Ownership Structure as a Determinant of Firm Value: Evidence from Newly Privatized Czech Firms

Financial The Review

EFA Eastern Finance

Association The Financial Review 41 (2000) 1-32

Ownership Structure as a Firm Value: Evidence

Determinant of from Newly

Privatized Czech Firms Anil K. Makhija*

Michael Spiro The Ohio State University

University of Pittsburgh

Abstract

Using a sample of 988 newly privatized Czech firms, with part of the ownership structure exogenously determined prior to voucher privatization, we find that share values are positively related with the ownership stakes of foreigners, insiders, and restituents. While the findings for foreigners and insiders can be attributed to their superior ability to identify more profitable firms, we interpret the findings on restituents as evidence of the beneficial effect of blockholdings. On the other hand, we find that the ownership of the fund with the largest stake is not significantly related with share value, suggesting that the value of external blocks depends on the identity of the owner. However, when the fund is also the largest blockholder in the firm, it has an adverse effect on share value. The negative effect of the dominant block owned by a fund is mitigated when a bank sponsors the fund. Although funds are legally separated from their sponsoring institutions, bank-sponsored funds may nevertheless have inherited a better access to the innards of these firms, and may be in a better position to monitor them.

Keywords: ownership structure, privatization, Czech voucher scheme

JEL classification: G32

*Corresponding author. Ohio State University, Fisher College of Business, Department of Finance, Columbus, OH 43210-1399; Phone: (614) 292-1899; E-mail: [email protected]

We appreciate the helpful comments we have received from Jacob Birnberg, Daniel Fogel, Harry Evans, Viktor Kozeny, Kenneth Lehn, Gershon Mandelker, Jana Matesova, James Patton, Jan Svejnar, Dusan Triska, Petra Wendelova, and participants of the accounting, finance, and economics workshops at the University of Pittsburgh. Funding was provided by the Institute for Industrial Competitiveness at the Katz Graduate School of Business, University of Pittsburgh. We also appreciate the computational assistance provided by Richard Seda. The usual disclaimer applies.

1

2 A. Makhija and M. Spiro/The Financial Review 35 (2000) 1-32

1. Introduction According to Demsetz (1983, p. 384), there is no cross-sectional relation be-

tween firm value and concentration of insider or external ownership, since the ownership structure that ‘ ‘emerges is an endogenous outcome of competitive selec- tion in which various cost advantages and disadvantages are balanced to arrive at an equilibrium organization of the firm.” Consequently, shareholder wealth maximization may require a diffuse external ownership structure in one case, while a large outside equity block is optimal in the case of another firm. Similarly, one cannot infer differences in share values from differences in sizes of insider stakes across firms. Supporting this view, Demsetz and Lehn (1985) find no relation between the accounting profit rate and different measures of ownership concentration for a sample of U.S. firms. The Czech voucher privatization scheme, involving the privatization of 988 firms in the first stage carried out in 1992, presents a natural experiment to re- examine the relation of firm value to ownership structure. Prior to the voucher scheme, which provides us with a relative valuation of equity by investors, ownership by insiders, foreigners, and restitution owners was established.’ These stakes- particularly those held by restitution owners-do not represent the endogenous choice of ownership structure, which would create a bias towards finding no relation according to Demsetz (1983). Following the voucher scheme, through which fund ownership emerged, the shares of newly privatized firms began to trade in the stock market. Assuming that the ownership structure did not immediately adjust, we examine the relation of market value of equity to ownership, including the stake held by funds.

Former ex-Soviet bloc countries favor privatization presumably because private monitoring is superior to government monitoring and brings about greater efficiency. However, as pointed out by Berle and Means (1932) and Jensen and Meckling (1976), a system of private corporate governance does not eliminate problems associated with monitoring. Furthermore, the nature of monitoring depends on the motivations of different private owners (Shome and Singh, 1995). This paper exam- ines and finds differences in the impact of different types of owners on the value of newly privatized Czech firms. Although ownership has been considered in prior work on the Czech case, either (1) ownership is not the focal issue (Svejnar and Singer, 1994, who study demand and prices in the voucher scheme), or (2) the concentration of ownership is the primary subject, without addressing differences across major types of owners (Claessens, 1997).

We find that there is a positive relation between stock value and the percentage of outstanding shares held by foreigners, insiders, and restituents, controlling for other firm characteristics. While the relation of foreign and insider ownership to stock value is also consistent with a signaling explanation, given the likely special

Restitution consists of the return of property that was confiscated by the communists to original owners, based on the 1990 Law, On Mitigation of Property Related Injustices.

A. Makhija and M. Spiro/The Financial Review 35 (2000) 1-32 3

access these parties have to information about the firm, we interpret the findings on restitution ownership as supportive of a positive effect of block ownership on stock value. We similarly find that when foreigners, insiders, and restituents represent the largest equity block, they have a positive effect on stock value, after controlling for the concentration of ownership. With respect to fund ownership, we find that the percentage of equity owned by the fund with the largest stake in the firm does not have a significant effect on stock value. However, when a fund is the largest blockholder, it affects stock value negatively. This is consistent with two explana- tions: (a) that fund managers themselves face serious agency problems compared with other private blockholders and do not monitor the firm properly, and (b) that funds pursue activities that benefit them at a cost to other shareholders. The negative effect of the dominant block owned by a fund is mitigated, however, when a bank sponsors the fund. Although funds are legally separated from their sponsoring institutions, bank-sponsored funds may nevertheless have inherited a better access to the innards of these firms, and may be in a better position to monitor them.

The remaining paper is organized in the following manner. Section 2 develops hypotheses regarding the effect of different types of ownership on stock value. Section 3 outlines the voucher privatization process undertaken in the Czech Repub- lic. Section 4 describes the data, and compares firms with different types of owners. Section 5 presents the methodology and results of a cross-sectional analysis of the effect of foreign, insider, and restitution ownership. Section 6 reexamines the relation of ownership with stock prices using fund ownership established during the voucher scheme. The role of blockholders is considered in Section 7. Concluding remarks are contained in Section 8.

2. Hypotheses regarding insider, foreign, restitution, and fund owners hip

The ownership structure of firms entering the Czech voucher scheme can be considered to not have achieved optimal values for three reasons: (1) The Czech government discouraged equity ownership by managers, possibly fearing that former communists may acquire control of firms. Even if the managers had no communist affiliations, most were unlikely to have the wealth necessary to acquire the stakes needed by nearly the thousand firms undergoing privatization. (2) Similarly, there was a fear that foreigners may acquire the best firms, or so-called “national silver,” at throwaway prices. Consequently, less that 10% of the firms had any insider or foreign ownership. (3) Finally, restitution ownership emerged as a result of historical accident for some firms, with no significant element of choice for the original owners. Moreover, unlike insider and foreign owners, restitution owners had no meaningful access to these firms for decades, so that the presence and size of restitution ownership is unlikely to constitute a signal of firm value.

In the remaining section, we review the literature and formulate hypotheses regarding share values and ownership structure. We take into account the identities


of the owners, since they have differing motives and roles to play in the governance of firms. These hypotheses are in contrast to the predictions in Demsetz (1983), since the hypotheses below suggest significant relations between share value and stakes by different types of owners. According to Demsetz (1983), ownership structure is endogenously determined and is optimal given the characteristics of firms. Accordingly, Demsetz (1983) predicts that there is no significant relationship between share value and ownership structure.2 It is implicit in the hypotheses below that there are significant costs associated with changing the ownership structure. Otherwise, shareholders would not forego the gains in value that can be obtained by changing the ownership structure.

The central issue emphasized in the development of the following hypotheses is the agency problem-the effect of the separation of ownership and control in the modern corporation-which gives rise to conflict of interests between shareholders and managers. According to Berle and Means (1932), the ownership of stocks in many firms is apparently so dispersed that individual shareholders do not have the incentives to undertake costly monitoring, leaving managers to pursue their own welfare at the expense of shareholders’ wealth maximization. Moreover, these agency-related concerns are more pressing for newly privatized firms in Central and Eastern Europe.

Partly as a legacy of the communist past, agency problems are particularly severe in the transition economies in Eastern and Central Europe. Formerly, under a system of state ownership, the separation of residual claims against the income stream generated by the assets and the control of assets created serious agency problems. Residual claims were vested among the citizens at large, with individual stakes too small to provide sufficient economic incentives to monitor their interest. As a result, managers “learned to consider shirking and illicit appropriation of state property their God-(Party-)given right” (Frydman and Rapaczynski, 1994). Furthermore, in the transition, “the collapse of the old system has been followed by a mix of aimlessness, political rent-seeking, asset-stripping, and corruption,” according to Sachs (1992, p. 43). While managers in the Czech Republic may not have had the free rein enjoyed by managers in other countries in the region, there are also economic considerations that heighten the importance of agency problems. Decades of both over-investment and under-investment, use of obsolete technology and neglect of assets, has resulted in a relatively small value of assets in place compared to the value of growth options for many firms. Moreover, many enterprises are too large and too diversified, as a result of past socialist planning. Since active monitoring is particularly important for firms in need of restructuring and large

* Supporting empirical evidence is reported in Demsetz and Lehn (1985). They find no relation between accounting profit rate and different measures of ownership structure for a sample of 511 firms in 1980. Similar conclusions are reached in more recent tests of the relation of ownership with performance in Denis and Denis (1994).


significant growth opportunities, agency considerations should play an important role in the ownership structure of Czech firms.

2.1. Insider ownership

Researchers have generally ignored the endogeniety issue. Morck, Shleifer, and Vishny (1988) and McConnell and Servaes (1990) predict a positive or negative relation between firm value and size of insider holdings, depending on the ownership range. Managerial stock ownership can be the basis of a convergence-of-interests and a positive effect on firm value, although large managerial ownership can provide the control necessary for the manager to carry out his preferences for non-value- maximizing behavior. Indeed, Morck, Shleifer, and Vishny (1988) document a non- monotonic relation between Tobin’s Q and fraction of shares held by insider^.^ Consequently, we test whether the relation between share value and insider ownership is non-monotonic, with perhaps a negative relation between value and insider stakes at higher levels of insider ownership. Alternatively, it could be argued that if shares of firms with insider ownership sell for higher prices, the underlying cause is not the beneficial effect of insider ownership, rather it simply signals the targeting of better firms by insiders. That is, with their access to information, insider ownership is a signal of the profitability of the firm. While we attempt to control for the profitability of firms in our empirical methodology, we may not succeed in doing so fully because of the nature of data available to us.

