Emerging Regulatory Governance: Contextual
Evidence on Going Private Transactions
Gilles Chemlaa

Adrian Popb
andDiana Popc
Version: November 2008
Abstract: This research project aims at assessing the link between the regulation ofcontrol transactions and the corporate governance of Romanian public companies, by analyzing the massive delisting activity from 1997 to 2006. The large number of listed companies offers a unique opportunity to investigate the appeal of a frontier emerging market
for domestic and foreign investors. Over time, the Romanian authorities have undertaken
wide-ranging institutional reforms, most of which favoring large strategic investors oversmall and dispersed shareholders. Our empirical approach, based on the logit methodology and survival analysis, allows us to analyze the evolution of public companies over thisperiod and sheds light on the likely events causing frontier emerging markets’ eclipse. Our
main findings reveal that delisting is more likely to occur when (i ) the block obtained bycircumventing the market is high; (ii ) the company experiences frequent takeover bids;
and (iii ) the stock liquidity is low.
Keywords: takeover regulation; squeeze-out; minority shareholder protection.
JEL Classification: G34; G38; K22

a Imperial College London, South Kensington Campus, London SW7 2AZ, UK, Tel.: +44-2075-94-91-61; fax: +44-20-75-94-91-89. E-mail: g.chemla@imperial.ac.uk
b Institute of Banking & Finance, University of Nantes (LEMNA), Chemin de la Censive duTertre, BP 52231, 44322 Nantes, Cedex 3, France, Tel.: +33-2-40-14-16-54; fax: +33-2-40-14-1650. E-mail: adrian.pop@univ-nantes.fr
c Sorbonne Graduate Business School (IAE), University Paris 1 Panthéon-Sorbonne, 21 Rue
Broca, 75005 Paris, Cedex 05, France, Tel.: +33-1-53-55-27-39; fax: +33-1-53-55-27-01. E-mail:diana.pop@univ-paris1.fr (corresponding author)
Acknowledgements
We are grateful to the Global Corporate Governance Forum for generous financial support.
We are also grateful to Vladimir Atanasov, Gilbert Colletaz, Myron Slovin, and participants at theEmerging Markets Workshop (Yale School of Management, The Millstein Center for Corporate
Governance and Performance, New Haven) and CEREG Finance Seminar (University of Paris
IX Dauphine) for their helpful comments and suggestions; Cristian George Avram (Romanian
Universe Database) and Adrian Zoicaş (Broker S.A.) for help with data; Camelia Brad and Heidi
Wechtler for excellent research assistance. The usual disclaimer applies.

1.

Introduction

The question of how to structure the ownership and deal with conflicts arisen between
the various protagonists of public companies has been recently restated within the context
of the reform process undergone in the European emerging markets. The vast privatization
programs addressed to millions of citizens and the subsequent trading of distributed freeshares on new revived markets were viewed as genuine steps forward to the implementationof financial discipline in deficient corporations. The emergence of what have been confusedly
called “dispersed shareholders” had been longtime considered a trump card in the reforming
process involving former state-owned enterprises. Indeed, the existence of a large numberof shareholders could justify to some extent the use of the ‘public corporations’ label, but it
represents at best a ‘sine qua non’ condition for implementing tough restructuring measuresin privatized companies. Specifically, restructuring asks for the involvement of institutional
shareholders or industries’ leaders likely to have expertise in the area of financial engineering, and to possess substantial financial resources for acquiring controlling positions in
those companies. The compromise ownership structure “controlling owner — small individual
shareholders”, opened a new debate on the role of regulation governing the property rights
and control transactions and the type of corporate governance solutions that could address
conflicts opposing private market actors. In this respect, facilitating the emergence of asound private sector requires specific regulatory measures insulating minority shareholders
from the expropriation by the controlling ones. In emerging markets, the authorities considered that leveling the playing field among corporate claimants could be achieved simply
by transposing some of the rules applicable in well-established financial markets. Whether
the “imported” legal texts have reflected the evolving domestic institutional issues and have
had the expected wealth effects remains an open question whose answers are likely to becontextual.
In CEE the peculiar corporate structures fuel a broad discussion on the design of explicit
rights of minority shareholders in block-holder regimes. The continuous dilution inflicted tominority shareholders in Romanian public companies led OECD1 to recommend delisting
as one of the top priorities that could restore the confidence in the private economic sector.
We address this general corporate governance issue by focusing on the consequencesof regulation governing control transactions on the shareholders’ decisions of changing the
public status that preceded and followed the OECD recommendations. In this respect, weanalyze the evidence from the over-the-counter market RASDAQ between 1997 and 2006.
Our evidence shows that the controversy around shareholders rights finds its roots in the
proliferation of deals with large blocks made by circumventing the market. We posit thatthe institutional choices of Romanian government in the early stages of privatization dra1

It is worth underlining that some international or private bodies, like OECD, EBRD, World Bank, Standard and Poor’s, Wilshire Consulting, are closely analyzing the institutional transformations likely to boost
the restructuring of companies chartered in emerging countries. These bodies publish regularly comparative
analyses on the quality of institutional environment based on a large number of indicators.

