Building a Castle on Sand: Effects of Mass Privatization on Capital Market Creation in Transition Economies

Abstract:     
In this paper we study the relationship between mass privatization and capital market development in the transition economies. The link is investigated empirically using a panel of data which includes most of the transition countries. Our results confirm the hypothesis that mass privatization exerted a negative influence on capital market functioning in the short and medium term. Results further indicate that in countries with mass privatization, the capital market was established and perceived only as a byproduct of the privatization process and did not serve as a source of capital for the corporate sector. This non-transparent market of thousands of securities caused negative investor sentiment and thus did not contribute to initiating economic growth.

Number of Pages in PDF File: 56

Keywords: Privatization, mass privatization, emerging capital markets, capital market

JEL Classification: G15, G28, P34

working papers series