2.2 External blockholders: Foreign, restitution, and fund ownership

External blockholders can beneficially affect share values in a number of ways. They can reduce the agency cost of free cash flow by preventing managers from growing their firms beyond the optimal value-maximizing size. According to Jensen (1986), managers have an incentive to over-invest since larger firms provide greater prestige and perk consumption. External blockholders can also ensure that managers do not expropriate corporate resources through consumption of excessive perquisites or shirking (Jensen and Meckling, 1976). Yet another source of gain to shareholders comes from monitoring of investments by external blockholders. Managers are likely to be not well diversified because a significant part of their wealth, including their human capital, is tied to the firm. Consequently, without oversight, managers are

They find that for a sample of 371 Fortune 500 firms in 1980; Tobin’s Q is positively related to insider ownership from 0% to 5% insider ownership, negatively up to 25%, and positively beyond that. Hermalin and Weisbach (1990) also report a non-monotonic relation using a sample of 134 NYSE f m s for 1971, 1974, 1977, 1980, and 1983; however, they find a positive relation between Tobin’s Q and CEO stock ownership in the 0% to 1% range, negative from 1% to 5%, positive from 5% to 20%, and negative beyond that. Using over 1000 f m s in 1976 and 1986, McConnell and Servaes (1990) find that the relation between Tobin’s Q and insider ownership is positive till insider ownership reaches about 40% to 50%.


likely to forego value-increasing but risky projects. Moreover, Shleifer and Vishny (1986) argue that large blockholders, even when not active monitors, have a beneficial effect, since the threat of takeover works as an effective device in disciplining managers.

Blockholders, however, can also affect the other shareholders adversely. For example, as argued by Demsetz (1986), blockholders have access to information that permits opportunities for insider trading, adversely affecting smaller shareholders. Similarly, they can utilize the firm’s assets to pursue their narrow self-interests, amenity potential in Demsetz and Lehn (1985), to the detriment of other shareholders. These adverse effects are expected to be more important in the case of larger blockholders. Consequently, in general, without taking into account the identity of the owner, we expect a non-monotonic relation between share value and size of blockholdings by external blockholders.

The evidence on the effect of external block ownership and share value is also mixed. Mikkelson and Rubback (1985), Holderness and Sheehan (1985), and Barclay and Holderness (1990) report positive stock price reactions to announcements of acquisitions of large equity blocks. However, Holderness and Sheehan (1988), comparing samples with single shareholders holding 50% or more of the equity against a control sample with no shareholders owning more than 20%, find no significant difference in Tobin’s Q or accounting profit rates. Foreigners: While foreigners are expected to affect share values as external blockholders, there are reasons why they are expected to act more like insiders in the Czech case. Prior to the voucher scheme, foreign deals were virtually impossible unless they were undertaken with the cooperation of incumbent management. This only reinforces a positive relation between share value and foreign stake at lower levels of ownership, with possibly a negative relation for higher ownership levels. As with insider ownership, a positive relation between share value and foreign ownership can be interpreted as a signal of profitability, given a special access to information. It can also be explained in terms of what the foreign owner may bring to the firm in the form of superior technology and management methods. Restituents: The role of restitution owners is markedly different from that of insiders and foreigners, providing primarily the effects of external equity blockholdings rather than a signal of firm profitability. The size of their holdings and the firms in which restitution owners appear is not determined by firm characteristics, except that these enterprises are survivors. Survival in the former regime, however, did not imply profitability, since the state subsidized unprofitable enterprises and there was no meaningful notion of bankruptcy. Thus, restitution ownership can be reason- ably assumed to be exogenously determined. Consequently, an empirical finding of higher firm value in cases with restitution ownership can be assigned to the impact of restitution owners as blockholders, rather than to a signaling effect. Funds: The concentration of ownership needed to monitor newly privatized assets was not taken into account in the design of the Czech privatization scheme. It was hoped that the market would develop mechanisms to form the necessary blocks. One


such potential mechanism emerged spontaneously with the formation of investment privatization funds. Assuming that competition among funds minimizes the agency problems faced by fund managers, the net effect of fund ownership on the stock value is nevertheless an empirical issue.

Prior research offers mixed evidence on the effect of institutional ownership on share value. Two competing hypotheses suggested by Pound (1988) are: (a) the efficient monitoring hypothesis, and (b) the conflict-of-interest hypothesis. Pre- dicting a positive relation between firm value and institutional ownership, the efficient monitoring hypothesis claims that institutions have the expertise to monitor management at lower costs compared with atomistic investors. This factor is likely to be more important in the case of funds that have been sponsored by banks, because banks have a history of monitoring borrowers. Besides better monitoring, the sponsoring banks may also be a source of further funding, particularly in periods of financial distress in an attempt to protect the value of their loans to the firm. However, if funds face a conflict of interest, e.g., an opportunity to transfer wealth from creditors, they may adversely affect share value. Coffee (1995) has emphasized this possibility in the case of Czech enterprises, since banks sponsored a large number of the investment privatization funds in the Czech Republic. These banks, which have also been privatized, have inherited the loans made by the previous regime to enterprises. Consequently, the investment funds may want the firm to pursue activities that are beneficial to the bank as an existing debtholder (or seek new lucrative lending arrangements) at the expense of shareholders. Even though legal walls are supposed to separate these funds from their parent banks, in practice regulatory oversight is weak at best!

3. Czech privatization

The privatization of large firms in the Czech Republic was planned in two stages, or so-called Wave 1 and Wave 2, with 988 state enterprises slated for privatization in Wave 1. A summary of the salient events related to the firms undergoing voucher privatization in Wave 1 is described in Table 1. Two aspects are elaborated below: (1) emergence of ownership structure through the formulation of privatization proposals and the approval process for the best plan by April 1992, and (2) valuation of shares in the-voucher privatization scheme, lasting from May- December, 1992.

In a thiid hypothesis which like the conflict-of-interests hypothesis predicts that fund ownership has a negative effect on stock value, called the strategic-alignment hypothesis, Pound (1988) argues that institutional investors and firm managers cooperate between themselves to pursue mutually advantageous activities.


Table 1

Czech voucher privatization: Selected events for Wave 1 firms'

Date Event

Nov. 1989 Nov. 1990 Feb. 1991

Jan. 1992

Collapse of communist regime is accompanied by calls for privatization of businesses. Restitution Law passed, providing for return of property confiscated by communists. Law on Large Scale Privatization passed with provision for voucher scheme to distribute equity of large state-owned firms to citizens. 1) Privatization plans submitted to Ministry of Privatization. Any party, foreign or domestic, could submit plan. Roughly five plans submitted for each firm. 2) Adult citizens purchase coupon booklets with 1,000 investment points for about a week's wages for an average Czech. These points can be directly, or through funds, bid in the voucher scheme. Over 400 investment privatization funds are registered to participate in the voucher scheme. Approved privatization plans for f m s are announced, making 988 of them eligible for the voucher scheme in Wave 1. Remaining large f m s will be privatizedin Wave 2 in 1994. Voucher scheme begins. In round 1 all shares are priced at 33.33 investment points per share. Investors, individually or through funds, can bid for a number of shares. If the total demand for the shares of a company is about equal to the number of shares available, demand is satisfied and the company is declared sold. If demand is less than available shares, demand is satisfied and the remaining shares are held for the next round when they are to be offered at lower prices. If demand exceeds supply by 25%, all shares are held for the next round, setting higher prices in the next round. A complicated scheme is used to distribute shares with demand between 100% to 125% of available shares. In this manner, 5 rounds of bidding are conducted. Voucher scheme ends with results announced for the fifth round. Although only 170 firms are completely sold, 92% of the shares were sold. The unsold shares are held by the government. Shares are transfened to owners. Stock trading begins with the first auction on the RM System taking place on July 8, 1993.

Feb. 1992 Apr. 1992

May 1992

Dec. 1992

May 1993

'Source: Kotrba (1995) and Svejnar and Singer (1994).

3.1. Privatization plans and approval process

Privatization plans were invited for the privatization of all or a part of an enterprise. Besides identifying the assets and liabilities of the firm, the plans were expected to elaborate a proposed ownership structure. A mandated 3% of the equity had to be allocated to the National Property Fund to meet the costs of the privatization process, and to make restitution payments that are not covered through allocations of shares of firms. Generally, there were few restrictions on the disposition of the equity, except for some constraints in the amounts that could be allocated to certain types of owners. Discouraged by the government, employee ownership was restricted to less than 5%, including shares for managers. Along with shares already sold to other Czech nationals, this stake was recorded as direct domestic sales. In this paper, we treat the ownership created through domestic sales as the stake held by insiders. Since domestic purchases could only be arranged with the cooperation of managers, they can be considered as insider purchases. Also discouraged, and scrutinized by


government, were sales to foreigners. Like in direct domestic sales, it was feared that there was collusion with managers, and that state property was being cheaply given away. The government itself could be handed shares, some of them perma- nently for strategic reasons while others were to be held temporarily. Finally, shares could be allocated to original owners as restitution for their property that had been confiscated by the communists. All privatization plans were required to confirm that restitution claims were satisfactorily addressed. The remaining equity was set aside for the voucher scheme. Once 988 proposals were selected, the supply of shares to be distributed through the voucher scheme was determined in the following manner. A thousand crowns of book equity were defined as one share. Setting aside the ownership for restitution owners, insiders, foreigners, government, etc., as delineated in the chosen privatization plan, the remaining shares were available for the voucher scheme.

3.2. The voucher scheme

The demand for shares was established through a distribution of investment points. For about $35, each adult citizen was eligible to purchase a voucher booklet that gave him 1,000 investment points. The voucher scheme had five rounds, although this was not known at the start of the scheme. In the first round of bidding, instead of valuing such a large number of enterprises, authorities chose to set the same price for every enterprise-33.33 investment points per share. Investors, either directly or through investments that had sprung up spontaneously, bid for a number of shares using the investment points.

The voucher scheme provides relative valuation of shares through prices developed in the bidding process. Since the first round, all shares were priced at 33.33 investment points, share demand reflects the costs and benefits of owning the shares. Reacting to the supply and demand for shares, authorities set prices in the second round (see Table 1 for details). Proceeding in this fashion, one may expect that “equilibrium” prices were reached at the end of the bidding process in the fifth round. This appears not to be the case, however. Authorities apparently pursued a number of objectives in setting prices, in addition to obtaining correct relative values of shares based on demandsupply conditions. They were interested in a rapid conclusion to the process, and did not want unused investment points left over at the end of the scheme. Consequently, consistent with an attempt to absorb investment points, authorities actually raised prices for many shares in later rounds even though the shares had excess supply in the previous round. However, these mispricing problems are the least in the second round, since at that point in time the behavior of authorities was consistent with supplyldemand conditions for all except a very small percentage of cases. Out of 988 stocks, only 23 stocks had higher prices (and 24 had no changes in prices) despite excess demand in the first round. Consequently,


we stress the use of second round prices as measures of relative ~aluation.~ We also use the “equilibrium” prices in the fifth round.

Although the voucher scheme was completed by December 1992, shares were not delivered to the public until May 1993. Soon after the distribution of shares, trading became possible through two organized exchanges-the Prague Stock Ex- change (PSE) and Registranci Misto System (RMS). Both exchanges provided periodic auctions at the time. Although, the PSE has gained in importance, initially the number of shares with positive volume on the RMS far exceeded that on the PSE; and we use RMS stock prices in our analysis. This provides a market-based valuation of shares for our analysis.

