fast convergence, which brought income per capita closer to the rest of Western Europe than ever before in the twentieth century. The period from 1950 to 1973 is in fact regarded as the ‘golden years’ of the Portuguese economy.Footnote ³ Following in the footsteps of Europe's richest nations, the engine of Portuguese growth was meant to be industry. The industrialisation effort was pursued through five-year development plans (Planos de Fomento), but entrusted to entrepreneurs, with the state investing in infrastructures and playing a facilitating role. To attract capital to industry, a profit-friendly environment was created by the state's economic policy: tariffs to isolate Portugal from international competition, and barriers to entry into domestic markets, through the condicionamento industrial (industrial conditioning) law. This legislation allowed incumbents to oppose the entry of competitors, on the grounds of avoidance of the waste of capital and of placing product quality in jeopardy. Given the lack of track record and know-how, the unexpected success factor of the Portuguese industries turned out to be their low cost factor, in terms of both raw materials (mostly coming from the African colonies) and wages.

Not only did the economy grow at a healthy pace (and above the European average for the first time since the end of World War II), it continued to do so while barriers to trade were dismantled and domestic producers were exposed to international competition. Absent from the set of founding members of the European Economic Community in 1951, Portugal became a founding member of the European Free Trade Association (EFTA) in 1960,Footnote ⁴ and joined the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (GATT) in the early 1960s. Fiscal discipline and the accumulation of large international reserves (to which emigrants' remittances made a significant contribution) guaranteed a macroeconomic environment characterised by monetary and exchange rate stability. However, the beginning of the war in AngolaFootnote ⁵ led to a sharp increase in public expenditure (with the war bill standing at around 30 per cent of the budget during the 1960s) and to a deficit in the balance of payments, harming the state's capacity to assist the development efforts through infrastructure investments. The war effort forced Portugal, absent from the international capital markets since 1902, to place debt on the American market in 1962 and issue eurobonds in 1964.

The third (and last) Plano de Fomento (1967–73) dropped the inward orientation of the previous two and emphasised comparative advantages and international competition. The ratio of the average of exports and imports to GDP, a simple measure of the degree of openness of the economy, rose from 14 per cent in 1959 to 25 per cent in 1973 (Mateus Reference Mateus1998), and the share of the overseas territories in the total of Portuguese exports and imports dropped, between 1962 and 1973, from 22.2 to 14.6 per cent and from 12.6 to 9.6 per cent respectively (Ferreira Reference Ferreira, Lains and da Silva2005).

The replacement of Oliveira Salazar (after a fatal accident suffered in 1968) by Marcello Caetano as prime minister led to a reorientation of economic policy. Caetano's secretary of state for industry, Rogério Martins (Reference Martins1970), summarised the last Estado Novo cabinet's economic policy as (i) giving a pivotal role to market forces by eliminating barriers to entry in several industries that had been raised by previous governments to restrict competition, (ii) supporting concentration of companies to gain scale, (iii) aggressively promoting exports, and (iv) actively seeking direct foreign investment. The previous focus on budgetary discipline and strong currency was softened. Caetano named his version of the Estado Novo ‘Estado Social’ (social state) and introduced wealth redistribution measures and Keynesian-style demand management policies. Inflation increased on a yearly basis in the 1970s, and reached double-digit levels in 1973.

This more pro-competitive and open approach to economic policy had a positive impact on the equity market. The Lisbon Exchange, which was mostly stagnant during the 1950s and 1960s (Figure 1), experienced a remarkably bullish period in the early 1970s (the Bank of Portugal index rose 85 per cent in 1973), peaking in November 1973 before entering into a bearish stance.

Figure 1.

A price index of the Lisbon Stock Exchange

Note: General weighted share price index of the Lisbon Exchange from 1950 to 1973, the ‘golden years’ of the Portuguese economy

Source: Banco de Portugal, www.globalfindata.com

The stock market peak of 1973 is a direct reflection of the turning point reached by the Portuguese economy with the first oil shock. Sousa (Reference Sousa and Sousa1989) lists five consequences of the oil shock: (i) a near fivefold soar in the cost of Portuguese main, and imported, energy sources; (ii) a general increase in the price of raw materials; (iii) a rise in the price of capital goods, which were almost exclusively imported; (iv) an upturn in transport prices, with negative consequences for tourism, an important source of revenue for Portugal; and (v) a contraction of industrialised economies, reducing demand for Portuguese exports and undermining the flow of emigrants' remittances. Deficits in the current account occurred in November and December 1973, which, without enough compensating flows from emigrants' remittances or from expenditure of foreign tourists in Portugal, led to the contraction of the money supply. The authorities responded with interest rate increases, and kept fiscal policy mostly unchanged, financing the ever-increasing war effort with uplifts in indirect taxation and cuts in other capital expenditures.