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3matically influenced not only the power balance between large and small shareholders, butalso the subsequent market regulations that could adjust the erroneous initial administrative decision. Besides, the agency conflicts between shareholders compelled to restructure
and those whose simple presence is the essence of the financial visibility of companies wereexacerbated by the ample wave of abandoning public markets. This polemic has been intensified by some notable exceptions from the mandatory bid rule, as well as by a seriesof amendments to the valuation criteria of minority equity stake in going private transactions. Such legal details enabled the internal rent-seeking behavior thus encouraging thepersistence of large block-holdings. Taken together, legal standards and contextual evidence on delisting allows arguing that corporate regulation is in fact an important sourceof path dependence in the country’s pattern of corporate structures rather than an effective
response to conjectural corporate governance failures. Our approach tries to establish how
the reform agenda of Romanian market authority can give insights on the level of minority
shareholders protection, which could be relevant for other emerging markets. Besides, theempirical specifications controlling for the outcomes of privatization, takeovers and sharecapital changes on the decision of whether to remain public of 3,321 public companies also
reveal that private status, as an extreme form of concentrated ownership, is driven by initialownership structures (Bebchuck and Roe, 1999).
The remainder of the paper is structured as follows. In Section 2, we briefly present thehistory of corporate structures formation and market regulation in Romania, with a focus on
the main challenges raised by the implementation of fair price standards in freeze-out bids.
In Section 3, we discuss the arguments founding the delisting decisions and summarize themain empirical findings of the related studies on going private and going dark transactions.
Section 4 presents the empirical methodology employed in our research and describes oursample selection procedure and the selected independent variables. In Section 5, we present
the results of logistic and duration analyses explaining the likelihood a company changes its
public status into the private one. The final section concludes.
2.
2.1.

Institutional setting and legal provisions regulating control transactions
Initial patterns of corporate ownership structures

The peculiar experience of Romanian stock market has been fuelled by the controversial
mass privatization policy. Unlike other authorities from CEE where the transfer of State
property into private hands involved private intermediaries that competed for collecting
privatization vouchers (e.g. Poland, Czech Republic, Bulgaria), the Romanian government
preferred to establish a direct relation between companies and citizens. In this respect, each
adult citizen could exchange the voucher received for free for the shares of a single company.
When the mass privatization program was re-launched, they could make a choice within alist of 3.905 companies based on some basic information (industry code, share capital, sales,
gross profit and the maximum percentage of share capital to be privatized). During theselection process the vouchers could not be bilaterally exchanged and thus, nobody could

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4gather more vouchers. At the end of subscription period the Privatization Authority (AVAS)
distributed the shares to individual shareholders based on the subscription degree: (1) if theoffer was over-subscribed, it made a pro-rata distribution without exceed the initial offeredpercentage; (2) if the offer was under-subscribed it allotted the corresponding shares, while
keeping the unsubscribed ones. Those who could not decide themselves were allowed to
exchange their privatization vouchers for the shares of one of five private property funds
administratively created in 1991. The stock market emerged at this stage of restructuring
process, as an artifact of the mass privatization program. All companies included in that
program were compulsory listed either on Bucharest Stock Exchange (1995) or at the overthe counter market, RASDAQ (1997). The distributed shares to citizens formed the free
float of companies, considered from then-on public companies. According to the numberof listed companies, the Romanian market has become the largest market of the region.2
Nonetheless, the mass privatization concerning thousands of industrial companies created
18 million small shareholders but very few companies with dispersed shareholdings. For theend of 1998, Earle and Telegdy (2002) report a mean and median ownership of shareholders
who received shares within mass privatization program of 24.5% and 18.4%, respectively.
As, on the average, the individual shareholders could not make any corporate decision evenwith perfect coordination, they have been for a long time regarded as a class of tolerated
passive investors. Paradoxically, the stock market was viewed as a platform were “voucher”
shareholders could sell their holdings and thus enjoy the last free lunch proposed by thegovernment, rather than an institutional structure facilitating capital raising.
Despite its scope, the mass privatization was only one piece in the puzzling restructuring
program of Romanian Government. Meanwhile, the Privatization Authority (AVAS) had
continued to sell the State property to individual and institutional investors either by direct
deals or market bids. According to AVAS data, 9.258 blocks were dealt between 1993 and2003, more than 45% transactions involving majority stakes.
The broad picture of the very way the AVAS holdings were sold credibly signals that
Romanian government aimed principally at attracting large investors. While investments
in controlling positions arouse the interest in performing the needed changes, the pervasive
block-holdings obstruct the portfolio investments, calling thus into question the enduranceof market structures. Fama and Jensen (1983), Maupin et al. (1984), Jansen and Kleimeier(2003), Atanasov et al. (2005) argue that high ownership concentration makes companies
decide to go private. As under these views the gradual eclipse of public companies canbe reasonably predictable, our contention is that Romanian stock market is an excellent
candidate for analyzing the delisting decision in frontier emerging markets.3
2Berglöf and Pajuste (2003) and Pajuste (2002) present a comparative analysis among the markets ofCentral and Eastern Europe which could provide the reader with further details.
3
In order for a market to be considered as “emerging” several criteria have to be met: (1) the market islocalized in an emerging country; (2) the market does not exhibit financial depth; (3) there exist broad based
discriminatory controls for non-domiciled investors; (4) it is characterized by a lack of transparency, depth,market regulation, and operational efficiency Wilshire Consulting provides an annual report classifying the
emerging markets in two distinct categories: (1) “investable” emerging markets and (2) “frontier” emerging

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2.2.

