Abstract
We estimate investment-cash flow models for a large sample of firms in 13 transition economies over the period 1993–2003, and find that (1) investment-cash flow sensitivities decline over transition years; (2) for state-owned firms, in early transition the investment-cash flow sensitivity is negative, which we interpret as being consistent with soft budget constraints; (3) privatised firms invest efficiently; and (4) foreign-controlled firms are less financially constrained than other firms.
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Notes
See, for example, Lizal and Svejnar (2002) for the Czech Republic. This study explored data provided by the Czech Statistical Office over the period 1992–1998.
See Budina et al. (2000) for Bulgarian firms over the period 1993–1995 using the Amadeus dataset.
Most papers on corporate investment behaviour in transition countries focused on the early transition period. For example, see Lizal and Svejnar (2002) and Budina et al. (2000), Konings et al. (2002) for firms in Poland, the Czech Republic, Bulgaria and Romania during 1994–1999. Some studies examine late transition, for example, see Mueller and Peev (2007) for 151 publically listed firms in 10 transition economies during 1999–2003.
For a survey of empirical studies, see Chirinko (1993), Mueller (2003, pp. 177–179), and Gugler (2005).
For recent studies applying both AI and MD theories, see Gugler et al. (2004a).
Various proxies of financial constraints are used, like dividend payments (Fazzari et al. 1988); firm affiliation to business groups (Hoshi et al., 1991); age, ownership concentration, and membership in an interrelated group (Chirinko and Schaller, 1995).
A hardening of the budget constraint should only affect over-investing firms. Under-investing firms (firms with cash constraints) do have rates of return larger than their cost of capital, thus they already have a hard budget constraint.
See, for example, Jones and Mygind (1999) for ownership change in Estonia; Grosfeld and Hashi (2003) for the Czech Republic and Poland; Mueller et al. (2003) for Bulgaria. For the differences in corporate performance depending on ownership concentration, see, for example, Hanousek et al. (2007).
We may expect that corporatised state firms face harder budget constraint than state-owned enterprises. However, our data have limitations to separate the state firms into these two groups, thus we use a total sample of all state-owned firms.
Among recent contributions see, for example, for Hungary, Colombo and Stanca (2006) for 4,333 firms over the period 1989–1999 and Perroti and Vesnaver (2004) for 56 public companies in the period from 1992 to 1998. Among the early studies, see, for example, Grosfeld and Nivet (1997) for 173 large firms in Poland during 1988–1994. The authors distinguished three types of enterprises: state-owned, ‘commercialised’, and privatised.
See, for example, Perroti and Gelfer (2001). The authors examine the controlling role of banks in financial-industrial groups in Russia. They study 71 public companies in 1995 and find a negative correlation between investment and cash flow in bank-led groups. The authors explain this result with extensive reallocation of funds and use of profitable firms as cash cows.
For discussion on the agency issues related to the corporate pyramid structures, see Morck et al. (2005).
See Mueller (1986) for a similar approach.
Amadeus is a Pan-European financial database, containing balance sheet, income statement, and ownership structure information on over 250,000 major public and private companies in all sectors in more than 30 European countries. The Amadeus ownership database provides basic information about the company owners, namely: identification number, name, type, nationality, and percentage of ownership stake (Ownership Database, Bureau van Dijk Electronic Publishing, 2004).
For empirical evidence on the high ownership concentration of listed firms in Western Europe, see, for example, Gugler et al. (2004b).
However, the Amadeus database like other official databases has limitations to measure the ultimate state control and capture only the direct state ownership in the non-financial firms. Some studies investigate the full degree of state control in privatised firms (see eg Hanousek and Kochenda, 2008).
For a similar transition matrix describing ownership transformation, see Jones and Mygind (1999) for Estonia and Grosfeld and Hashi (2003) for the Czech Republic and Poland.
Of course, it would be preferred to use a set of truly independent instrumental variables (IV) instead. It was, however, impossible for us to identify and collect a set of IVs that would vary across firms and time and that would be uniformly valid for all 13 countries in the sample.
We observe similar results when we run yearly cross-sectional regressions. That is, cash flow coefficients reach values of more than 0.2 in 1995/1996 but only 0.05–0.1 in 2002/2003. These results are available upon request.
Again we must note that we have only data on direct ownership at hand, so we can claim our results only for directly state-controlled firms.
In a recent survey, Estrin et al. (2008) summarizes 34 empirical studies published or circulated as working papers by December 2007 and show that the positive privatisation effects on performance are conditional on factors like the type of the new private owners, corporate governance, access to know-how and markets, and the like.
See the estimation procedure in the section named ‘Econometric Modeling’.
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Acknowledgements
This research was partly supported by the FWF project P 19522-G14 on ‘Corporate Governance in Central and Eastern Europe’, by a Marie Curie Intra-European Fellowships within the 6th European Community Framework Programme and by the Austrian National Bank. We thank the seminar participants for helpful comments at the corporate governance and investment workshop in Jönköping, at the NOEG annual conference, at the seminar of the Department of Economics at the University of Vienna, and at the FMA conference 2008 in Prague.
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Gugler, K., Peev, E. Institutional Determinants of Investment-Cash Flow Sensitivities in Transition Economies. Comp Econ Stud 52, 62–81 (2010). https://doi.org/10.1057/ces.2009.11
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DOI: https://doi.org/10.1057/ces.2009.11
Keywords
- investment
- cash flow
- asymmetric information
- managerial discretion
- soft budget constraint
- ownership change
- corporate governance
- transition