The turning point in the state of the economy was quickly followed by what came to be called the ‘Carnation Revolution’, due to the fact that soldiers paraded in Lisbon, Portugal's capital, with carnations in the barrels of their machine guns after the success of the uprising. On the 25 April 1974, the regime was overthrown by a military uprising led by middle-ranking officers dissatisfied with the government's handling of the colonial wars. General António de Spínola, former deputy chief of staff of the Portuguese armed forces, commander in chief of the Portuguese army in Guinea and author of Portugal e o Futuro, a ground-breaking book published in 1974 that somehow inspired the officers' uprising, was appointed president of the Republic.

Portugal moved at an astonishing pace from a very conservative society to a radical one, under the influence of the only well-organised political force of the time, the Portuguese Communist Party, and of its allies in the armed forces. On 13 September 1974, less than five months after the revolution,Footnote ⁶ the three Portuguese issuing banks – Banco de Portugal (the central bank), Banco de Angola (the bank of issue in Angola) and Banco Nacional Ultramarino (the bank of issue in the remainder of the Portuguese Empire) – were nationalised. These were the only nationalisations immediately announced by the military leaders who had overthrown Caetano's government.

Spínola, unable to resist a strong wave of radicalism, resigned almost immediately afterwards, on the last day of September. Strongly disappointed with the turn of events, he sponsored a failed coup in March 1975, after which he went into exile. Three days later, the nationalisation of all banks and insurance companies, with the exception of those owned by non-residents and savings banks (caixas económicas) and mutual insurers, was decreed.

III

Four days after the ‘Carnation Revolution’ the military junta led by General Spínola suspended all securities trading and closed the Exchange. At that time, 146 companies were listed. The Lisbon Exchange would reopen for trading only on 28 February 1977,Footnote ⁷ without most of the companies listed on it in 1974. Portuguese post-revolutionary policy makers nationalised 253 companies, among them 60 listed on the Lisbon Exchange. After the March nationalisation of banks and insurance companies, the state takeover of financial institutions owned by residents was completed in June 1976 with the nationalisation of mutual funds.

From April to November 1975 (a period that was to be termed the ‘hot summer’) the electrical companies, the transport companies, most industries (oil, chemicals, cement, tobacco, shipyards, pulp, mining, breweries and agro-industries), the national broadcasting company and all radio stations were nationalised.

The wave of nationalisations came to an end in the same abrupt way it started, with a failed counter-coup. After the general elections were held in April 1975, in which the Socialist Party emerged as the largest party, pro-communist officers launched a left-wing coup, in November, which was forestalled by moderate officers under the command of Lieutenant Colonel António Ramalho Eanes, later to be elected president of the Republic in July 1976. The nationalisation mania was brought to a halt after the nationalisation, in July 1976, of four newspapers and eight fishing companies.

The abrupt and intense Portuguese nationalisation programme is clearly rooted in the 25 April Revolution, which caught the government forces off guard. A previous military uprising, on 16 March 1974, had been quashed with ease, and the Estado Novo regime, although anachronistic, seemed under no immediate threat. In his memoirs, Caetano (Reference Caetano1975) referred to his attendance at the football match between Lisbon's two biggest clubs, Benfica and Sporting, on 31 March 1974. He wrote: ‘When the speaker announced that I was at the stands, the 80,000-strong crowd cheered enthusiastically …, and the information that reached the government had until then also guaranteed general tranquillity and support for the regime’ (p. 246). Pinheiro de Azevedo, one of the five members of the military junta that took power from Caetano, stated in his memoirs (Azevedo Reference Azevedo1979, p. 48) that he was asked to join the uprising only two days before its occurrence and that the military coup ‘had taken everyone by surprise’.