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5

Imported or tailored corporate rules?

Contrary to the dominant opinion according to which the changes in transition economies
have been performed in a legal vacuum, in Romania the control transactions between private investors have been regulated from the market inception, drawing on the EU legislation.
The regulation of acquisition has been strongly linked to the concept of restructuring, all
the more such an objective assume enhanced relationships between owners and the agentsmandated to use the company resources. The main protection guaranteed to shareholders
concerns the obligation of an investor to make a non discriminatory public offer whenever heaims at acquiring at 33% or 50% of the voting rights. As a consequence, the capital transactions leading to the acquisition or reinforcement of a control position in public companies
have proliferated after 1997. More than 1.000 takeover bids were approved by the Romanianmarket authority (CNVM) over a 10 years span. While deemed to be public regarding, thetakeover law dissimulates the sheer ignorance about the future of minority shareholders.
The mandatory bid rule was tailored so that to address privatization objectives and theinterests of groups dominating the corporate realm. Particularly, an acquirer who obtains
the majority position following a transaction made within privatization process is exemptedfrom the obligation to make a bid for the rest of the company shares. Under these circumstances investors could build a high toehold by dealing directly with AVAS outside themarket without being forced to share the gain inherent to the control block with minority
shareholders. Because of these ‘excepted transactions’, the other external investors can notextract any information from market prices about the acquirer’s intention to get the control
in a target.
For achieving a comprehensive view on the scope of market regulation, we present in
the Appendix 2 a schema detailing the takeover and securities legal texts addressing those
aspects. Our main inquiry is to determine in which extent the actual legal measures could
assure the proportional sharing of companies’ value among all shareholders. In this respect,
we focus our further discussion on the reasons leading OECD to recommend the intensification of delisting, as well on the regulatory answer of Romanian market authorities to thoserecommendations.
Before 2001 a company was allowed to delist only (a) after concluding a public offer
initiated in the name of the majority of shareholders to buy-back the outstanding sharesand (b) if, the General Assembly of Shareholders of the company having after the offer fewer
than 500 shareholders or a share capital lower than 1 billion ROL decided to transform thecompany into a private one. According to the regulation from 1996 the exit price was based
exclusively on the net asset value. The main objective of this regulation was to maintaina minimal functionality of capital market on behalf of small shareholders willing to trade
their stocks. However, the prospects of concluding trades on the capital market were poor
markets. The aim of this classification is to identify those markets that are able to support institutional
investments and not to evaluate the current attractiveness for investment managers. For the time being, theonly European emerging markets classified as “investable” are Hungary, Poland, and the Czech Republic.

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6

because the majority of companies were under the control of a major shareholder from thevery first day of their public episode. Besides, the low free floats created scope for market
price manipulation that further deepened the market illiquidity. The OECD report (2001)
provides anecdotal evidence on expropriation practices used by major shareholder especiallyin small- and medium-sized enterprises, by mean of changes of share capital and relatedparties transactions. Under this view, the main redress available for minority shareholders
was to create the premises for ownership consolidation and delisting of illiquid companies
by instituting an equitable system of tender offers. In this respect, OECD recommend to
Romanian market authority to determine a reasonable threshold triggering the squeeze-out
procedure and to assure the implementation of a fair price standard.
Beginning with 2002, the updated takeover rules in respect with the recommendations
made in the OECD report, state the ‘obligation’ for the largest shareholder owning at least
90% of the capital to cash-out the minority shareholders. The law regulating the capital
market promulgated in 2004 redefines this ‘obligation’ as a ‘right’ of controlling shareholder
owning 95% or having obtained more than 90% of the target shares in a previous takeover
bid to take the company private.
In spite of this evolution, the appraisal remedy granted to the minority shareholders
has raised a lot of controversy. The conditions of determining the buyout price had beenchanged no less than five times between the first draft of the market law from March 2002
and the end of that year. Particularly, in some cases (e.g. the delisting of Timken Romania)
the major shareholders interpreted the rules only with respect to the obligation to delist thecontrolled company and neglected the obligation concerning the minimum price to be paid tominority shareholders. The ambiguity created by the law encouraged some active minority
shareholders to contest the decisions concerning public to private transactions made by themarket authority. According to the final version of the appraisal remedy established at theend of 2002, the buyout price proposed to minority shareholders had to be compoundedbased on three distinct values: (1) the average market price in the 12 months preceding
the going private transaction; (2) the maximum price paid by acquirer for the target shares
over the same period; and (3) the equity per shares valuated based on the International
Accounting Standards. Beginning with 2004, the squeeze-out price provision states thatthe price paid in a previous tender offer according to which at least 90% of the remaining
shares were tendered is a fair price.4 Unless the controlling shareholder does make use of
his right in the next three months following the acquisition of such a stake, the fair pricewill be valued by an independent expert. Besides, according to the market law of 2004
minority shareholders can have the right to sell-out the remaining shares5 to the dominant4