4. Data 4.1. Sample and sources of data

Barring special information available to some investors, a series of publications brought out by the Center for Voucher Privatization (Czech Ministry of Finance), Privatizace Kuponova, represents the only comprehensive database readily available to the investing public. For each of the 988 firms in the voucher scheme, this database reports only certain financial variables, besides the ownership data: shareholders’ equity, total equity (sum of shareholders’ equity plus a reserve account for workers), total liabilities, bank loans, production, pre-tax profits, and the number of employees for 1989, 1990, and 1991. Production approximates sales, except that goods shipped to inventory are included. Our analysis is restricted to these variables for 199 1, since by then most prices in the economy had been liberalized and managers had been given responsibility for profits and losses for their enterprises.’

Given the production (versus profit) orientation of the accounting system, and perhaps questions about its quality (Jilek, 1995), tests using this data can be viewed as joint tests of the relation between ownership structure and share prices, and the quality of the accounting data. Although we are not aware of specific biases arising from the nature of our data, we employ the data in alternative specifications to check the robustness of our findings.* In particular, we report analyses that use

Hillion and Young (1995) document the nature of mispricing by authorities, reporting that the number of cases of mispricing in later rounds are much larger than that in the second round. However, we regressed fifth round prices on stock market prices for shares in the aftermath of the voucher scheme, and found a strong positive relation. This suggests that prices in the voucher scheme are useful measures of relative share value, despite the apparent cases of mispricing.

While 427 stocks traded on July 8, 1993, date of the first RMS auction, only 11 stocks had trades on the PSE in its auction a few days earlier.

’ Data on ownership by funds and the identity of the largest blockholder were provided by Aspekt.

According to United Nations (1993), “State-owned enterprises, joint stock companies and joint ventures use an identical financial accounting system with double-entry bookkeeping based on generally accepted concepts such as the business entity as a reporting unit, money measurements for transactions, use of historic cost, a going-concern assumption, and accrual accounting.”


dummies to capture above and below median values of firm-specific accounting variable^.^

4.2. Descriptive statistics

Table 2 contains selected descriptive statistics for 1991 for the 988 Czech firms undergoing voucher privatization in Wave 1. According to Panel A, there was a wide diversity in the sizes of firms entering the voucher scheme, with median revenues (total assets) of $5.66 (6.93) million. Compared to US firms traded on exchanges, these are smaller firms. The median ratio of liabilities to assets is 32.98%, while the ratio of bank debt to total assets is 14.29%. The average firm was profitable in 1991 with mean (median) pre-tax firm profits to book equity of 19.08% (10.91%).

Panels B and C describe the ownership structure for the sample of firms entering the voucher scheme. The remaining ownership, by indlviduals and funds, is slated for distribution through the voucher scheme, with mean (median) percentage of the firm sold equal to 33.49% (29.33%) and 41.38% (41.79%) to individuals and funds, respectively.'O Even though the mean amounts of foreign, and insider ownership are not large according to Panel B (median is zero in all cases), Panel C shows that they are clearly important when they are present. For the 41 firms with foreign, and 90 with insider ownership, the mean (median) are 39.15%(36.00%), and 41.24% (40.00%). In the case of restitution ownership, the mean and median are 5.43% and 3.00%, respectively, for the 75 cases with restitution ownership. Although these are not as large as the averages for foreign and insider ownership, the impact of restitution ownership remains an empirical question. Restitution owners may be important to these firms, because they have negligible other private equity blocks. Also, in the absence of insider holdings and under-developed capital markets, even small blocks may exert considerable control. Conversely, there may not be a sufficient incentive to undertake costly monitoring, and, there may even be use of the firm by restitution owners for their personal benefit at the expense of other shareholders.

4.3. Comparison of prices of shares with differences in ownership

In the remaining section, we examine average values of shares held by these owners, based on prices in the voucher scheme and in the stock market. The findings are reported in Table 3. In Panel A, we study the average prices for the second and fifth rounds for portfolios with foreign (FRNR), insider (INSD), and restitution (ORIG) ownership. We compare these portfolios against the remaining firms that do not have foreign, insider, or restitution ownership (OTHR). Shares of portfolios

Repeating the analysis with actual figures, yields qualitatively similar results

'" Also not shown is the percentage of the f i i left unsold (mean=8.40%, median=4.22%) at the end of the voucher scheme, which reverted back to the National Property Fund.

Tabl

e 2

Sele

cted

des

crip

tive s

tatis

tics f

or C

zech

firm

s un

derg

oing

pri

vatiz

atio

n in

Wav

e 1'

~~

~

~~~

~~~

Pane

l A:

Firm

Cha

ract

eris

tics

Stan

dard

F

rst

Thir

d Sa

mpl

e V

aria

ble

D e f

i n i h o n

M

ean

Med

ian

Dev

iatio

n Q

uant

ile

Qua

ntile

Si

ze'

REV

R

even

ues2

, $m

18

.78

5.66

75

.99

2.24

14

.23

980

TA

Tota

l Ass

ets,

$m

32.2

1 6.

93

250.

22

2.95

17

.84

980

LIA

BK

'A

Liab

ilitie

s to

TA

, %

34

.94

32.9

8 21

.06

18.9

5 47

.55

980

BK

DB

TK'A

B

ank

Deb

t to

TA, %

15

.68

14.2

9 12

.84

5.94

22

.45

980

RO

E Pr

e-ta

x fm

pro

fits

to

19.0

8 10

.91

39.2

6 3.

44

24.5

0 98

0

VA

R(R

0A)

2-di

git I

SIC

intra

-indu

stry

15

0.21

10

8.34

20

5.54

43

.51

146.

52

97 1

Boo

k Eq

uity

, %

varia

nce

of R

OA

, (%

)3

RE

VE

MP

Rev

enue

s pe

r Em

ploy

ee,

$ 19

,331

.33

11,4

15.8

8 25

,100

.15

7306

.89

19,9

83.3

3 97

9 Pa

nel B

: O

wne

rshi

p for

Ful

l Sam

ple

Var

iabl

e D

efin

ition

St

anda

rd

Firs

t Th

ird

Max

imum

Q

uant

ile

Mea

n M

edia

n D

evia

tion

Qua

ntile

FRN

R

Fore

ign

owne

rshi

p, %

1.

62

0.00

8.

68

0.00

0.

00

75.0

0 IN

SD

Dire

ct D

omes

tic S

ales

, %

3.76

0.

00

13.4

9 0.

00

0.00

84

.00

OR

IG

Res

titut

ion

to o

rigi

nal o

wne

rs, %

0.

41

0.00

2.

62

0.00

0.

00

58.0

0 G

VT

T

Tem

pora

ry g

over

nmen

t 6.

89

0.00

13

.94

0.00

5.

00

84.0

0

GV

TP

Perm

anen

t go

vern

men

t 0.

24

0.00

2.

73

0.00

0.

00

45.0

0

BN

KS

Futu

re sa

les

thro

ugh

fina

ncia

l 1.

49

0.00

6.

89

0.00

0.

00

72.0

0

MU

NI

Mun

icip

ality

ow

ners

hip,

%

1.18

0.

00

3.77

0.

00

0.00

67

.00

(Ins

ider

Ow

ners

hip)

owne

rshi

p, %

owne

rshi

p, %

inst

itutio

ns, %

P 5 c.

E a a & is iu

I hl

tu

(con

tinue

d)

?

Tabl

e 2

(con

tinue

d)

Sele

cted

des

crip

tive

stat

istic

s for

Cze

ch fi

rms u

nder

goin

g pr

ivat

izat

ion in

Wav

e 1'

~ ~

Pane

l C

: Ow

ners

hip

Dis

trib

utio

n for

Fir

ms

with

FW

R, I

NSD

, or

OR

IG E

quity

Stan

dard

Fi

rst

Thir

d V

aria

ble

Def

initi

on

Mea

n M

edia

n D

evia

tion

Qua

ntile

Q

uant

ile

Min

imum

FRN

R>O

Fo

reig

n ow

ners

hip,

%

39.1

5 36

.00

18.7

9 25

.00

5 1 .O

O 5.

00

INSD

>O

Dire

ct d

omes

tic sa

les,

41.2

4 40

.00

21.3

1 25

.00

61.0

0 1 .o

o

ORI

G>O

R

estit

utio

n to

orig

inal

5.

43

3.00

8.

01

1 .oo

6.00

1 .o

o

N=4

1

N=9

0 %

(Ins

ider

Ow

ners

hip)

N=7

5 ow

ners

, %

'Sou

rce:

Pri

vatiz

ace K

upon

ova,

199

2/19

93, C

ente

r for

Vou

cher

Pri

vatiz

atio

n, C

zech

Min

istry

of

Fina

nce.

'R

even

ues

are

amou

nts p

rodu

ced,

incl

udin

g ad

ditio

ns to

inve

ntor

y.

'Fro

m t

he f

ull s

ampl

e of

988

fm

s, ei

ght f

m, are

drop

ped

beca

use

seve

n of

the

m r

epor

t neg

ativ

e lia

bilit

ies

and

one

firm

rep

oas an a

bnor

mal

ly h

igh

RO

E (r

epor

tedl

y a

typo

). A

lso,

one

add

ition

al fi

rm is

exc

lude

d in

cal

cula

tions

usin

g th

e nu

mbe

r of

empl

oyee

s bec

ause

the fm

is

repo

rted

as h

avin

g ze

ro e

mpl

oyee

s. F

inal

ly, i

ntra

-ind

ustr

y var

ianc

e of

RO

A

was

cal

cula

ted

only

for

971

firm

s be

caus

e th

ere

wer

e no

t eno

ugh

firm

s in

som

e in

dust

ries

.

Tabl

e 3

Com

pari

son

of p

erfo

rman

ce o

f po

rtfo

lios b

ased

on

owne

rshi

p'>

Pune

l A:

Perf

orm

ance

in V

ouch

er S

chem

e by

Por

tfolio

s B

used

on

Ow

ners

hip

Price

Cha

nge

from

Rou

nd 1

and

Rou

nd 2

Pr

ice

Cha

nge

from

Rou

nd 1

to R

ound

5

Ow

ners

hip

Mea

n %

r-

test

of

diff

. of

Mea

n %

t-

test

of

diff

. of

Gro

ups

N

(Std

. Dev

) m

eans

from

OTH

R

(Std

. Dev

) m

eans

from

OTH

R

FRN

R

OTH

R

WSD

OTH

R

OR

IG

OTH

R

41

76

3 88

76

3 71

76

3

271.

54

(256

.18)

3.

40

(128

.79)

14

5.83

(2

28.3

1)

3.40

(1

28.7

9)

0.98

(9

6.08

) 3.