Foreign diplomats and intelligence agencies were equally surprised by the coup. The head of the CIA head in London, Cord Meyer, stated that the American intelligence was ‘out for lunch’ when the revolution occurred (Antunes Reference Antunes1992, p. 335), and historian P. A. Oliveira (Reference Oliveira2007, p. 411) reports British diplomats posted in Lisbon at the time were equally oblivious.

The Portuguese business community behaved on 25 April as on any ordinary working day. Steel tycoon António Champalimaud was informed by phone of the military uprising on the eve of the 25 April by a friend of his daughter with family ties to the cabinet, went back to sleep and turned up at the office as usual in the morning (Antunes Reference Antunes1997). The IPO of Interhotel, a subsidiary of the listed conglomerate Grão-Pará, was scheduled precisely for 25 April (Fernandes and Santos Reference Fernandes and Santos2005, p. 15).

Azevedo, a seasoned admiral and commander of the Portuguese Marines in 1974, stated that for a rebel military coup like the ‘Carnation Revolution’ to be successful, it had to abide by two key factors: surprise and immediate propaganda. The obvious success of the 25 April coup could not have taken place without the element of surprise, and, as such, we are led to conclude that the possibility of a revolution eventually leading to nationalisations was in no way factored into stock prices of the time, an important basis for the methodology used to assess the magnitude of wealth transfers.

IV

The main driver of the Portuguese nationalisation process was ideology. Post-revolutionary Portuguese policymakers' actions were driven by ideological goals such as making the income distribution more equitable, granting power to the workers to the detriment of capitalists, making company directors the custodians of public interest and fighting international capitalism.Footnote ⁸

Motivations of an economic nature were mostly absent. Nationalisations went far beyond industries in which a natural monopoly could be argued. The foremost identifiable economic motivations were the will to award planning a central role in economic policy (a goal that, according to Attali (Reference Attali and Holland1978), required state control over at least 50 per cent of investment), and the belief that both fiscal and monetary policy effectiveness would vastly increase with important state holdings in firms in general and banks in particular.Footnote ⁹

The design of the indemnities process was clearly influenced by such motivations. Although the Portuguese Constitution of 1976 adhered to the soviet-style principle that ‘the law can state that expropriations of landowners and shareholders take place without compensation’ (article 82, number 2), the Indemnities Law enacted in October 1977, six months after the reopening of trading in the Lisbon Exchange, did not dispute that indemnities were due. Nevertheless, the practical question of how much was actually due in indemnities revealed itself to be an almost never-ending story. In theory, the legislature faced two alternatives: to pay former shareholders in cash, or to deliver fixed-income securities. Beyond this formal choice, valuation issues had to be considered. Alternative valuations could be based on market values or on more conservative criteria, such as book values. The criteria selected were the following:

1. 1. The basis for valuation was to be the weighted average of audited book value as it was in the year directly before nationalisation (a weight of 85 per cent) and the average of high and low stock prices (for unlisted companies this value was to be replaced by a so-called ‘capital value’, computed as a multiple of declared dividends) for each of the years between 1964 and 1974 (a weight of 15 per cent).

2. 2. Indemnities were to be paid in cash up to a maximum amount of 50,000 Portuguese escudos (approximately €250), and all amounts above that value would entitle stockholders to receive tradable government bonds, to be called TNE, the acronym of Títulos de Nacionalização e Expropriação (nationalisation and expropriation securities).

3. 3. TNEs would pay interest, accrued since the date of nationalisation and computed at rates varying inversely with the absolute indemnity value, at a maximum of 13.5 per cent and a minimum of 2.5 per cent (applicable to indemnities over 6,050,000 Portuguese escudos, approximately €30,000).

The inverse relationship between the TNEs' interest rates and the indemnity value was justified, in the recitals of the Indemnities Law, with the intention of ‘avoiding a new, and undesired, concentration of wealth’. In addition to this bias, interest rates were set significantly below market rates, giving rise to what Lopes (Reference Lopes1996) terms ‘an important confiscatorial element’. In harsher terms, the former CUF, Portugal's largest pre-1974 conglomerate, CEO and controlling shareholder Jorge de Mello, stated that ‘you only have to compare what happened in France in 1981 to conclude that, in the light of what is standard in international law in developed societies, in reality no indemnities for nationalisations were paid in Portugal’ (Alves Reference Alves2004, p. 228). This near-confiscation was to be softened later, through the eligibility of TNEs, at face value, for the settlement of debts generated before 1977, for the settlement of debts to social security and banks and also for swaps for shares in private companies held by nationalised companies.

