Ownership and Corporate Governance: Evidence from the Czech Republic
22 Pages Posted: 8 Aug 1997
Date Written: March 1997
The Czech Republic's mass-privatization scheme improved the management of privatized firms by concentrating ownership. And contrary to expectations, banks with an (indirect) equity stake in a privatized firm have a positive influence on the firm's corporate governance.
The Czech Republic's mass-privatization scheme changed the governance of many firms in a short time. Claessens, Djankov, and Pohl show that mass privatization was effective in improving firm management because of the concentrated ownership structure that resulted.
For a cross section of 706 firms for the period 1992-95, they find that the more concentrated the firm's ownership, the higher the firm's market valuation and profitability. Large ownership through bank-sponsored investment funds and strategic investors appears to be particularly important in improving corporate governance and turning firms around.
They find no evidence that market valuation or profitability were lower for firms in which investment funds sponsored by a firm's main bank represented a large ownership stake. It is often argued that the firm's main bank having (indirect) ownership control could represent a conflict of interest. The empirical analysis here shows, quite the contrary, that such indirect ownership control has a significant positive influence.
On balance, banks that had an (indirect) equity stake in a firm have a positive influence on the firm's corporate governance.
This paper - a joint product of the Office of the Regional Vice President, East Asia and Pacific, and the Finance and Private Sector Development Division Division, Europe and Central Asia, and Middle East and North Africa Technical Department - was presented at the International Symposium on Capital Markets and Enterprise Reform in Beijing, November 8-9, 1996.
JEL Classification: F29
Suggested Citation: Suggested Citation