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Abstract:
This paper, based on a study of mid-sized firms in the Czech Republic, Hungary, and Poland, seeks to explain the reasons behind the marked impact of ownership on firm performance which has been observed in a number of studies in Eastern Europe and other parts of the world. Focusing in particular on the differential impact of ownership on revenue and cost performance, the paper argues that privatized firms controlled by outside investors are more entrepreneurial than those controlled by corporate insiders or the state. The paper provides evidence that all state and privatized firms in transition economies engage in similar types of restructuring, but that product restructuring by firms owned by outsider investors is significantly more effective (in terms of revenue generation) than that by firms with other types of ownership. The paper also examines the impact of managerial turnover on revenue performance, as well as differences among managers of firms with different types of ownership, and concludes that the more entrepreneurial behavior of outsider-owned firms is due primarily to incentive effects, rather than human capital effects, of privatization. More specifically, the authors argue that the success of outsider-owned firms is due to their greater readiness to accept risks (as evidenced by the higher variance of the revenues generated by restructuring) and a lesser need to defend, and account for, their managerial decisions.

Abstract:
Data on mid-sized firms in three transition economies provide strong evidence that private ownership- for worker ownership- improves corporate performance. And the privatized firms' superior ability to generate revenues allows those firms to sustain or expand employment.

Using a large sample of data on mid-sized firms in the Czech Republic, Hungary, and Poland, Frydman, Gray, Hessel, and Rapacynski compare the performance of privatized and state firms in the environment of the postcommunist transition.

They find strong evidence that private ownership- for worker ownership- improves corporate performance.

They find no evidence of the privatization shock that was supposed to afflict the behavior of firms undergoing rapid changes in ownership. Instead, they observe a severe shock from marketization, affecting both state and privatized firms - a shock for which private ownership provides a powerful antidote.

Among their other findings:
Private ownership is most effective in improving a firm's ability to generate revenues, an area in which entrepreneurship seems to be required. Ownership also affects a firm's ability to remove the rather obvious cost inefficiencies inherited from the past, but this effect is less pronounced, as both state and privatized firms engage in significant cost restructuring.

Most important, privatized firms generate significantly more employment gains than state firms. It is their superior ability to generate revenues, rather than competence at cost-cutting, that allows them to sustain or expand employment. This is why privatization is the dominant strategy for expanding employment in transition.

Outsider-owned firms perform better than insider-owned firms on most performance measures, but there is enough difference between employee- and manager-owned firms to suggest that putting all insiders under a common umbrella is unjustified. Although the effects of managerial ownership are ambiguous, putting employees in control appears to offer no advantages over state ownership on any measure and creates a distinct disadvantage in terms of employment performance.

Among outsider owners, privatization funds seem to do as well at revitalizing the privatized companies as do other outsider owners; in particular, the authors find no evidence that funds are less effective than strategic investors. And foreign investors provide perhaps less of an edge than might have been expected; their impact appears no stronger than that of major domestic outsiders.

This paper - product of the Development Research Group - part of a larger effort in the Bank to explore issues of corporate governance in transition economies. The study was funded by the Bank's Research Support Budget under research project Corporate Governance in Central Europe (RPO 678-42).

Abstract:
This paper, based on a large sample of mid-sized manufacturing firms in the Czech Republic, Hungary and Poland, argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. The study offers three main conclusions. First, we find that state enterprises represent a higher credit risk both because of their inferior economic performance and because of their lesser willingness or propensity to meet their payment obligations. Second, the brunt of the state firms' lower creditworthiness is borne by their state creditors, as state enterprises deflect the higher risk away from private creditors. Third, this transfer of risks from private to state creditors is possible because state creditors impose significantly "softer" financial discipline on state firms. Inasmuch as such softness may reflect unwillingness to accept a likely demise of a large number of state firms that are in principle capable of successful restructuring through ownership changes, we conclude that the imposition financial of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance.

Abstract:
The existing literature on soft budget constraints suggests that firms may be subsidized for political reasons or because of the creditors' desire to recover a part of the sunk cost invested in an earlier period. In all these models hard budget constraints are viewed as being, in principle, capable of inducing the necessary restructuring behaviour on the level of the firm. This paper argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. Using evidence from the post-communist transition economies, the paper shows that a policy of hard budget constraints cannot induce successful revenue restructuring, which requires entrepreneurial incentives inherent in certain ownership types (most notably, outside investors). The paper also shows that the policy of hard budget constraints falters when state firms, because of inferior revenue performance and less willingness to meet payment obligations, continue to pose a higher credit risk than privatized firms. The brunt of state firms' lower creditworthiness falls on state creditors. But the 'softness' of these creditors, while harmful in many ways, is not necessarily irrational, if it prevents the demise of firms that are in principle capable of successful restructuring through ownership changes.

ownership, financial discipline, performance, transition

Abstract:
This paper compares the performance of privatized and state firms in the transition economies of Central Europe, while controlling for various forms of selection bias. It argues that privatization has different effects depending on the types of owners to whom it gives control. In particular, privatization to outsider, but not insider, owners has significant performance effects. Where privatization is effective, the effect on revenue performance is very pronounced, but there is no comparable effect on cost reduction. Overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from post-privatization restructuring.

Abstract:
This paper, based on a study of mid-sized firms in the Czech Republic, Hungary, and Poland, examines the sources of performance differences between state and privatized firms, particularly those that may be due to politicization and differences in the degree of entrepreneurship. The paper presents inefficiencies in the cost behavior of state enterprises, but does not explain their inferior revenue performance, which is independent of the degree of state involvement. The paper also documents that the lower average revenue performance of state firms is accompanied by lower variance. The authors associate these differences with different attitudes toward risk and different degrees of accountability of the persons in control of state and privatized firms. The paper examines the impact of managerial turnover on revenue performance, as well as other differences between the managers of state and privatized firms, and concludes that the more entrepreneurial behavior of privatized firms is due primarily to the incentive effects, rather than the human capital effects, of privatization.

Abstract:
This paper is based on a survey of 148 Russian privatization investment funds representing, in terms of size, 69 percent of all investment funds created in connection with the voucher privatization of about 14,000 state enterprises. The investment funds surveyed hold shares in about 5,000 privatized enterprises, thus providing a window into the world of corporate governance of a substantial portion of Russian firms. The paper argues that investment funds, like most other outside investors, have relatively small impact on the governance of Russian firms due to the firms' domination by corporate insiders, particularly management. Given high returns from shareholder activism, the investment funds attempt to influence the firms in their portfolios in a variety of ways (through obtaining board seats and providing them with a range of services), but have extremely poor access to information and are largely unable to prod the firms toward more radical restructuring. In particular, the investment funds are only rarely able to effect managerial changes, although a logistic equation model used shows that firms which do participate in more that one dismissal of top managerial personnel seem to be interested in fundamental restructuring. The paper also describes the main features of the emerging Russian capital market and analyzes the determinants of the trading activity of the investment funds.