When compared to other cases of nationalisation, in Europe and elsewhere, the Portuguese case stands out, particularly as far as the policy of indemnities is concerned. In the very long Italian nationalisation of public utilities, that lasted from 1962 to 1966 (Zanetti and Fraquelli Reference Zanetti and Fraquelli1979), funds for the compensation of shareholders (and for future investments) were raised by issues of the newly created ENEL, guaranteed by the state and paid not to the shareholders of the nationalised companies merged into ENEL but to the nationalised companies themselves, so as to encourage them to carry out activities in other sectors. The terms adopted for compensation were favourable, and intended to encourage this transition. The same happened in the UK nationalisations after World War II, with compensation paid being criticised as over generous (Griffiths and Wall Reference Griffiths and Wall2007) and also for enabling shareholders to get their wealth out of lacklustre industries like railways and coal. A rather remote source of inspiration can be traced to the French pre- and post-World War II nationalisations (the armaments industry, gas and electricity industries, coal-mining firms, Banque de France as well as four commercial banks and 34 insurance companies), in which expropriated shareholders were paid with negotiable securities of up to 50 years, some with a fixed 3 per cent coupon (Gide Loyrette Nouel 1981). Even so, although the compensation policy of the Portuguese authorities was not one of outright expropriation, it was intended to be a mechanism for the redistribution of wealth, as plainly stated in the recitals of the Indemnities Law.

V

The value of nationalised companies as they were on the day of the revolution has a natural metric: market values. Nonetheless, this metric is useless to quantify the wealth transfer from the shareholders of nationalised companies to all Portuguese citizens due to nationalisations and indemnities. For this purpose, the relevant metric is the one proposed by Langhör and Viallet (Reference Langhör and Viallet1986): ‘the wealth transfer is the difference between the market value of the compensation for a nationalised firm's share and the firm's share price in the absence of nationalisation’ (pp. 273–4).

The fact that the shares were not tradable between 1974 and 1977 affected both shareholders of nationalised companies and of non-nationalised companies equally; the value of shares differed substantially before the closure of the Lisbon Exchange in 1974 and its reopening in 1977.

This being the case, to quantify this wealth transfer requires the definition, necessarily a theoretical one, of what the market value of nationalised companies would have been, had the companies remained public. This value is named by Langhör and Viallet (Reference Langhör and Viallet1986) as the ‘indifference price’, and owes its name to the fact that receipt of this (as calculated at the reopening of trading) would have left, ceteris paribus, an investor holding shares of nationalised companies as wealthy as he would have been had he held shares of non-nationalised companies instead. Differences between indifference prices and indemnities represent a control premium, if positive, and an expropriation if negative.

We take 24 April 1974 as the cut-off date, t = I for short. In 1975 and 1976 the nationalisation process broke down the list of listed companies as they were on 24 April 1974 into two groups: the nationalised companies and the remaining ones. With the first group we build a portfolio termed the ‘nationalised (N) portfolio’, and with the second group a ‘control (C) portfolio’. The composition of these portfolios is disclosed in Tables A1 and A2 in the Appendix.

The N portfolio is made up of 66 shares; the C portfolio 20, totalling 86 shares. On 24 April 1974, 148 shares were listed on the Lisbon Exchange; however, 62 did not relist on 28 February 1977 for reasons other than nationalisation: the so-called ultramarinas (literally, ‘from overseas’), which held assets in Portuguese colonies and whose delisting is not attributable to Portuguese nationalisations, and several other companies which virtually had not traded during the early 1970s.