According to the acquisition literature, establishing a price for the going private transaction equal tothat paid in the previous stage of a two-stage bid conditioned by the acquisition of 90% of the voting rights,
it is argued by the free rider behaviour of atomistic shareholders. If the final price were higher than thislimit, all the minority shareholders would wait the final stage of the offer. Besides, as each stockholder has achoice of whether to tender the shares to prospective investor such a price could not be considered coercive.
5
According to Holderness and Sheenan (1988), such a fair price provision restricts ex-ante the scope ofbidders’ opportunism and insulates the small investors from excessive expropriation.

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7shareholder owning 95% of share capital either according to the terms of the bid preceding
the acquisition of such a stake6 or based on the valuation of an external expert. However, if
an external valuation of the minority holdings is necessary, the small shareholder contesting
the price being offered is obliged to bear the valuation costs. When small shareholders are
wealth constrained and there is likely that costs exceed the value of shares, such fairness
principle becomes simply unfeasible.
The odd market conditions reflecting the manipulation of thinly traded positions andlow equity valuations made takeovers on Romanian market cheap and the public to private transactions highly affordable. Corroborated with the set of favorable circumstances
offered within the privatization process, this pressure to change the public status creates
the premises of an inconsistent playing field between large and minority shareholders.
It is highly recognized that, when target shareholdings are dispersed, allocational acquisitions are possible only if acquirers can either limit the access of minority shareholders
to post-acquisition gains (via dilution, private benefits of control or squeeze out rights) orbuild a toehold in the target. Under such circumstances, the exclusion mechanisms havea socially desirable impact, as long as these ones allow the market for corporate control
play its disciplinary role. According to Yarrow (1985) providing an acquirer with a squeezeout right is an effective alternative to voluntary dilution in systems with widely dispersed
shareholdings. However, when concentrated ownership structures predominate, the market
authority should first assess whether, under the conditions prevailing on the capital market,
acquirers and target shareholders really play a zero-sum game in which small shareholdersof target are eternal winners.
Particularly, the criteria based on the previous bid prices applied for valuing the minority
shareholdings in the case of delisted firms seem highly inadequate in emerging markets.
According to the Bates et al (2006)’s “theory of bid capture,” the minority shareholders
need protection mainly because of the ability of major shareholder to structure binding bids.
Bebchuk and Kahan (2000) argue that there is an adverse selection effect that results fromthe use of market prices as benchmark for no freeze-out value of minority shares. The freezeout right is regarded as an important source of private benefits, whenever the controllingshareholder uses private information having a downside effect on the company value. In
illiquid markets, the investors possessing private information have the ability to exploit the
inefficiencies caused by the low free float (Lehn and Poulsen, 1989). Pop (2006) stresses
the ineffectiveness of the mandatory public offers made on the Romanian market from thepoint of view of minority shareholders of the target company, especially when a dominant
shareholder exists and the insider trading is unbounded. In public to private transactions
the minority shareholders run the danger to be under-compensated despite the premium
paid above the market price. Consequently, in markets fraught with opportunities to exert‘substantive coercion’ on minority shareholders, the authorities should avoid imposing theprice paid in the previous tender offers as the exclusive benchmark of fair value.
6

An extensive discussion about the mirroring characteristics of the rights of controlling shareholder andminority shareholders, respectively, is provided in Burkart and Panunzi (2004).

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8

A way of avoiding the coercion by the buyer would have consisted of a non-waiveable‘majority of the minority’ condition, at least when the position that assures the squeeze-out
right is acquired by dealing directly with AVAS. Arguably, the interference of the Stateauthority within control transactions could involve a degree of tension between controlling
owner and minority shareholders.
A protective legislation would provide the minority shareholders with a judicial review
under the entire fairness standard, that is a remedy allowing the oppressed minority not
only to receive the value of their shares as assessed by the Court but also damages if thisprice exceeds the freeze-out price established unilaterally by controlling shareholder.
Gilson and Gordon (2003) state that one of the main conditions that could make afreeze-out tender offer by a controlling shareholder non-coercive, regards the involvementof independent directors in the process of decision making of non-controlling shareholders.
Particularly, these ones should hire their own advisers and disclose adequate information
about the company that entitles minority shareholders to an enhanced price. However, sucha redress solution has had limited ground on Romanian market, as far as the there is unlikely
for public companies to also have independent directors.
Because of the limitations revealed by benchmarking the Romanian regulation against
modern takeover laws, the regular changes of takeover regulation and fair price standards
in freeze-outs, as well as the looser intervention of market authority against the abuses
proliferated by majority shareholders, we wonder whether the measures promoted on thismarket assure the proportionally participation of shareholders in the value of the company.
The ample phenomenon of delisting that experienced Romanian market, including even someblue-chips, that followed the OECD report brings into question the likely effectiveness of theintroduction of the squeeze-out rights and advocate for more diligence when adopting legal
texts from developed markets. Minority freeze-outs not only raise the problem of financial
considerations but embrace also the question of fair dealing that means analyzing how some
control transaction, including privatization, were initiated, structured, and disclosed to theminority shareholders in the previous stages.
3.