40

(128

.79)

6.66

***

5.75

***

0.84

338.

73

(676

.27)

46

.89

(240

.15)

32

4.28

(5

56.6

8)

46.8

9 (2

40.1

5)

29.0

7 (1

37.8

0)

46.8

9 (2

40.1

5)

2.75

***

4.62

***

-0.9

6

? ;s n L. E a a

&

(con

tinue

d)

lu

I cu

h,

Tab

le 3

(con

tinue

d)

Com

pari

son

of p

erfo

rman

ce o

f po

rtfo

lios b

ased

on

owne

rshi

p'J

Pane

l B:

Stoc

k M

arke

t Pri

ce P

erjo

iman

ce b

y Po

rtjo

lios

Bas

ed o

n O

wne

rshi

p

RM

S T

rans

actio

n Pr

ices

or

Quo

tes

Auc

tion

8 C

ompa

riso

n B

etw

een

Sam

ples

A

uctio

n 1

Auc

tion

2 A

uctio

n 3

With

and

With

out

July

8, 1

993

Aug

. 9,

1993

Se

pt. 3

, 19

93

Dec

. 12

, 199

3 O

wne

rshi

p by

Fol

low

ing

Mea

n $

f-st

at

Mea

n $

t-sta

t M

ean

$ t-s

tat

Mea

n $

t-sta

t G

roup

s (N

) fo

r di

ff.

(N)

for

diff

. (N

) fo

r di

ff.

(N)

for

diff

.

FR

NbO

96

.32

FRN

R=O

39

.95

(939

) IN

SD

S

71.7

2 (8

7)

INSD

=O

32.0

1 (8

92)

ORI

G>O

29

.01

Res

titut

ion

(74)

O

wne

rs

ORI

G=O

36

.07

(905

)

(40)

Fo

reig

ners

Insi

ders

63.6

8 (4

0)

16.7

5 8.

99**

*

(939

) 36

.61

(87)

16

.23

8.04

***

-1.2

7

48.5

7 (4

0)

16.7

5 8.

32**

*

(939

) 36

.61

(87)

16

.23

7.75

***

(74)

18

.33

-1.2

6

62.8

4 (4

0)

19.4

9 (9

38)

45.0

3 (8

7)

18.9

4

18.4

2 (7

4)

21.5

0 (9

04)

9.45

***

8.39

***

8.08

***

7.68

***

(891

)

-0.8

6 -1

.28

*** I

ndic

ates

stat

istic

al si

gnifi

canc

e at t

he 0

.01

leve

l. 'S

ourc

e: P

rivat

izac

e Kup

onov

a, 1

992/

1993

, Cen

ter f

or V

ouch

er P

rivat

izat

ion,

Cze

ch M

inis

try o

f Fi

nanc

e.

L

'u

I Lu

'See

Tab

le 2

for v

aria

ble

defin

ition

s.

'Sam

ple

size

s diff

er a

cros

s the

var

iabl

es, a

nd a

re g

iven

in T

able

2 fo

r the

full

sam

ple.

The

sam

ple s

ize

for f

orei

gn o

wne

rshi

p is

39, w

hile

the

sam

ple s

izes

for i

nsid

er a

nd re

stitu

tion

owne

rshi

p va

ry f

rom

86

to 8

8 an

d 74

to 7

5, re

spec

tivel

y.

16 A. Makhrja and M. Spiro/The Financial Review 35 (2000) 1-32

with foreign ownership perform better than the OTHR sample, irrespective of the measure used to determine changes in prices. Moreover, the differences in price changes are large and highly significant (at the 0.01 level). For example, the 41 firms with foreign ownership experience an increase of 271.54% compared with the average increase of 3.40% for the OTHR sample in prices from round 1 to round 2. Although the price changes for the INSD sample are not as large as the FRNR sample, relative to the OTHR sample, firms with insider ownership also have high price increases (again significant at the 0.01 level). Firms in the ORlG sample do not experience similar price gains. Firms with restitution ownership have lower price increases compared with other firms (0.98% vs. 3.40% and 29.07% vs. 46.89% when we consider second round and fifth round prices, respectively), although they are insignificantly different from zero according to the t-tests reported in the table.

In Panel B, we compare RMS stock prices for shares with different types of ownership. Apart from the first three auctions, we present results for the eighth auction, assuming that in the roughly six months since shares were delivered markets have had sufficient time to adjust fully to relevant information. There is a disadvan- tage to the use of December prices, however. Unlike the first three auctions, Decem- ber prices are affected by developments after the delivery of shares. Nevertheless, like Panel A, we find that share prices of firms with foreign or insider ownership are higher than that for other firms, while firms with restitution ownership have lower prices.

Based on the above examination of firms with different types of ownersh ip whether we consider prices in the voucher scheme, or RMS stock prices-we can infer that restituents did not receive the better firms." These findings, although consistent with the notion that restitution ownership does not have a positive effect on share values, can be attributed to other firm characteristics. This issue is considered in the next section.

5. Cross-sectional analysis with voucher prices

5.1. Methodology

In order to examine the relation of ownership structure with share prices (LP2 or LP5 for the voucher scheme, and LRMS for the RM System), after controlling for firm characteristics, we estimate the following regression:

LP2 or LP5 or LRMS = a0 + a,LFRNR + azLINSD + a,LORIG + a4DROE + a5DVAR + CX~DTA + a,DBK + agDGVT + a,DRE + aloDIND + a,,DLOC + e (1)

" Yet another measure that shows that restituents did not receive the better firms is profitability (ROE). Firms with restitution ownership have an average ROE in 1991 of 18.73% compared with 56.78% and 27.61% for insiders and foreigners, respectively.


where we are particularly interested in the coefficients of LFRNR, LINSD, and LORIG, the logs of the ownership stakes. The other variables control for firm characteristics. In this specification, given the reservations regarding the financial data, we employ dummy variables. It is assumed that, even though the financial data are noisy, the data can be relied upon to distinguish a firm with an above median ROE from one with a below median ROE. Similarly, other firm characteristics are also captured using dummy variables. The definitions and rationale for the independent variables is contained in Table 4. The choice of these variables is based on prior work by Svejnar and Singer (1994), Hingorani, Lehn, and Makhija (1997), Lastovicka, Marcincin, and Mejstrik (1995), and Claessens (1997).

5.2. Results Panel A of Table 5 contains the results of cross-sectional analysis using prices

from the voucher scheme. In both estimations 1 and 2, the coefficients of each of the ownership variables are positive and significant. The adjusted R square has values of 42.40% and 34.00%, respectively. Similarly, others have obtained high explanatory power (e.g., Svejnar and Singer (1994), in work on the determinants of voucher prices). The coefficient of special interest is the coefficient of LORIG, which has values 0.14 and 0.22, suggesting that a 1 % increase in restitution ownership is associated with a 0.11% to 0.22% increase in share values in the voucher scheme. The corresponding values for the coefficient of LFRNR (LINSD) are 0.35 and 0.25 (0.15 and 0.19), respectively.

Among the control variables, most have significant coefficients with the hypothesized signs with high levels of significance (p-value = 1%): the coefficient of DROE (profitability) is positive, the coefficient of DTA (size) is negative, the coefficient of DBK (bank debt ratio) is negative, the coefficient of DGVT (government stake) is positive, the coefficient of DRE (revenue per employee) is positive, and the coefficient of DIND is negative. At the 0.05 level of significance, the coefficient of DLOC is positive and significant when prices are measured in terms of the fifth round. Only in one case, the coefficient of DVAR (intra-industry variance of ROA) has a sign that is not consistent with the prediction. Admittedly, DVAR is a crude measure of risk, and may be proxying higher growth industries if high intra-industry variation in ROA is an indicator of greater change.” Overall, these results suggest that Czech investors displayed economic rationality, since prices in the voucher scheme agree with almost all the economic predictions.

Although not reported here, we repeat the analysis using full accounting data instead of the dummy variables used in Table 5. Since the magnitudes of the independent variables are taken into account, we run the risk that outliers affect our findings. Consequently, we screen for outliers, checking for Cook’s distance > 1.00.

‘*These findings are generally supported by prior work on the Czech voucher scheme (Svejnar and Singer, 1994), but they do not consider issues related with ownership.

Tab

le 4

Cro

ss-s

ectio

nal r

egre

ssio

n m

odel

to t

est

rela

tion

of s

hare

val

ue w

ith o

wne

rshi

p st

ruct

ure

LP2

or L

P5 o

r LR

MS

= a

n + a,

LFR

NR

+ m2

LIN

SD +

(Y) LO

RIG

-t ad D

RO

E + as D

VA

R+

cx6 D

TA

whe

re th

e de

pend

ent v

aria

bles

, LP

2, L

P5 a

nd L

RM

S, a

re th

e lo

g of

pri

ces

in th

e se

cond

rou

nd,

the

fift

h ro

und

and

RM

S au

ctio

ns,

resp

ecti

vely

. LF

1 is

not

in

clud

ed i

n re

gres

sion

s w

ith

LP2

or L

P5 a

s de

pend

ent v

aria

bles

.

+ a, D

BK

+ as

DG

VT

+ ag D

RE

+ aIn

DIN

D +

al

I D

LO

C +

e

Pred

icte

d Si

gn o

f V

ar.

Coe

ffic

ient

D

efin

ition

and

Com

men

t -

LLN

SD

+ Lo

g of

per

cent

age o

f equ

ity o

wne

d by

ins

ider

s whe

n pr

esen

t, ot

herw

ise z

ero.

Non

-mon

oton

ic re

latio

n ex

pect

ed w

ith s

hare

va

lue,

with

pos

itive

rela

tion

at lo

wer

sta

kes (

conv

erge

nce o

f in

tere

sts)

, and

neg

ativ

e at

hig

her s

take

s.

LFR

NR

+

LOR

IG

+

LF1

+/-

DV

AR

DR

OE

Log

of p

erce

ntag

e of

equi

ty o

wne

d by

for

eign

ers w

hen

pres

- en

t, ot

herw

ise z

ero.

Non

-mon

oton

ic re

latio

n ex

pect

ed w

ith

shar

e va

lue,

with

pos

itive

rela

tion

at lo

wer

sta

kes

(ben

efit

of

mon

itori

ng),

and

nega

tive

at h

ighe

r st

akes

. Lo

g of

per

cent

age

of e

quity

ow

ned

by r

estit

uent

s whe

n pr

es-

ent,

othe

rwis

e ze

ro. N

on-m

onot

onic

rela

tion

expe

cted

with

sh

are

valu

e, w

ith p

ositi

ve r

elat

ion

at l

ower

sta

kes

(ben

efits

of

mon

itori

ng),

and

nega

tive

at h

ighe

r st

akes

. L

og o

f pe

rcen

tage

of e

quity

ow

ned

by f

und

with

the

larg

est

bloc

k am

ong

fund

s. B

enef

its o

f m

onito

ring

are

ques

tiona

ble,

gi

ven

agen

cy p

robl

ems

face

d by

fun

ds th

emse

lves

.