To compute indifference prices we use, following Langhör and Viallet (Reference Langhör and Viallet1986), the matched portfolios introduced by Black and Scholes (Reference Black and Scholes1973). This technique has been applied to situations where the risk characteristics of a portfolio are either unobservable or require a benchmark for comparison purposes. Warner (Reference Warner1977) used matched portfolios to study railroad bankruptcies in the United States from 1926 to 1955 (to isolate, through comparison with a matched portfolio of non-bankrupted railroads, the incremental effect on the risk of a railroad of the bankruptcy petition). Watts (Reference Watts1978) used the same technique (designated ‘paired sample’) to analyse abnormal returns after earnings announcements, matching portfolios with positive and negative earnings forecast errors in order to create a trading strategy involving no outlay and with a beta of zero. The Langhör and Viallet (Reference Langhör and Viallet1986) application of this technique to the computation of wealth transfers during nationalisations infers unobservable prices (and computes unobservable returns) for nationalised, and thus delisted, shares, from observable prices (and returns) of non-nationalised portfolios with identical risk profiles; in our case, the C portfolio.

We term t = R the date of the Lisbon Exchange reopening. For periods I < t < R, we have neither observable prices nor observable returns; for periods t < I we have, potentially, both observable prices and returns for the 86 shares that are part of the N and C portfolios; for periods t > R we have, potentially, observable prices and returns only for the 20 shares that make up the C portfolio. However, imposing the restriction of price availability for every one of the 52 weeks before t = I and minimal liquidity (defined as the existence of a trading price or bid or asking price in at least 16 of the 52 weeks analysed), we have to cut 14 shares from the N portfolio, reducing its size to 52 shares. With identical restrictions, the size of the C portfolio drops from 20 to nine shares. We exclude a further set of six shares of the N portfolio, namely the issuing banks, that are exceptional cases given their large state shareholding before the nationalisations and the early date of their nationalisation, and three others (Banco do Alentejo, Banco Intercontinental Português and União Fabril do Azoto) whose accounts raised enough uncertainties to prevent the settling of indemnities at the same time as the other nationalised companies. This reduces the size of the N portfolio to 46. Finally, we drop one share – Compal – of the C portfolio, reducing its size to eight, due to the absence of trading after the Exchange reopened.

Our goal is to compare indemnities with (theoretical) market values; to accomplish this one has to compute those on the various dates t after R in which the shareholders whose shares were nationalised received the correspondent indemnities.

As such the returns of the 54 shares that comprise the N and C portfolios, on the dates where they are observable (e.g., t < I), are described with reference to the market model equation:

(1)

where R _jt designates the return of the j-th share in period t, βj is the ratio between the covariance of share j's returns and market returns and the variance of market returns, R _mt is the return on the market portfolio in period t and ɛ is a random residual, with the usual assumptions of bivariate normality, stationarity and white-noise residuals.

To estimate the coefficients we chose weekly returns. At the time, the Lisbon Exchange opened for trading three times a week, on Mondays, Wednesdays and Fridays. Taking Wednesday 24 April 1974 as the final day and working backwards calculating on a Wednesday to Wednesday basis, we compute 52 returns.

We take as the proxy for the return on the market portfolio the return on the Share Price Weighted Index for the Lisbon Exchange, computed by the Bank of Portugal and disclosed in the bank's annual reports.

Once the systematic risk coefficients are computed, the ones relating to the C portfolio are ranked in descending order, allowing the breakdown of the C portfolio into two equally weighted subportfolios of four shares each. We designate these as the High Beta (H) Portfolio and the Low Beta (L) Portfolio. Betas for these portfolios are termed, respectively, ß_H and ß_L. We use these betas to define, for each of the n shares of the N portfolio, a factor Φ _n such that

(2)

These factors, once applied to the betas of the two control subportfolios, generate a composite with the same beta as the share of the N portfolio with reference to which one they were constructed against. This allows the computation, for t > R, of n series of portfolio returns, the ‘matched returns’ since each is matched, through (2), with the (unobservable) series of returns of each share that is integrated into the N portfolio:

(3)

where R _Ht and R _Lt designate the returns, on the t-th period, of the H and L portfolios respectively.

The matched returns for t > R will be unbiased estimators of the unobservable returns provided that, either betas of the analysed shares are stationaryFootnote ¹⁰ in the periods ante and post-trading interruption, or the weaker assumption of an eventual beta non-stationarity affecting the shares that the N and C portfolios are made up of equally.

