Corporate Governance and Equity Prices Evidence from the Czech and Slovak Republics

findings The 1992 Czechoslovakia mass privatization program cxpect that two firms with different shareholding involving about 1,500 enterprises and implemented structures, but otherwise identical, would trade at through a voucher scheme with competitive bidding was different prices-with the firm with a more a bold step in changing the ownership and governance of concentrated ownership, and presumably better a large part of thc r._onomy. It represents a clear test case corporate governance, trading at a higher price. On a of one approach, and other countries may benefit from cross-sectional basis, ownership structure may thus be its lessons. significant in explaining (relative) share prices. At the time, much skepticism was voiced about mass Claessens explores this line of reasoning. Controlling privatization: it would lead to diffuse ownership, and no for a number of firm and sector-specific variables, he effective corporate governance would result. But finds that: innovative forces led to the emergence of investment * Majority ownership by a domestic or foreign funds that collected much of the individuals voucher investor has a positive influence on firm prices. points, leading to a much more concentrated ownership * Firms with many smnall owners have lower prices. structure. It has been expected that this concentrated-Ownership by many small-scale investors makes it ownership would lead to improved corporate easier for any single investor to establish effective governance, control, but such control does not necessarily translate But the jury is still out. So far, only limited and largely into higher prices. anecdotal evidence is available on the impact investment Claessens provides two possible explanations of why funds have on the way firms are being managed. Too higher prices appear to be associated only with majority little tirne has passed and too many shocks have occurred ownership by a single investor: (for example, the split of the Czech and Slovak-The corporate legal framework and the difficulty in Republics) to expect to find discernible changes in collecting proxy votes in the Czech and Slovak Republics corporate governance on measures of actual firm may prevent a small investor from making the necessary performance. changes in the way firms are managed, thus keeping An alternative approach is to investigate whether firms prices low. that ended up with more concentrated ownership-and * Commercial banks are both managers of investment possibly improved governance-sell for higher prices, funds and creditors of individual firms. Funds managers either in the last voucher round or in …