The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies

38 Pages Posted: 6 Mar 2000

See all articles by Roman Frydman

Roman Frydman

New York University (NYU) - Department of Economics

Cheryl W. Gray

World Bank

Marek P. Hessel

Fordham University - Gabelli School of Business

Andrzej Rapaczynski

Columbia Law School

Multiple version iconThere are 2 versions of this paper

Date Written: February 1999

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.

JEL Classification: G32, P17, P27, P31

Suggested Citation

Frydman, Roman and Gray, Cheryl W. and Hessel, Marek P. and Rapaczynski, Andrzej, The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies (February 1999). Columbia Law School, Center for Law and Economic Studies, Working Paper No. 165. Available at SSRN: https://ssrn.com/abstract=209112 or http://dx.doi.org/10.2139/ssrn.209112

Roman Frydman

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

Cheryl W. Gray

World Bank ( email )

1818 H Street
Washington, DC 20433
United States
202-473-9188 (Phone)
202-522-1155 (Fax)

Marek P. Hessel

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

Andrzej Rapaczynski (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States
(212) 854-3421 (Phone)
(212) 854-7946 (Fax)

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