We compute indifference returns regarding the date when the provisional indemnities were set. These provisional indemnities were set over three different periods of time. First in 1974, the issuing banks (Banco de Portugal, Banco de Angola and Banco Nacional Ultramarino); second, by the end of 1978, banks and insurance companies; and finally, in 1979, the remaining companies. We make our calculations by applying the publication dates in the Portuguese official journal (Diário da República), which in all cases occurred after the date of the rulings that set the provisional indemnities. Our calculatory dates are as follows:

• • For banks (10 shares) and insurance companies (13): t = 16 December 1978;

• • For the remaining 24 shares: t = 25 May 1979 (for simplicity, we also use this date for the Aliança Eléctrica do Sul indemnity, published, for company-specific reasons, only on 29 April 1980).

Weighting each of the 46 returns defined in (3) by the weight, as they were on 24 April 1974, of each of the shares in the N portfolio (w _n), we get the portfolio-equivalent of (3), the returns of the matched portfolio

(4)

The return on the N portfolio is defined as

(5)

Finally, we define the differential return as the difference between the realised and the replicated returns:

(6)

The cumulated returns of the N portfolio and of the matched portfolio, for the period of 52 weeks in which the returns of the N portfolio are observable, are defined respectively as

(7)

(8)

and are presented in Figure 2.

Figure 2.

Cumulated returns of the N and the matched portfolios

A casual inspection suggests that the matched portfolio closely replicates the N portfolio. To test this assertion rigorously, and assuming independent differential returns, we test the statistical difference from zero using the t-statistic

(9)

where is the sample standard deviation, equal to 2.79 per cent. For a significance level of 1 per cent, only in the case of the 29th week's deviation is the hypothesis of zero residual rejected. This being the case, we deem the replication capability of the matched portfolio as satisfactory.

VI

The computed indifference prices are shown in detail in Table A3 in the Appendix, where I _j are the designated indemnities set for the j-th share, R ^E_jIT and P*_jt are the corresponding returns and indifference prices, P _jI is the share price as it was on 24 April 1974 and M _j is the nominal nationalisation premium, defined as

(10)

A positive premium indicates an indemnity above the indifference price, and a negative premium the opposite.

The average indifference return is –83.8 per cent, slightly above the one reported in Jorion and Goetzmann (Reference Jorion and Goetzmann1999) based on the Bank of Portugal's data, for the value variation of shares listed in Lisbon during the Exchange's trading halt (−77 per cent in nominal terms).

The nominal premia distribution is strongly asymmetrical, as can be seen in Figure 3. Only 10 per cent of the cases imply negative premia; 74 per cent of the shares were awarded nominal premia above 100 per cent, and 66 per cent were awarded premia above 300 per cent.

Figure 3.

Nominal premia distribution and descriptive statistics

The mean is strongly influenced by a significant number of very high values. The maximum, with a premium of 736 per cent, occurred in the case of a utility, Companhia Portuguesa de Electricidade, and the minimum, with a negative premium of –72.3 per cent, was an insurance company, Companhia Europêa de Seguros. The highest premia generally occur in the smaller capitalisations. If we weight the premia by the market cap as it was on 24 April 1974, the mean drops to 107.1 per cent.

The results lead us to conclude that the nominal premia set in 1978 and 1979 exceeded the indifference prices by a large margin. However, we must bear in mind that this is valid only for indemnities paid immediately and in cash, and this was the case only for shareholdings worth a maximum of PTE 50,000. All other indemnities were paid with TNEs, bearing coupons far below current market rates, which translated into severe discounts to par value. Furthermore, the larger the shareholding, the lower the TNE's coupons and, therefore, the higher the discount. Law 80/77 explicitly acknowledged this policy, stating (article 29) that in case of early redemption of the bonds (allowed in restricted cases, such as the settlement of tax liabilities and the redemption of housing loans), their value would be the discounted value calculated at the highest of the 13 coupon rates set. This being the case, we are not faced with one nationalisation premium, but instead with 13, one being the aforementioned nominal premium and one for each class of the TNEs issued. Table 1 and Figure 4 show the basic characteristics and discounted values,Footnote ¹¹ as they were in 1978, of the various classes of TNE. Only classes I and II were conceived in a way that produced near par market values.

Figure 4.

TNEs' discounted values

Table 1.