=1 if

the

2-di

git I

SIC

intr

a-in

dust

ry va

rian

ce o

f R

OA

is a

bove

m

edia

n, o

ther

wis

e ze

ro. V

aria

bilit

y of

pro

fits

with

in a

n in

dus-

try

is u

sed

to p

roxy

typi

cal r

isk

face

d by

fir

m in

ind

ustq

.

= 1

if R

OE

is a

bove

med

ian

for

sam

ple

of f

ms

in W

ave

1,

othe

rwis

e zer

o. M

easu

re o

f f

m pr

ofita

bilit

y.

Pred

icte

d Si

gn o

f V

ar.

Coe

ffic

ient

D

efin

itio

n an

d C

omm

ent

~~

DB

K

-

DG

VT

+

DR

E +

DIN

D

-

DTA

-

DL

OC

+

~

= I

if (B

ankD

ebfl

otal

Ass

ets)

is a

bove

med

ian,

oth

erw

ise

zero

. Acc

ordi

ng to

Altm

an (

1984

). th

ere

is a

dir

ect r

elat

ion

be-

twee

n a

firm

’s le

vera

ge a

nd it

s pr

obab

ility

of

fina

ncia

l dis

- tr

ess.

Mor

eove

r, A

ltman

(19

84).

Ang

, Chu

a, a

nd M

cCon

nell

(198

2). a

nd W

arne

r (19

77) p

rovi

de e

vide

nce

that

ban

krup

tcy

is c

ostly

in

term

s of

leg

al a

nd a

dmin

istr

ativ

e cos

ts, a

nd th

e in

- di

rect

eff

ects

it h

as o

n bu

sine

ss.

= 1

if g

over

nmen

t has

a c

ontin

uing

stak

e, o

ther

wis

e zer

o. A

s a

resu

lt of

pub

lic o

utcr

y, th

e C

zech

gov

ernm

ent h

eld

onto

the

best

fm

s. A

lso,

the

gov

ernm

ent i

s no

t exp

ecte

d to

inte

rven

e in

the

man

agem

ent o

f th

ese

firm

s. =

1 if

(Rev

enue

sEm

ploy

ee) i

s ab

ove

med

ian,

oth

erw

ise z

ero.

R

even

ues p

er e

mpl

oyee

is a

mea

sure

of

prod

uctiv

ity, a

nd is

an

othe

r co

ntro

l for

the

bette

r per

form

ing

fms.

= 1

if th

e fm

is

in a

“sm

okes

tack

” in

dust

ry, o

ther

wis

e it i

s ze

ro. “

Smok

esta

ck”

indu

strie

s-m

inin

g,

agri

cultu

re, c

onst

rnc-

tio

n, a

nd m

anuf

actu

ring-

in

the

Cze

ch R

epub

lic te

nd to

be

tech

nolo

gica

lly ob

sole

te, o

vers

ized

and

over

-div

ersi

fied

. The

y te

nd to

per

form

poo

rly a

nd a

re in

nee

d of

cos

tly re

stru

ctur

ing.

=1

if

Tot

al a

sset

s of fm

are

abo

ve m

edia

n, o

ther

wis

e zer

o.

Lar

ger f

ms

are

mor

e co

mpl

ex, l

eadi

ng to

mor

e ag

ency

pro

b-

lem

s. (J

ense

n an

d M

eckl

ing,

197

6, an

d E

aton

and

Ros

en

1983

) =

1 if

firm

is lo

cate

d in

Pra

gue

dist

rict

, oth

erw

ise i

t is

zero

. N

ot o

nly

are

prop

erty

val

ues

high

er in

Pra

gue,

a Pr

ague

loca

- tio

n ca

n lo

wer

the

cost

of

mon

itorin

g fo

r in

vest

ors,

sinc

e m

ost

of t

he p

opul

atio

n liv

es in

the

Prag

ue d

istr

ict.

?

Tabl

e 5

Reg

ress

ion

anal

ysis

of s

hare

pri

ces

in t

he v

ouch

er s

chem

e an

d st

ock

mar

ket f

or C

zech

firm

s un

derg

oing

vou

cher

pri

vatiz

atio

n in

Wav

e 1:

For

eign

, in

side

r an

d re

stitu

tion

owne

rshi

p as

inde

pend

ent

vari

able

s'

Pane

l A:

Log of R

ound

2 (

LP

2) an

d R

ound

5 (

LP.5

) Pri

ces

as D

epen

dent

Var

iabl

es

Est.

Dep

. C

oeff

icie

nt o

f (r

-sta

tistic

s in

par

enth

eses

) A

dj .

No.

V

ar.

Con

stan

t LF

RN

R

LIN

SD

LOR

IG

DR

OE

DV

AR

D

TA

DB

K

DG

VT

D

RE

DIN

D

DLO

C Rz% N

1 LP

2 3.

05

0.35

0.

15

0.14

0.

69

0.08

-0

.37

-0.2

6 0.

40

0.24

-0

.33

0.07

42

.40

958

(44.

82)*

**

(10.

93)*

** (

6.33

)***

(2.

48)*

** (

14.2

5)**

* (1

.57)

(-7

.39)

***

(-5.1

8)**

* (8

.78)

***

(4.7

3)**

* (-5

.38)

***

(1.1

3)

2 LP

5 3.

18

0.25

0.

19

0.22

0.

77

0.13

-0

.68

-0.1

8 0.

47

0.33

-0

.38

0.19

34

.00

958

(33.

68)*

**

(5.7

9)**

* (5

.72)

***

(2.7

8)**

* (1

1.53

)***

(1

.87)

* (-9

.78)

***

(-2.6

7)**

* (6

.85)

***

(4.6

8)**

* (4

.52)

***

(2.1

4)**

* Pr

edic

ted

Coe

ffici

ent

Sign

of

Posit

ive

Posit

ive

Posit

ive

Posit

ive

Neg

ativ

e N

egat

ive

Neg

ativ

e Po

sitiv

e Po

sitiv

e N

egat

ive

Posi

tive

(con

tinue

d)

R is C1J

cr,

Tabl

e 5

(con

tinue

d)

Reg

ress

ion

anal

ysis

of

shar

e pr

ices

in

the

vouc

her

sche

me

and

stoc

k m

arke

t for

Cze

ch f

irm

s un

derg

oing

vou

cher

pri

vatiz

atio

n in

Wav

e 1:

For

eign

, in

side

r an

d re

stitu

tion

owne

rshi

p as

inde

pend

ent v

aria

bles

’ LP

2 =

log

of p

rices

in

Rou

nd 2

. LP

5 =

log

of p

rices

in

Rou

nd 5

. LF

RN

R =

log

of p

erce

ntag

e of

equ

ity o

wne

d by

for

eign

ers.

LIN

SD =

log

of p

erce

ntag

e of

equ

ity o

wne

d by

ins

ider

s. LO

RIG

= lo

g of

per

cent

age

of e

quity

ow

ned

by r

estit

utio

n ow

ners

. D

RO

E =

1 if

RO

E is

abo

ve m

edia

n, o

ther

wis

e ze

ro.

DV

AR

= 1

if

the

2-di

git

ISIC

int

ra-in

dust

ry v

aria

nce

of R

OA

is

abov

e m

edia

n, o

ther

wis

e ze

ro.

Reg

ress

ions

are

est

imat

ed u

sing

Whi

te’s

(19

80) p

roce

dure

to

adju

st f

or h

eter

oske

dast

icity

Pane

l B: Lo

g of

RM

S St

ock

Pric

es D

urin

g A

uctio

n N

umbe

rs 1

, 2, 3

, and

8 a

s D

epen

dent

Var

iabl

es

DTA

= 1

if T

A i

s ab

ove

med

ian;

oth

erw

ise

zero

. D

BK

= 1

if (

BK

DE

BT

EA

) is

abo

ve m

edia

n, o

ther

wis

e ze

ro.

DG

VT

= 1

if g

over

nmen

t has

a c

ontin

uing

owne

rshi

p st

ake,

oth

erw

ise

zero

. D

RE! =

1 if

RE

VE

MP

is a

bove

med

ian,

oth

erw

ise

zero

. D

IND

= 1

if f

irm

is

in a

“sm

okes

tack

” in

dust

ry (

agric

ultu

re,

min

ing,

m

anuf

actu

ring,

util

ities

, co

nstru

ctio

n, a

nd t

rans

porta

tion)

, ot

herw

ise,

for

se

rvic

e it

is z

ero.

D

LOC

= 1

if fm

is

loca

ted

in t

he P

ragu

e di

stric

t, ot

herw

ise

zero

.

N

0

Est.

Dat

e of

C

oeff

icie

nt o

f (t-

stat

istic

s in

par

enth

eses

) A

dj .

No.

Auc

tion

Con

stan

t LF

RN

R

LIN

SD

LOR

IG

DR

OE

DV

AR

D

TA

DB

K

DG

VT

DR

E D

IND

D

LOC

R

2 %

N

1 Ju

ly 8

, 2.

99

0.27

0.

14

0.16

0.

72

0.10

-0

.45

-0.2

0 0.

41

0.24

-0

.33

0.17

45

.689

79

’93

(49.

02)*

**

(9.1

9)**

* (6

.43)

***

(3.2

3)**

* (1

6.34

)***

(2.

25)*

** (

-9.9

8)**

* (-

4.56

)***

(8.

81)*

** (

5.13

)***

(-6

.02)

***

(3.0

0)**

* 2

Aug

. 9,

2.65

0.

27

0.14

0.

15

0.64

0.

07

-0.4

2 -0

.22

0.39

0.

23

-0.3

5 0.

20

43.1

7 97

9 ’9

3 (4

3.28

)***

(9

.10)

***

(6.6

4)**

* (2

.91)

***

(14.

65)*

**

(1.6

6)*

(-9.2

5)**

* (-

4.84

)***

(8.

40)*

** (

4.85

)***

(-6

.37)

***

(3.5

3)**

*

3 Se

pt. 3

, 2.

41

0.28

0.

14

0.16

0.

59

0.04

-0

.37

-0.2

1 0.

35

0.18

-0

.35

0.22

38

.01

979

’93

(37.

65)*

**

(8.9

8)**

* (6

.39)

***

(3.0

0)**

* (1

2.84

)***

(0

.78)

(-7

.78)

***

(-4.5

7)**

* (7

.08)

***

(3.7

2)**

* (-6

.09)

***

(3.6

4)**

*

4 D

ec. 1

2,

2.21

0.

26

0.12

0.

17

0.57

0.

10

-0.0

6 -0

.24

0.30

0.

30

-0.2

0 0.

34

38.1

2 97

8 ’9

3 (3

4.92

) (8

.63)

***

(5.3

9)**

* (3

.23)

***

(12.