Wealth sources in going private and going dark transactions

The objective of maximizing the firm value asks often the revision of the form of businessorganization of firms from public to private ownership. A going private transaction usuallyrefers to a buyout transaction of a public company by one or a handful of the target’s
shareholders, its management or external investors. Typically, the remaining stocks arepaid in cash, sometimes by debt raising, which is backed by the target’s assets and serviced
by its operating cash flow. The intent of offeror to take private a company is materialized
in a tender offer for the outstanding shares. One can prefer a two-step deal having similar
economic terms: (1) a tender offer directly to the target’s stockholders; (2) conditioned on
the acquisition of 90% of the target’s stock, a squeeze out of minority stockholders who did
not tender in the previous offer. While it is acknowledged that going private transactions

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9create some benefits, there is a broad disagreement around the sources of the gain arising byreason of leaving the market. In the studies conducted on developed markets the following
hypotheses were tested: (1) the agency costs-related hypotheses, including the free cash flow
hypothesis, incentive realignment hypothesis, and control hypothesis; (2) the undervaluation
hypothesis; (3) the takeover defense hypothesis; (4) the transaction costs hypothesis; (5)the tax benefit hypothesis; and (6) the wealth transfer hypothesis (see Renneboog et al.,2007). A broad reading of international evidence shows that the assumptions made in therelated literature for explaining why the private status is preferred to the public one are notnecessarily mutually exclusive.
Turning to private equity is an extreme form of corporate restructuring allowing toa group of shareholders, like managers, to exploit valuable investments opportunities7 orconversely, to address the lack of growth potential.8 Kaplan (1997) and Weir et al. (2002)
underline that, when the internal governance mechanisms are likely to be associated withbest practices there can be a shift in emphasis away from external governance control.
A shareholders buyout may help avoiding the conflicts stemming from the separation ofownership and control. De Angelo et al. (1984), Weir and Laing (2002), Weir et al. (2005a)
argue that the interest to take a company private comes from the improvement of monitoringmade by an active shareholder, while Jensen (1986), Lehn and Poulsen (1989), Opler andTitman (1993), Rao et al. (1995), Jansen and Kleimer (2003), Mehran and Peristiani (2006)
point to the free cash flow problem9 and the refocus on performance. However, when an
investor having access to superior information learns that the firm is undervalued, he tries
to obtain exclusively the unrealized lock-up value. The empirical findings of De Angelo etal. (1984), Maupin et al. (1984), Marais et al. (1989), Kim and Lyn (1991), Damodaranand Liu (1993), Betzer et al. (2004), Weir et al. (2005b) give support to the undervaluation
hypothesis.
The low trading price of some companies exposes them to hostile takeover risk while
limiting their ability to issue new shares against acquisitions because of the dilutive effecton their existing shareholders. Many going private transactions are preceded by competingbids and takeover rumors, which could signal to insiders the accrued interest for the company. In Lehn and Poulsen, (1989), the significant influence of takeover potential validates
the “takeover defense hypothesis,” proving that sometimes going private transactions makesense. Mehran and Peristiani (2006) find evidence that the side-effect of the ownership concentration, namely the low stock turnover, plays an important role for the timing of decision
to go private.
Another leading hypothesis confirmed in the previous studies concerns the tax saving
effect associated with the modified corporate status or the financing methods engineering
7

Burkart and Panunizi (2004) cite among the reasons in favor of going private transactions the need for
integrating the organizational structures in order to create financial synergies.
8This strategy seems suitable for stable growth firms, characterized by high pay-out ratios and low
reinvestment (Lehn and Poulsen 1988; Kieschink, 1989; Opler and Titman, 1993).
9This argument is more relevant in the case of leveraged buyouts, where the debt financing used intransaction reduces the free cash flow available in the period following the delisting decision.

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10buyouts (see Halpern et al. 1999; Marais et al., 1989; Kosedag and Lane, 2002).
Depending on certain circumstances, a public company that can no longer meet therequirements under the securities regulation can elect to delist. The process of going dark
does not involve any cash transfer in the benefit of shareholders, as it is the case of going
private transactions. Besides, the shareholding structure is preserved after the company
becomes private. Thus, any gain from removing the costs associated with stock listing isshared by shareholders proportionally with their holdings. A non exhaustive list of suchcosts would contain the costs of organizing the shareholders general assemblies, of disclosing
periodical information about the financial state of the company, as required by legal andstatutory provisions protecting the shareholders’ interests. The difficulty to comply withsuch corporate governance standards may encourage the small public companies to leave
the public arena. Consequently, management can focus on long term business strategies
instead of meeting external investors’ expectations. The argument concerning the reductionof stock listing costs backs the “transaction costs hypothesis” (see De Angelo et al., 1984).
Notwithstanding the reasons favoring the private status instead of the public one, thepotential of raising equity capital in future and the company’s ability to take advantage of
growth opportunities are clearly diminished. The ultimate effect of the decision to delist on
the shareholders’ wealth varies with respect to ownership and control structures in target
firms, as well as to the regulatory constraints imposed on such transactions.
To get a better view on the range of conditions likely to defy those provisions, in thenext section we analyze empirically whether specific trades (privatization, public offers, andcapital transactions) could explain the choice for a private status of controlled companies,
as well as the timing of delisting decision.
4.
4.1.

