Corporate Governance and Stock Market Performance in Central and Eastern Europe: A Study of Nine Countries, 1994-2001

Abstract

This paper offers analysis of corporate governance issues behind stock market performance (stock returns and activity) in nine Central and Eastern European (CEE) countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Over the period June 1994 - June 2001, the CEE stock markets have had lower returns and higher risk than developed markets. This is explained by the negative influence of two crisis years (1995 and 1998), the "flight to quality" effect. Among other reasons, there are cases when the controlling owners have artificially kept down prices in order to abuse minority shareholders. The evidence shows that the enforcement of law matters more than the quality of law on books, which is in line with previous research (Pistor, Raiser, and Gelfer, 2000). I find that the effectiveness (enforcement) of financial regulations has the highest explanatory power of stock market returns in the sample countries. The protection of minority shareholders (Legal index) has a significant impact on market activity, measured by market turnover to market capitalization ratio.

Keywords: Corporate governance, Ownership concentration, Transition economies

JEL Classification: G15, G18