42)*

**

(2.0

8)**

(-1

.29)

(-5

.17)

***

(6.1

9)**

* (6

.08)

***

(-3.4

8)**

* (5

.73)

***

Pred

icte

d

Coe

ffici

ent

Sign

of

Posit

ive

Posit

ive

Posit

ive

Posit

ive

Neg

ativ

e N

egat

ive

Neg

ativ

e Po

sitiv

e Po

sitiv

e N

egat

ive

Posit

ive

?

B 5 c:

a a & ru

I (*,

l.4

***I

ndic

ates

statis

tical

sign

ifica

nce

at th

e 0.

01 le

vel.

**In

dica

tes s

tatis

tical

sign

ifica

nce

at th

e 0.

05 le

vel.

*Ind

icates

sta

tistic

al si

gnifi

canc

e at

the

0.10

leve

l. ‘S

ourc

e: Pr

ivat

izac

e Kup

onov

a, 19

9211

993,

Cen

ter fo

r V

ouch

er F

’riva

tizati

on, C

zech

Min

istry

of

Fina

nce.


We also apply White’s adjustment for heteroskedasticity. Although, the values of the coefficients are affected the signs and significance of the coefficients are similar to those in Table 5.

Both specifications, using the accounting data in a limited manner or the full information procedure, support the view that Czech investors view greater amounts of foreign, insider, and restitution ownership positively. We interpret the positive association between restitution ownership and share values as evidence of the beneficial effect of block ownership. Unlike foreign and insider ownership, restitution ownership is not associated with high ROE or revenue per employee. Moreover, shares of firms with restitution ownership are not priced higher than other shares (Table 3).

In Panel B of Table 5, we relate RMS prices with ownership and other independent variables used in the cross-sectional analyses above, and obtain adjusted R square values that range from 38.01% to 45.68%. Along with the same independent variables, we also have the same predictions for the coefficients. For all four auctions, we find that the coefficients of the ownership variables are positive and significant (at the 0.01 level). There is also a remarkable robustness associated with the values of the coefficients, which have very little variation. The average coefficients are: 0.27 for LFRNR, 0.14 for LINSD, and 0.17 for LORIG. Compared with the estimations based on the voucher prices in Panel A, these coefficients are very similar. All the other variables, except for DVAR, have coefficients with the expected signs.

In order to test for a non-monotonic relation between ownership and stock value, we included squared terms-(LFRNR)’, (LINSD)’, and (LORIG)’-as additional explanatory variables. Whether we use voucher scheme prices, LP2 or LP5, or RMS stock prices for various auctions, the coefficients of the squared terms are not significant. These findings suggest a monotonic positive relation between ownership by these different types of owners and stock value.13 These findings are in contrast with those reported by previous researchers (Morck, Shleifer, and Vishny, 1988, McConnell and Servaes, 1990, and Hermalin and Weisbach, 1987), who document a non-monotonic relation between size of ownership and stock value. We conjecture that the difference in findings may arise from the severity of agency problems in the post-communist economies, and the consequent value attached to even large amounts of concentrated ownership.

l 3 We also repeat our analysis by further including cubic terms-(LFRNR)), (LINSD)), and in order to test for more complicated non-linearities. Although we generally find that the coefficients on the cubic terms are insignificant, there is some evidence that the coefficients of (LINSD)’ and (LINSD)’ are significant negative and significant positive, respectively. When we use RMS prices in the third and eighth auctions, and voucher scheme prices in the fifth round as dependent variables, we find these significant relations. In the other estimations (RMS prices in the fist and second auctions, and voucher scheme prices in the second round as dependent variables), the coefficients have the similar signs, but are not significant.


6. Fund Ownership

In the analysis thus far, we have examined the effect of the percentage of equity held by foreigners, insiders, and restitution owners prior to the voucher scheme. In the process of the voucher scheme, ownership was distributed to funds and individuals. In the design of the voucher scheme, no explicit mechanisms were incorporated to ensure the formation of ownership blocks. The spontaneous emergence of investment privatization funds, which collected voucher points from individual investors, gave rise to sizeable blockholdmgs. Over 400 funds were formed, giving investors considerable choice in investment policies if they did not choose to invest on their own. Overall, some 72% of all points were handed to funds, with nearly 40% of the points collected by the top three funds, giving rise to the possibility that some funds will emerge as significant blockholders. Fund regulation only required that a fund not invest more than 10% of its capital in any one security (not a real constraint on the larger funds), nor own more than 20% of the nominal value of securities issued by one issuer (a constraint overcome at the time by founding multiple funds in a family of funds). Banks founded the largest funds, because banks enjoyed a favorable reputation and were able to better finance the marketing of their funds.

With the large number of points collected by bank-sponsored funds, they tended to adopt an investment strategy of forming well-diversified portfolios, presumably because their investors wanted low risk investments (Coffee, 1994). But many of these portfolios have hundreds of different stocks, far more than necessary for diversification purposes. Some funds, however, like Harvard Consulting, targeted a small set of firms for their portfolio (just 51 different stocks). Still others formed specialty funds, in one case concentrating on Bohemia crystal, for example. On the other hand, SIS, an investment company founded by a savings bank, Ceska Spori- telna, had 500 different shares in its portfolio. This would place some obvious constraints on the personnel available to serve on the boards of firms. SIS holds some 280 board seats, and with only about 120 employees almost every employee serves on a board. Coffee (1994), reviewing the practical aspects of monitoring in the Czech Republic, also notes that directorships on the board may constitute a supplement to the compensation of fund employees (the kind of arrangement that may lead to the conflict-of-interest pointed out by Pound, 1988).

The importance of fund ownership can be seen in terms of the percentage of the average firm owned by various funds. In Panel A of Table 6, we present the mean (median) percentage of holdings by funds. The fund with the largest holdings of the firm obtained 13.54% (14.00%) of the firm. The top ten largest funds together owned 39.55 (40.63%) of the firm, a proportion comparable to the average holdings by foreigners and insiders (means of 39.15% and 41.24%, respectively, in firms with such ownership, Table 2, Panel C). Since all except one firm had fund ownership, funds play a significant role in many firms.

Tab

le 6

Em

erge

nce o

f pri

vate

blo

ckho

ldin

gs a

mon

g 98

8 C

zech

firms

unde

rgoi

ng p

riva

tizat

ion

in W

ave

1 Pa

nel B

repo

rts t

he n

umbe

r of f

irm

s with

gre

ater

than

sta

ted

tota

l ow

ners

hip

aris

ing

from

the

sum

of

equi

ty p

erce

ntag

es h

eld

by f

orei

gner

s, in

side

rs, r

estit

utio

n ow

ner,

and

vary

ing

num

bers

of

inve

stm

ent f

unds

. F1

is th

e fu

nd w

ith th

e la

rges

t sta

ke in

the firm a

mon

g fu

nds.

€2 is

the

seco

nd la

rges

t, et

c.

?

Pane

l A: M

ean

(med

ian)

Per

cent

ages

of

Hol

ding

s by

Fun

ds of

Tota

l Out

stan

ding

Sha

res.

Larg

est h

oldi

ngs

znd la

rges

t 3r

d lar

gest

4t

h lar

gest

5I

h lar

gest

T

op 5

larg

est

Top

10

larg

est

in firm

hold

ings

in f

irm

ho

ldin

gs i

n fm

ho

ldin

gs i

n fi

rm

hold

ings

in firm

hold

ings

in firm

hold

ings

in fm

13.5

4 9.

09

6.05

3.

93

2.59

35

.20

39.5

5 (1

4.00

) (9

.57)

(5

.99)

(3

.61)

(2

.00)

(3

6.97

) (4

0.63

) Pa

nel

B: N

umbe

r of

firm

s w

ith d

iffer

ent a

mou

nts

of pr

ivat

e ow

ners

hip.

Sum

of

Ow

ners

hip

of O

utst

andi

ng S

hare

s Gre

ater

Tha

n:

Gro

up o

f Pr

ivat

e O

wne

rs

210%

>2

0%

>30%

>4

0%

>50%

>6

0%

>70%

>8

0%

>90%

FRNR +

INSD

+ O

RIG

+ F1

79

9 21

2 11

2 84

63

47

24

5

0 FR

NR

+ IN

SD +

OR

IG +

F1

+ F

2 90

9 71

6 37

6 11

9 72

58

29

7

0 FR

NR

+ IN

SD +

OR

IG +

F1 +

F2 +

F3

930

816

602

328

140

62

39

10

0 FR

NR

+ IN

SD +

OR

IG +

F1 +

F2 +

F3 +

F4

934

833

677

456

221

100

49

13

2 FR

NR

+ IN

SD +

OR

IG +

F1 +

F2 +

F3 +

F4 +

F5

936

863

706

542

306

146

58

16

2 FR

NR

+ IN

SD +

OR

IG +

F1 +

.......

..... +

F10

936

863

733

605

440

27 1

123

26

4

k,

cr,

k

I k,

lu

h) w


Taking into consideration fund ownership with foreign, insider, and restituent ownership, Panel B of Table 6 shows that a large number of firms left the voucher scheme with considerable concentration of ownership. Out of the 988 firms, in nearly half of the cases (440), the top ten funds and foreigners, insiders, and restituents owned more than a majority of the shares.I4 While this obviously suggests that concentration of ownership did occur, the consequences of fund ownership are not necessarily similar to that of stakes held by foreigners, insiders, or restitution owners, as discussed in the hypothesis section.

In order to examine the relation of fund ownership on stock value, we repeat the cross-sectional analysis in Table 7. Only stock prices are used as dependent variables, since share prices and fund ownership of firms were simultaneously determined in the voucher scheme. We are also assuming that the ownership structure did not immediately adjust, so that it is meaningful to cross-sectionally examine the relation between fund ownership and stock values. In a specification comparable to our tests for the effect of ownership by foreigners, insiders, and restituents, Table 7 shows that stock value is not significantly related to the percentage of ownership held by the fund with the largest stake among funds.15 We repeat the analysis by also including the square of the percentage ownership of the fund with the largest holdings, and find that its coefficient is not significant in any estimation.

These findings suggest that Czech investors consider fund ownership to have a neutral effect on stock value. Possibly, the adverse effects recognized in the conflict-of-interests hypothesis cancel the beneficial effects of fund blockholdings.

7. Effect of largest blockholder

Thus far we have considered the effect of the size of the ownership stake held by various parties. In order to examine their relative roles, in this section we consider their position among blockholders, after controlling for the concentration of ownership in the firm:

LP2 or LP5 or LRMS = a" + aHERF + a,(HERF)' + a3DBFRNR + a4DBINSD+ a5DBORIG + a6DBF1 + a7DROE + a8DVAR + (Y~DTA + a,,,DBK + allDGVT + alZDRE + a13DIND + a14DLOC + e ( 2 )

where HEW is the Herfindahl index for ownership, and DBFRNR is a dummy with a value of one when foreigners own the largest block and zero otherwise.

l 4 The percentage of shares does not fully reflect their relative position among blockholders. Assuming that shares held by individuals do not exert control, the stake held by funds relative to other important blockholders provides a better measure of their position. Counting the stakes held by important blockholders to include the ownership by the top ten funds, and foreigners, etc., the fund with the largest stake has a mean (median) relative stake of 24.54% (23.25%).

l5 We do not test for the effect of total ownership by funds (or by a significant number of funds), since that may represent the price pressure effect of large fund demand.

