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Corporate Governance and Investment in Associated Candidate Countries: Theory, Empirical Evidence and the EU Proposals for Reform

Final Activity Report Summary - CGIACCTEUPR (Corporate governance and investment in associated candidate countries: theory, empirical evidence and the EU Proposals for Reform)

The major results of the project are as follows.

Corporate Governance and Investment
Public companies
(1) The investment performance of the average actively traded public non-financial firm in Central and Eastern Europe (CEE) is fairly similar to the corresponding estimates for countries with Germanic and Scandinavian legal systems. The investment performance of CEE companies was better than for the average firm in countries with French origin legal systems (e.g. France, Greece, Italy, Portugal, Spain), but worse than in the Anglo-Saxon countries. Thus, this study provides evidence for a functional convergence of public non-financial companies actively traded on the first segment of stock exchanges in CEE countries to public companies in the West. (2) "Soft budget constraints" in CEE have hardened by the 1999-2003 period. (3) The banks as owners play a more effective role in decreasing agency problems than non-bank financial institutions (mutual funds, etc.). (4) Companies under control by a foreign owner have relatively better investment performance, but their returns on investment are still less than their cost of capital. (5) There is a hardening of budget constraints for state and other "transitional" ownership categories.

Public and private firms
(1) Investment-cash flow sensitivities decline over the period 1993-2003 transition years, which we attribute to a decreasing of asymmetric information and managerial discretion as capital markets and corporate governance standards develop. (2) Systematic differences arise when the state preserves its control on firms during transition years. In early transition there was negative investment-cash flow sensitivity for state-owned firms. In late transition, the investment-cash flow coefficient became positive. In both cases, state-owned firms suffered from inefficient investment performance. (3) Firms invest more efficiently after both primary and secondary privatisation. (4) Firms under privatisation fund control display large and significant investment-cash flow sensitivity. Thus, this study presents additional empirical support to the theoretical view that voucher privatisation led to severe managerial discretion problems in privatisation funds as a specific transitional type of institutional investor in CEE countries.

Country studies
Examining listed companies after mass privatisation in Bulgaria and the Czech Republic over the period 1998-2003, the study reveals: (1) In the Bulgarian sample, contrary to the expectations firms controlled by foreign firms are financially constrained. (2) Firms controlled by state-owned holding company show financial re-allocation investment pattern, while firms under control of privatisation fund have inertial investment behavior. (3) In the Czech Republic, companies controlled by foreign investors are less financially constrained and have profit-maximisation behavior, firms controlled by the National Property Fund have insignificant financial re-allocation, and firms under control of other domestic firms are most financially constrained.

Corporate Governance and Financing Patterns
(1) In the CEE region since 1999, the rates of both total debt and long-term debt are still much lower than in the EU-15. The long-term debt in CEE is about twice lower than in both the EU-15 and developing countries. Only Poland has total debt ration comparable with some EU-15 countries like Austria, Greece, Spain and the Netherlands. (2) The state controlled companies in both EU-15 countries and new member states have higher leverage ratios than other types of companies. (3) Firms with dispersed ownership in CEE have the lowest leverage rate in Europe. (4) The results show a statistical and economic significance of the tangibility of assets on leverage in the NMS only for family-controlled, firms controlled by mutual funds and firms with dispersed ownership. (4) The relationship between ownership concentration and leverage is non-linear. This non-linearity is observed for companies under the control of corporations in both the EU-15 and NMS samples.