TNE issue characteristics

When one takes these very different payment means into consideration the computed nominal premia are significantly reduced. Figure 5 shows the nominal premia, both equally and value-weighted, previously presented, and also the effective premia corresponding to each of the TNE classes.

Figure 5.

Effective nationalisation premia

Using equal weights, the 170 per cent cash premium becomes negative for indemnities settled with TNE of classes XI and XII. Using value weights, the premium for settlements with TNE of class X is also negative.

If one takes class XII, the one applicable to large shareholders, as a standard, the mean premium is –23 per cent if equally weighted and –41 per cent if value weighted, clearly showing the confiscatory nature of indemnities awarded to larger shareholdings. On the contrary, indemnities awarded to very small shareholdings were most generous.

This asymmetrical treatment was very material, given that the weights of the several TNE classes issued clearly show that popular capitalism was not in place in Portugal in the 1970s. Free float was low, and listed companies were controlled by what the French came to call later noyauxs durs, as can be seen in the distribution of the TNEs issued in the twelve classes applicable, posted in Figure 5.

The generous indemnities awarded to small shareholdings were applicable to a small universe, whilst the confiscatory-type indemnities awarded to large shareholdings were the vast majority of compensations paid. If we weight the (13) different nationalisation premia against the weights of the various TNE classes, the weighted average premia is 24.2 per cent (using equal weights for the several nationalised stocks) and −4.7 per cent (with value weights). The more meaningful value-weighted average nationalisation premia is in marked contrast with the results of Langhör and Viallet (Reference Langhör and Viallet1986) for the French nationalisations of 1981–2, in which nationalisation premia of 20.2 per cent are reported.

Beyond the weighted results, one should acknowledge that the strongly preferential treatment given to the small shareholders in companies with highly concentrated shareholding structures is a specific characteristic of the Portuguese nationalisations. In capitalist systems, nationalisations are not meant to remove private property, and, as such, tend to give rise to indemnities that are non-discriminatory among nationalised shareholders and that are set at the market value of the nationalised assets. In the Marxist Portugal of the mid 1970s, left-wing academic thinking was in clear disagreement with this view. Moreira, a law professor at Coimbra and a Portuguese Communist Party member of parliament in the 1970s, argued that nationalisations with cash indemnities at market values merely changes the composition of capitalists' balance sheets, keeping their wealth intact, which should not be the case (Moreira Reference Moreira1981). Bronze (Reference Bronze1976), another left-wing scholar, went beyond that and challenged the very need to pay indemnities. This reasoning, however, only partially found its way into the 1976 Portuguese Constitution. In addition to the aforementioned number 2 of article 82, article 62, number 2, stated the right to ‘fair indemnities’ whenever private property was to be expropriated in the pursuit of public interest, and article 82 also specifically addressed the case of nationalisations, stating that the law would set the appropriate indemnity criteria.

The indemnities which were actually set were in fact totally different for small and large shareholders. Table 2 compares the distributions of cash premia and of TNE XII premia.

Table 2.

Cash premia and TNE (class XII) premia: descriptive statistics

Resemblances are to be found only in what refers to skewness and kurtosis. With settlements in class XII TNE, only 12 premiums are positive, and the mean is clearly negative, even if equally weighted.

Several of these asymmetrical premia were vehemently criticised, which is hardly surprising. Criticisms included claims that the Indemnities Law was in breach of the constitutional principle of ‘fair indemnities’, and these complaints were brought before the Portuguese courts by several nationalised shareholders as well as being brought before the Portuguese Constitutional Court (Tribunal Constitucional) by the Portuguese Ombudsman (Provedor de Justiça) as a general complaint. Ruling 39/88 of the Constitutional Court essentially ruled against the classification of the Indemnities Law as being in breach of the constitution, except for minor technical points, stating that ‘[the indemnities set] do not violate the principle of the right to indemnity, because the criteria chosen neither generate ludicrous nor clearly disproportionate amounts, and also because the setting of different indemnity schemes is not in breach of article 13 of the constitution …’.