Data and research methodology

Empirical specifications

In order to analyze the determinants of the delisting process for the Romanian companies
listed on the OTC market RASDAQ, we use three different empirical specifications. The
first specification is based on a standard logit model of the following form:
Proba [ST AT USt = 1] = F (β 0 + β 1 X1 + β 2 X2 + ... + β n Xn )where F () represents the cumulative logistic distribution, X1 , X2 ,..., Xn a set of explanatory
variables, and
ST AT USt =

1 if the firm was delisted at time t
0 otherwise

Our second specification is based on a Cox proportional hazard (PH) or multiplicativemodel of the form:h (t) = h0 (t) · g (X1 , X2 , ..., Xn )

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where h (t) represents the proportional hazard function, h0 (t) the baseline hazard, and g()a nonnegative function of the covariates. The choice commonly adopted in the survival analysis literature is to let g() equal the relative risk, g (X1 , X2 , ..., Xn ) = eβ 1 X1 +β 2 X2 +...+β n Xn .
So, the hazard function in our Cox proportional hazard model is assumed to beh (t) = h0 (t) · eβ 1 X1 +β 2 X2 +...+β n Xn
The β i coefficients and the corresponding hazard ratios were estimated by maximizing
the partial log-likelihood function

ln ℓ =


D 

j=1



r∈Dj



Xr β − dj ln 



i∈Rj



eXr β where j stands for the ordered delisting times t(j) , j ∈ {1, ..., D}, Dj is the set of dj
observations that “fail” (i.e. are delisted) at t(j) , dj is the number of “failures” (i.e. delisted
firms) at t(j) , and Rj is the set of observations that are “at risk” at time t(j) . Xk is theraw vector of covariates for the time interval ]t0k , tk ] for the k-th observation in the dataset,k ∈ {1, ..., N}, and β is the vector of regression coefficients. The survival model allows for
censoring in the sense that not all companies are included in our sample were delisted during
the analyzed period (see Kalbfleisch and Prentice, 1980, for more details on the estimationof survival models).
A crucial assumption behind the Cox proportional hazards specification is that the hazard
ratio is proportionally distributed over time. To evaluate this assumption, we performed atest of nonzero slope in a generalized linear regression of the scaled Schoenfeld residuals on
various functions of time (see Grambsch and Therneau, 1994, for additional details). The
test is equivalent to evaluate the hypothesis that the log hazard ratio function is constantover time. After estimating each Cox proportional hazard model, we generated the matrixof Schoenfeld residuals (scaled adjusted), tested the null hypothesis that the slope is equal
to zero for each covariate in various models, and performed the global test recommended
by Grambsch and Therneau (1994). Although the null hypothesis of zero slope in theappropriate regressions was accepted for some individual covariates of interest, the global test
indicated in most cases deviations from the proportional hazards assumption. Consequently,
our third specification is based on an alternative modeling choice: the accelerated failuretime (AFT) model.
The AFT specification supposes a linear relationship between the logarithm of the survival time ln (tj ) and the covariates Xj
ln (tj ) = Xj β + ǫj
where ǫj is the error with density f (). As usual, the assumption on the distributional formof the error term determines the class of the regression models. Particularly, assuming anormal, logistic, extreme-value or three-parameter gamma distribution for the error term,
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12

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gamma, respectively. In the present paper, we opted for the generalized gamma modelfor two distinct reasons. First, as it is well known, the hazard function implied by thegeneralized gamma specification is extremely flexible, allowing for a large specter of possible
shapes (in particular, the Weibull and lognormal distributions can be viewed as special casesof the generalized gamma density). Second, to discriminate between various AFT models,
we computed for each model the log likelihood the Akaike Information Criterion (AIC).
According to our comparisons, the gamma generalized model appears to be the best-fitting
model (i.e. exhibiting the largest log likelihood) and the one with the smallest AIC value.
Compared to the PH specification, in the AFT models the parameter vector γ andcovariate coefficients β are estimated by maximizing the full log-likelihood functionln L =

U
j=1

ln {f (tj , γ |t0j )} +N

ln {S (tj , γ |t0j )}j=U +1

where N is the total number of firms, U of whom have uncensored times,f (tj , γ |t0j ) is thecontribution to the likelihood function of a firm j known to be delisted at time t conditionalon the listed time t0 , S (tj , γ |t0j ) is the contribution to the likelihood function of a (right)“censored” firm j only known to survive up to time t or, otherwise speaking, the probabilityof surviving beyond time t conditional on the entry time t0 .
The two classes of regression models used in our empirical analysis (logit and survival— PH & AFT — models) help to shed light on two distinct facets of our main researchquestion. On the one hand, the logit methodology allows us to conclude on the unconditional
predictive power of the various determinants of the decision to delist. On the other hand,the survival analysis allows us to obtain estimates of the impact of the covariates on theconditional probability to delist; that is, the probability to delist conditional on being listed
to a certain point in time and exhibiting certain values for the covariates in the previous
period. The later methodological issue is highly relevant to the literature on the decision of
public companies to delist.
4.2.