Tab

le 7

Reg

ress

ion

anal

ysis

of

stoc

k m

arke

t pr

ices

for

Cze

ch f

irm

s un

derg

oing

vou

cher

pri

vatiz

atio

n in

Wav

e 1:

For

eign

, ins

ider

, res

titut

ion

and

fund

ow

ners

hip

as in

depe

nden

t var

iabl

es‘

Dep

ende

nt V

aria

bles

: Log

of

RMS

pric

es d

urin

g au

ctio

n nu

mbe

rs 1

, 2, 3

, 8.

LFR

NR

= lo

g of

per

cent

age o

f eq

uity

ow

ned

by f

orei

gner

s.

LIN

SD =

log

of p

erce

ntag

e of

equ

ity o

wne

d by

ins

ider

s.

LOR

IG =

log

of p

erce

ntag

e of

equi

ty o

wne

d by

res

titut

ion

owne

rs.

LF

l =

log

of p

erce

ntag

e of

equi

ty o

wne

d by

the

fun

d w

ith th

e la

rges

t st

ake

amon

g fu

nds.

D

RO

E =

1 if

RO

E is

abo

ve m

edia

n, o

ther

wis

e ze

ro.

DV

AR

= 1

if t

he 2

-dig

it IS

IC in

tra-

indu

stry

var

ianc

e of

RO

A is

abo

ve

med

ian,

oth

erw

ise z

ero.

D

TA =

1 if

TA

is a

bove

med

ian;

oth

erw

ise

zero

. R

egre

ssio

ns ar

e es

timat

ed u

sing

Whi

te’s

(198

0) p

roce

dure

to a

djus

t for

het

eros

keda

stic

ity.

Est

. D

ate

of

Coe

ffic

ient

of (

t-st

atis

tics i

n pa

rent

hese

s)

Adj

. N

o.

Auc

tion

Con

stan

t LF

RN

R

LIN

SD

LOR

IG

LFl

D

RO

E D

VA

R

DTA

D

BK

D

GV

T D

RE

DIN

D

DLO

C

Rz,

%

N

1 Ju

ly 8

, 2.

94

0.28

0.

14

0.17

0.

02

0.71

0.

10

-0.4

6 -0

.21

0.42

0.

24

-0.3

3 0.

16

45.7

1 97

0

DB

K =

1 if

(B

KD

EB

TE

A)

is a

bove

med

ian,

oth

erw

ise

zero

. D

GV

T =

1 if

gov

ernm

ent h

as a

con

tinui

ng o

wne

rshi

p st

ake,

oth

erw

ise

zero

. D

RE

= 1

if R

EV/E

MP

is a

bove

med

ian,

oth

erw

ise

zero

. D

IND

= 1

if f

irm

is in

a “

smok

esta

ck”

indu

stry

(agr

icul

ture

, min

ing,

m

anuf

actu

ring

, util

ities

, con

stru

ctio

n, an

d tr

ansp

orta

tion)

, oth

erw

ise,

for

serv

ice

it is

zer

o.

DLO

C =

1 if

fm is

loca

ted

in th

e Pr

ague

dis

tric

t, ot

herw

ise

zero

.

1993

(2

6.96

)***

(9

.16)

***

(5.7

9)**

* (5

.02)

***

(0.6

5)

(16.

73)*

**

(2.3

3)**

(-1

0.12

)***

(-4

.44)

***

(9.2

1)**

* (5

.09)

***

(-5.3

5)**

* (2

.85)

***

2 A

ug. 9

, 2.

64

0.27

0.

15

0.15

0.

00

0.64

0.

07

-0.4

3 -0

.22

0.40

0.

22

-0.3

5 0.

19

43.2

1 97

0 19

93

(25.

52)*

**

(8.6

7)**

* (5

.81)

***

(4.1

5)**

* (0

.07)

(1

5.09

)***

(1

.67)

* (-9

.42)

***

(-4.7

0)**

* (8

.78)

***

(4.8

8)**

* (-5

.53)

***

(3.3

3)**

*

3 Se

pt. 3

, 2.

45

0.27

0.

14

0.16

-0

.02

0.58

0.

03

-0.3

8 -0

.22

0.35

0.

18

-0.3

5 0.

21

38.1

8 97

0 19

93

(24.

92)*

**

(8.2

7)**

* (5

.42)

***

(4.2

8)**

* (-0

.63)

(1

3.09

)***

(0

.70)

(-8

.03)

***

(-4.4

7)**

* (7

.42)

***

(3.7

4)**

* (-

5.30

)***

(3

.51)

***

4 D

ec. 1

2,

2.27

0.

26

0.12

0.

17

-0.0

2 0.

56

0.09

-0

.07

-0.2

5 0.

30

0.29

-0

.19

0.33

38

.09

969

1993

(2

4.26

)***

(7

.45)

***

(4.5

5)**

* (5

.66)

***

(-0.8

5)

(12.

63)*

**

(2.0

2)**

(-1

.49)

(5

.14)

***

(6.0

9)**

* (6

.23)

***

(-3.0

0)

(5.44)***

Pred

icte

d si

gn

Posi

tive

Posi

tive

Posi

tive

Posi

tive

Neg

ativ

e N

egat

ive

Neg

ativ

e Po

sitiv

e Po

sitiv

e N

egat

ive

Posi

tive

of c

oeff

icie

nt

*** I

ndca

tes

stat

istic

al si

gnif

ican

ce at

the

0.01

lev

el.

** In

dica

tes s

tatis

tical

sign

ific

ance

at th

e 0.

05 le

vel.

* Ind

icat

es st

atis

tical

sign

ifica

nce

at t

he 0

.10

leve

l. ‘S

ourc

e: F’

rivat

izac

e Kup

onov

a, 1

992/

1993

, Cen

ter f

or V

ouch

er P

riva

tizat

ion,

Cze

ch M

inis

try

of F

inan

ce

? ;s R

a- s

c:

a - h, 0

8 L

h,

CA


DBINSD and DBORIG are similarly defined for insider and restitution ownership. DBFl is a dummy with a value of one when the fund with the largest stake in the firm among funds is also the largest blockholder in the firm, otherwise it has a value of zero. Other variables have the same definitions as above for (1). This analysis is similar to that in Claessens (1997), who focuses on the concentration of ownership in the firm, paying limited attention to the identity of the different owners and their economic motivations considered in our analysis above.

The mean (median) value of the Herfindahl Index is 0.1212 (0.0836), suggesting that the average firm has an ownership equivalent of a single block that owns 34.14% (28.95% ) of the shares outstanding. The corresponding Herfindahl reported by Demsetz and Lehn (1985) is 0.04028 for 511 large U S . firms for the period 1980-1981, or the equivalent of a single block of about 20.00%. This suggests that Czech firms have started out with more concentration of ownership than U.S. firms.16 In terms of the largest blockholder, who is in a position to exert the most control, funds are the largest blockholders in 364 cases (out of the full sample of 988 firms). Foreigners, who have some stake in 41 firms, are the largest blockholders in 32 cases. Out of the 90 firms with insider ownership, insiders own the largest block in 76 cases. Restitution owners have the largest block in seven firms, although they own stakes in 75 firms. In most of the other firms, government holds the largest share of stocks.

Table 8 contains the results from an estimation of (2). For all the four auctions in the table, concentration of ownership, HEW, has a positive relation with stock value. However, the relation is not monotonic, since (HERF)' has a significant negative coefficient. This suggests that beyond some level concentration of ownership has a negative effect on stock value (30% to 40% range). This is consistent with some of the arguments presented in the hypotheses section. For example, this is predicted by the retrenchment hypothesis regarding insider ownership.

As for the effect of the identity of the largest blockholder, we find in Table 8 that foreigners, restituents and insiders have a positive effect on stock value, with the largest effect from foreign ownership, followed by restitution and insider ownership. On the other hand, when a fund is the largest blockholder, it negatively affects stock value. The coefficient of DBFl is significant and negative in all four estimations. This is consistent with funds as either poor monitors, or as blockholders that may pursue their own welfare at a detriment to other shareholders.

Since we are dealing with a heterogeneous group of funds, in Table 9 we examine how the characteristics of the funds affect stock value. In the first estimation, we consider the sponsorship of the fund. We find that, when the fund is sponsored by a bank and is the largest blockholder, it does not have a significant negative effect on stock value. In contrast, other funds in a similar role have a significant

l 6 One explanation may be that U.S. firms are much larger than Czech firms, and are expected to have a lower Herfhdahl index. However, we find that the log of the Herfindahl index for Czech f i i s is positively related with the log of total assets.

Tab

le 8

Reg

ress

ion

anal

ysis

of s

tock

mar

ket p

rice

s for

Cze

ch firms u

nder

goin

g vou

cher

pri

vatiz

atio

n in

Wav

e 1:

Con

cent

ratio

n of

owne

rshi

p an

d id

entit

y of

la

rges

t blo

ckho

lder

as in

depe

nden

t var

iabl

es‘

Dep

ende

nt V

aria

bles

: Log

of

RM

S pr

ices

dur

ing

auct

ion

num

bers

1, 2

, 3, 8

. H

ERF

= s

um o

f sq

uare

s of

frac

tions

of e

quity

hel

d by

dif

fere

nt o

wne

rs.

DB

FRB

R =

1 if

for

eign

ers o

wn

the

larg

est b

lock

, oth

erw

ise

zero

. D

BIN

SD =

1 if

ins

ider

s ow

n th

e la

rges

t blo

ck, o

ther

wis

e ze

ro.

DB

OR

IG =

1 if

res

titut

ions

ow

n th

e la

rges

t blo

ck, o

ther

wis

e ze

ro.

DB

Fl =

1 if

a fu

nd o

wns

the

larg

est b

lock

, oth

erw

ise

zero

. D

RO

E =

1 if

RO

E is

abo

ve m

edia

n, o

ther

wis

e zer

o.

DV

AR

= 1

if t

he 2

-dig

it IS

IC in

tra-

indu

stry

var

ianc

e of

RO

A is

abo

ve

med

ian,

oth

erw

ise z

ero.

ze

ro.

DTA

= 1

if T

A is

abo

ve m

edia

n; o

ther

wis

e ze

ro.

Reg

ress

ions

are

est

imat

ed u

sing

Whi

te’s

(198

0) p

roce

dure

to a

djus

t for

het

eros

keda

stic

ity.

