Private Ownership and Corporate Performance: Some Lessons from Transition Economies

56 Pages Posted: 11 Nov 2004

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

Date Written: June 1997

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).

JEL Classification: P10, P12, P17

Suggested Citation

Frydman, Roman and Gray, Cheryl W. and Hessel, Marek P. and Rapaczynski, Andrzej, Private Ownership and Corporate Performance: Some Lessons from Transition Economies (June 1997). WP 97-28; World Bank Policy Research Working Paper No. 1830. Available at SSRN: https://ssrn.com/abstract=55083

Roman Frydman (Contact Author)

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

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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