Sample selection

The large number of privatized firms having stocks traded on RASDAQ offers a uniqueframework to investigate the going-private deals in frontier emerging markets. From theuniverse of 3,596 companies that were delisted between 1997 and 2006, we excluded all thosejustifying their decision based on the following reasons: (1) merger with other companies; (2)divestiture; (3) bankruptcy; (4) radiation from the Commerce Registry; (5) administrativedecision of the market authority; (6) transfer to the Bucharest Stock Exchange. Particularly,
among the various reasons driving the decision to delist, we are interested only by those
implying the continuation of activity as a privately held company. We further deleted thecompanies having the one-digit NACE code “A. — Agriculture, forestry, and fishing”, as
far as during the analyzed period the judicial regime of the land had been ambiguous.
Consequently, we identified 2,081 delisted companies having as stated argument on theE R

 G  

13

official market reports either “withdrawn” or “closely held company” reasons. In order toreveal the rationale behind the decision to delist, we construct a matched control sample,
which includes 1,240 industrial companies that were still listed on RASDAQ at December
31st , 2006. As in the previous case, we excluded from the control sample all agriculturalfirms. To the best of our knowledge, we address the research question of delisting on thelargest data set analyzed up to date.
For each of these companies we collect detailed information about privatization, public
offers, share capital changes, stock market data, as well as financial data during the publicstatus episode. In order to construct our independent variables we explored and cross examined several sources of information: RASDAQ, the Romanian Minister of Finance, AVAS,
CNVM, and Romanian Universe Database. The stock market raw information regarding
the transaction history of the peer companies was kindly provided by Broker SA.
4.3.

Definition of independent variables

As our main inquiry is whether the privatization policy of AVAS influenced the decision
to take a company private, we construct three alternative variables: (1) AVAS_major, which
is a dummy variable taking the value of 1 if the size of the block sold directly by AVAS
exceeds 50% and 0 otherwise; (2) AVAS_maxdir, representing the maximum size of theblock dealt with AVAS by circumventing the stock market; and (3) Privatization rounds,
defined as the total number of privatisation rounds in which the company was involved. To
test whether the ability to restructure, or conversely to divert resources, depends on theidentity of the major shareholder, we include in our empirical models two dummy variables,
ESOP and Individual, that equal 1 if the maximum block of AVAS was sold to the company’s
employees or individuals, respectively, and 0 otherwise.
The takeover activity is captured by constructing the following variables: (1) First
Bid_Submitted representing the ratio of the number of shares submitted to the number oftargeted shares in the first takeover bid; (2) First Bid_Listed defined as the number of days
between the listing date and the date of the first takeover bid; (3) Nb Bids, representing thetotal number of takeover bids made for the company’s shares; (4) Bid_Av Price, expressedas the ratio of maximum biding price to average price over the considered period.
To control for market conditions, we used the Stock turnover variable, measuring theability of firms to attract the market participants’ interest, computed as the ratio of transaction volume to the average number of shares. The denominator of this variable is compoundby taking into account the duration between every two subsequent share capital changes
over the considered period. Besides, we control for the stock market conditions by includingin the analysis the proxy Market trend, the ratio of the last closing price in the last transaction day of the considered period to the average market price over the same period. For
the peer companies, we construct the market specific variables with respect to the 31st ofDecember 2005, in order to avoid an implicit bias in the size of transaction volume linked
to their continual public status.

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14

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In the related literature it is argued that new share issues might represent a subtle
strategy for adjusting the position of large shareholders in the detriment of the small ones.
The OECD report (2001) provides anecdotical evidence about practices aiming to diluteminority shareholders through capital increases without prior revaluation of existing capitalor through in-kind contribution of the majority shareholders. However, during the analyzed
period all firms included in our sample were allowed to revalue their assets. In order toupdate the equity value, they could choose between modifying the number of total sharesor the face value of shares. In the last case, companies may have not issued any additional
shares. As we have no information about the ownership structure, we take into account suchan impact via (1) the number of times the selected firms have changed the total numberof shares, Nb. capital changes, and (2) the total percentage share capital increases between
the delisted or “censored” date and the listing date, Capital change.
The relationship between the financial characteristics and probability of delisting is
expressed by the following variables (descriptive statistics are presented in Table 1): (1) Size,
the logarithm of total assets; (2) ROE, which whenever the equity value is negative this ratio
is considered —100%; (3) Leverage, computed as the ratio of debt to total assets; (4) Assets
turnover, equal to sales divided by total assets; and (5) FATA, representing the proportionof fixed assets in total assets. All financial variables are based on the financial statements
reported by companies at the end of the year preceding the delisting year/“censored” year.
5.