Nevertheless, one of the 13 judges, Prof. Cardoso da Costa of Coimbra University, voted against this ruling, claiming that the chosen indemnity scheme had been ‘unreasonable’. These criticisms led to subsequent revisions (two, in some cases) and, where agreement was unfeasible, to submission to arbitrage courts. This process was still ongoing at the start of the Portuguese privatisations, 11 years later. Fourteen indemnities for shares which were part of the N portfolio (30 per cent of the total) had their values reviewed, and registered a mean increase of 85.3 per cent relative to their initial values. Table 3 reports the premia revision statistics.

Table 3.

Distribution of premia revision: descriptive statistics

Unlike the premium distribution, the premium revision distribution is platikurtic, although also positively skewed (yet to a lesser degree). The value-weighted mean is again below the arithmetic mean, showing that the will to privilege small shareholdings was pursued far beyond the early revolutionary period.

VII

The nominal value of indemnities awarded to the owners of shares in the N portfolio amounted to PTE 51.610 m, if we take both the premia face value and their initial values. The indifference value of the N portfolio, as it was on the date when the initial indemnities were set, amounted to PTE 25.062 m, a number significantly below the market capitalisation of this portfolio as it was on 24 April 1974 (PTE 157.600 m). To estimate the wealth transfer involved in this movement from market to state, where wealth was transferred from the shareholders of nationalised companies to all of the Portuguese citizens, we need to pay due attention to the way the indemnities were settled. If one assumes that indemnities settled in cash accounted to exactly the same amount as the indemnities settled with the TNE class targeted at the next smaller shareholdings in line, the indemnities awarded to shareholders of companies included in the N portfolio would amount to PTE 23.757 m, far below the PTE 51.610 m nominal value. These effective indemnities, when compared to the indifference prices, translate into a wealth transfer of PTE 1.305 m, which is equivalent to 0.15 per cent of the Portuguese GDP in 1978 and to 46.5 per cent of the total market capitalisation of the Lisbon Exchange as it was at year-end in 1978. Although this figure is significant, it is still much lower than it would be if naively calculated using the face value of indemnities. These transfers are broken down by nationalised companies in Table 4.

Table 4.

Wealth transfers

Note: This table reports the wealth transfers for each of the 46 shares of the nationalised portfolio for which nationalisation premia were computed. P*_jT stands for the indifference price as it was on the date of the setting of the indemnities (in Portuguese escudos), I _j the indemnity awarded with a cash settlement (in Portuguese escudos), M _j the nominal premium (in percentage), IP _j the indemnity awarded with a settlement with the average TNE weighted by the share of each class in the total TNE issued (in Portuguese escudos), and WT _j the wealth transfer (per thousand Portuguese escudos) from the shareholders of the j-th nationalised company to all of the Portuguese citizens following the nationalisation of the j-th company and the setting of the corresponding indemnity.

VIII

The few assessments of the magnitude of the wealth transfer as a result of the Portuguese nationalisations of the seventies that have been put forward in the literature available are based on a direct comparison between the value of the nationalised companies before the 1974 revolution and the indemnities awarded, and generally point to a substantial wealth transfer. This article presents, for the first time to the best of the author's knowledge, a rigorous appraisal of the magnitude of the wealth transfer resulting from the nationalisations. Instead of comparing values as they were in April 1974 with the indemnities awarded and settled over a period of several years, two distinct factors are considered: first, the loss of value of Portuguese listed companies on the back of the revolution; and second, the wealth transfer generated by the level of the indemnities awarded. We find that the first factor, in itself, accounts for a loss of 84 per cent, slightly above the figures previously reported in multi-country studies. All investors in the Lisbon Exchange suffered heavy losses after 1974, independently of whether they owned shares that were nationalised or not. The relationship between indemnities and the value of nationalised shares as they were at the date the indemnities were set is another matter altogether. If one considers nominal values, indemnities compared rather well with relevant share values, but the vastly asymmetrical manner in which payment terms were set deliberately hurt large shareholders, who were underpaid for their holdings. For the largest shareholdings, a value-weighted discount of 41 per cent is found, which is very different from the comparable premium of around 20 per cent (Langhör and Viallet Reference Langhör and Viallet1986) received by shareholders of French nationalised companies in the 1980s. Duly quantified and separated from the post-revolution general value decrease, this wealth transfer amounted to 0.15 per cent of the Portuguese GDP in 1978; an important magnitude, although not as substantial as the literature available suggests.