Est.

Dat

e of

C

oeffi

cien

t of

(r-sta

tistic

s in

pare

nthe

ses)

A

dj. R2,

No.

Auc

tion

CO

NST

. H

EW

(H

EW

)z DBFRNRDBINSD DBORIC DBFl

DROE

DV

AR

DTA

DBK

DG

VT

DRE

DIND

DLOC

%

N

DB

K =

1 if

(B

KD

EB

TR

A)

is a

bove

med

ian,

oth

erw

ise

zero

. D

RE

= 1

if R

EV

EM

P is

abo

ve m

edia

n, o

ther

wis

e ze

ro.

DIN

D =

1 if

fi

is in

a “

smok

esta

ck”

indu

stry

(agr

icul

ture

, min

ing,

m

anuf

actu

ring

, util

ities

, con

stru

ctio

n, an

d tr

ansp

orta

tion)

, oth

erw

ise,

for

serv

ice

it is

zer

o.

DLO

C =

1 if

fir

m is

loca

ted

in t

he P

ragu

e di

stri

ct, o

ther

wis

e ze

ro.

DG

VT

= 1

if g

over

nmen

t has

a c

ontin

uing

ow

ners

hip

stak

e, o

ther

wis

e

1 Ju

ly 8

, 2.85

3.36

-4.75

0.70

0.18

0.53

-0.12

0.71

0.11

-0.44

-0.19

0.24

0.24

-0.28

0.11

46.92 975

1993 (26.07)*** (4.87)*** (-4.21)***(5.13)*** (1.70)* (3.26)*** (-1.84)* (16.43)*** (2.38)** (-9.91)***(-4,17)***(4.20)***(5.03)***(-4.66)***

(2.09)**

2

Aug

. 9,

2.61

2.66

-3.64

0.70

0.21

0.37

-0.18

0.64

0.08

-0.41

-0.20

0.22

0.22

-0.30

0.15 44.17 975

1993 (23.63)*** (4.08)*** (-3.59)***(4.85)*** (1.92)* (2.35)** (-2.56)***(14.90)*** (1.76)* (-9.33)***(-4.41)***(3.71)***(4.75)***(-.92)***(2.75)***

3 Se

pt. 3,

2.34

2.75

-3.36

0.70

0.19

0,49

-0.15

0.59

0.04

-0.36

-0.20

0.17

0.18

-0.30

0.16 39.13 975

4

Dec

. 12,

2.16

1.83

-2.26

0.74

0.22

0.46

-0.10

0.57

0.10

-0.06

-0.23

0.19

0.29

-0.16

0.29 37.58 974

1993 (20.33)*** (4.23)*** (-3.33)*** (0.15) (1.69)* (3.39)*** (-2.07)** (12.92)*** (0.85) (-7.93)***(-4.21)***(2.78)***(3.67)***(-4.69)***(2.73)***

1993 (19.28)*** (2.79)*** (-2.41)***(4.66)*** (1.87)* (3.86)*** (-134) (12.49)*** (2.07)** (-1.23) (-4.80)***(2.90)***(6.1 I)*

** (-2.54)** (4.93)***

Pred

icte

d

coef

ficie

nts

sign

of

Posi

tive

Neg

ativ

e Po

sitiv

e Po

sitiv

e Po

sitiv

e N

egat

ive

Neg

ativ

e N

egat

ive

Posi

tive

Posi

tive

Neg

ativ

e Po

sitiv

e

***I

ndic

ates

sta

tistic

al s

igni

fican

ce a

t the

0.01 l

evel

. **

Indi

cate

s st

atis

tical

sig

nific

ance

at t

he 0.05 l

evel

. *I

ndic

ates

sta

tistic

al s

igni

fican

ce a

t the

0.10 l

evel

. ‘S

ourc

e: P

rivat

izac

e K

upon

ova,

1992/1993, C

ente

r fo

r V

ouch

er P

rivat

izat

ion,

Cze

ch M

inis

try o

f Fi

nanc

e

ir I cu

N

Tabl

e 9

Effe

ct o

f fu

nd c

hara

cter

istic

s on

stoc

k va

lue

whe

n fu

nd is

larg

est h

lock

hold

er

Dep

ende

nt V

aria

ble:

Log

of R

MS

pric

e in

Auc

tion

1 (J

uly

8, 1

993)

. Reg

ress

ions

are

est

imat

ed u

sing

Whi

te's

(198

0) p

roce

dure

to a

djus

t for

het

eros

keda

stic

ity.

DB

F1-B

NK

= 1

if a

fund

ow

ns t

he la

rges

t blo

ck a

nd is

spo

nsor

ed b

y a

bank

. D

BFl

-NB

NK

= 1

if a

fun

d ow

ns t

he la

rges

t bl

ock

and

is n

ot s

pons

ored

by

a ba

nk.

DB

Fl-S

PC =

1 if

a fu

nd o

wns

the

larg

est

bloc

k an

d is

a s

peci

alty

fun

d.

DB

FI-N

SPC

= 1

if

a fu

nd o

wns

the

larg

est

bloc

k an

d is

not a

spe

cial

ty f

und.

D

BF1

-SM

L =

1 if

a f

und

owns

the

larg

est

bloc

k an

d is

bel

ow m

edia

n in

siz

e am

ong

fund

s.

DB

F1-B

IG =

1 if

a fu

nd o

wns

the

lar

gest

blo

ck a

nd is

abo

ve m

edia

n in

siz

e am

ong

fund

s.

Est.

Coef

ficie

nts

(t-sta

tistic

s in

par

enth

eses

) A

dj .

No.

Co

nst.

HEW

(H

EW

)' D

BFRN

R D

BIN

SD D

BORI

G

DRO

E D

VA

R D

TA

DBK

D

GV

T D

RE

DIN

D

DLO

C R

2,%

N

N

CQ

Pane

l A: B

ank

Spon

sors

hip

of F

und

~~

~~

DB

F1-

DB

F1-

BNK

N

BNK

1

291

339

-475

07

0 01

8 05

1 -0

02

-022

06

7 01

1 -0

46

-019

02

2 02

3 -0

29

011

4762

975

(2

6 90

)***

(4

92)*

** (-

4 22

)***

(5 09

)***

(1

70)

* (3

09)*

**

(-0 2

2)

(-3 0

9)**

* (1

5 29

)***

(2

40)*

* (-1

0 44

)***

(-4

15

)***

(3 9

2)**

* (4

81)

***

(4 7

7)**

* (2

09)

**

Pane

l B S

oeci

aliz

atiu

n of

Fun

d

DB

FI-

DB

Fl-

SPC

N

SF'C

2

2.85

3.

43

-4.8

3 0.

70

0.18

0.

53

-0.2

4 -0

,lO

0.

71

0.10

-0

.44

-0.2

0 0.

24

0.23

-0

.28

0.11

47

.05

975

(26.

09)*

** (

4.96

)***

(-4

.28)

***

(5.0

9)**

* (1

.72)

* (3

.26)

*** (

-2.8

2)**

* (-1

.53)

(1

6.53

)***

(2.2

6)**

(-1

0.00

)***

(-4

.25)

***

(4.1

9)**

* (4

.95)

*** (

-4.5

9)**

* (1

.94)

*

Pane

l C: F

und Size

DB

Fl-

DB

FI-B

IG

SML

3 2.

87

3.38

-4

.75

0.71

0.

19

0.53

-0

.17

-0.0

6 0.

70

0.11

-0.4

5 -0

.19

0.24

0.

23

-0.2

8 0.

11

47.0

9975

(2

6.59

)***

(4.

91)*

** (

-4.2

1)**

* (5

.19)

***

(1.7

9)*

(3.2

3)**

* (-2

.37)

**

(-0.8

1)

(15.

80)*

**

(2.4

2)**

(-1

0.23

)***

(-4

.14)

***

(4.1

6)**

* (4

.90)

*** (

-4.6

5)**

* (2

.10)

**

See

Tabl

e 8

for s

ourc

es o

f dat

a an

d de

finiti

ons

of v

aria

bles

, exc

ept f

or th

e fo

llow

ing

varia

bles

:

? - h, 8 P


negative effect on stock value. These findings are consistent with the notion that banks have a special expertise in monitoring (with empirical support in James, 1987; and Lumner and McConnell, 1989). On the other hand, these findings refute other notions of the role of banks in the Czech Republic. For example, as cited by Coffee (1994), the Wood Company Securities states in a study that “The strategy in many of these cases, it seems, was for the bank funds to leverage stakes in companies into seats on their managing boards and later into banking business for the fund’s sponsoring bank.” Moreover, with banks providing financing and serving on the board, the potential for holdout problems are likely to be serious.

In the remaining two estimations in Table 9, we consider how the investment policy of the fund affects stock value. The underlying idea that we test is that a policy of focus produces better monitoring, and higher stock values. In the second estimation, we find that a policy of focused investing did not produce a positive effect. However, since banks generally formed large portfolios, these are funds without bank sponsorship, and without the related monitoring expertise. In another test of the effect of focused monitoring, we consider in estimation 3 whether funds with fewer securities experienced better performance. Contrary to expectations, the findings in the table show that funds with a small number of securities did not fare well. Again, these results could arise from the relatively poor expertise among smaller (non-bank) funds.

8. Conclusion

The Czech voucher privatization scheme provides a natural experiment to test the relation of ownership structure with share value, talung into account the identities of the owners. Since foreign, insider, and particularly restitution ownership were exogenously predetermined, it is appropriate to cross-sectionally examine the relation of ownership with share value in the voucher scheme and the stock market prices that followed (Demsetz, 1983). After controlling for firm characteristics, we find that the stakes held by these owners are monotonically positively related with share value, as hypothesized in the literature based on a better alignment of interests of insiders, and stronger incentives for closer external monitoring by foreigners and restituents (Morck, Shleifer, and Vishny, 1988; McConnell and Servaes, 1990). While our findings for foreigners and insiders can be attributed to their superior ability to identify more profitable firms, we interpret the findings for restituents as evidence of the positive benefits of external blockholdmgs. Similarly, when foreigners, insiders, and restituents own the largest block, share prices are higher, after controlling for the concentration of ownership.

We also examine fund ownership, which emerged from the voucher scheme, and find no significant relation between the stake held by the fund with the largest block among funds and share value. However, when the fund is also the largest blockholder in the firm, it has an adverse effect on share value. This supports the view that funds provide insufficient monitoring because of the agency problems


faced by fund managers themselves. It is also consistent with the view that funds undertake activities that are harmful to other shareholders (Pound, 1988). Finally, we find that when a bank sponsors the fund, share value is not significantly affected, suggesting that such funds may provide better monitoring because of their bank connections. It also refutes the notion that Czech banks use funds to seek lucrative lending arrangements or protect bank loans at a cost to shareholders.

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Documents

Ownership Structure as a Determinant of Firm Value: Evidence from Newly Privatized Czech Firms