Empirical results

The empirical results presented in Table 2 reveal a positive and significant relationshipin all specifications between the variables used as proxies for the Government involvement in
the process of capital concentration and the probability of going private. Firms involved indirect privatization end with lesser investor participation, as the block held by AVAS is dealt
with a single or a very restrained group of investors. This result lends support to Bates etal.’s (2006) thesis that the likelihood of having minority shareholders “left out in the cold”
increases whenever there is discrepancy between them and the controlling shareholder. By
linking this result to the theory of bid capture, we validate indirectly the control hypothesis
indicating that the delisting decision and wealth of minority shareholders are negatively
related. While highly significant in the logistic regression, the size of the block obtainedby avoiding the market, irrespective of its size, has no impact on the duration of publicstatus (see Tables 3&4). However, this result is of common sense. On the one hand, inclosing-held companies no private investor could easily accept to have the Government as
partner. On the other hand, bearing in mind the strong dealing position of AVAS it ishard to imagine that it could behave like a usual shareholder by accepting to tender its
shares in a regular takeover bid. The stylized facts show that AVAS has always preferred to
cash out its minority positions in distinct deals. A similar effect of the Government stakes isreported in Atanasov et al. (2005), in their analysis of the Bulgarian market but they explain
their results by political costs arguments. As direct privatization leads to high ownershipE R

 G  

15concentration, the shareholder base of companies can not be unexpectedly changed. Under
these circumstances, the takeover defense hypothesis is less plausible in our case.
The probability and conditional probability to delist are lower when companies arecontrolled by employees’ association compared with those firms whose blocks were dealt byother firms or institutions. We link this result to the peculiar type of contracts allowing
employees to differ the complete payment of the negotiated price for several years. While
being the owners of privatized company, they could not resale the acquired block to anotherinvestor during this “teasing period”, which justifies the negative sign of this variable in ourempirical models.
The significant positive effect of OPA_submitted shows that companies whose shareholders massively accepted the conditions of the first takeover bid are taken private sooner
than their counterparts. The positive and significant coefficient of the Nb.Bids variable reveals that when bidders intend to obtain the whole participation in the target, the company
has more chances to end its public episode. It is hard to find a reasonable economic explanation to the OPA_listed variable. Intuitively, one expects to find a negative relationshipbetween the time span between the listing date and the date the company is identified byprospective acquirers (the shorter the period, the higher the probability to end by owing
all the company’s shares). However, this result could be justified in the light of the specificregulation of going to private transactions enacted in the last part of the analyzed period.
As a direct consequence, the number of public offers approved by the market authority after 2002 increased dramatically, as far as controlling shareholders owing more than 90% of
capital had the obligation to delist the company.
The change in organizational form becomes less likely for companies that modify the
total number of shares more often. The sign of variable Nb. capital changes is negative andhighly significant in all empirical specifications. We have also controlled for the amplitudeof these changes through the ratio of the number of shares before delisting date/“censored”
date to the initial number of shares, but the estimated results based on this variable are
not conclusive in the logit model. One possible explanation could be that in the case ofvery intensive assets firms, the revaluation process could cause a steep increase in the total
number of shares. As in such cases existing shareholders receive free shares proportionallywith their holdings, such a decision could be followed by improved market liquidity. Anotherway of explaining why the estimated coefficients of this variable are not significant concerns
the distribution of dividend shares. It is worth underlying that the two types of decisions
leading to the increase of share capital do not trigger any change in the ownership structure.
Even if the stylized facts reported by the OECD show that the dilution inflicted by major
shareholders trough in-kind contributions was a recurrent practice in small and medium
size enterprises, tracing such acts based only on the history of capital changes is practically
impossible. In order to distinguish between “benign” and “malign” operations, we would
have to control for the ownership structure before and after such an event (unavailable data).
However, when we control for this influence in the hazard model, our intuition is confirmedby the results; that is, within companies experiencing a steeper increase in the total number

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16of shares the decision to end the public episode is made sooner than in the peer companies.
As one of the main concerns of our study is to test how the conflicts of interest over theuse of companies’ resources influence the decision to go private or dark, in the empiricalmodels we control for financial conditions. Financial literature predicts that companies
that expend their activity by scarifying the profitability objective are more likely to faceconflicts of interest. By using the operating decision against small shareholders’ interest,
the blockholders seek to affect minority discounts paid in going to private transactions or tosimply influence their willingness to delist the company. Gilson and Gordon (2003) argue
that by taking private the company, the large shareholders can capture the capitalized valueof future private benefits over the value of a non-controlling share. Besides, there is a stronglink between those gains and the level of benefits likely to be appropriated by operational
means. If so, the positive sign of Assets turnover and the non-significant influence of thefinancial performance (measured by the ROE ) can be interpreted as an indication of theuse of such stratagems, i.e. disadvantageous transfer prices between the public companies
and other companies owned by the controlling shareholder. The positive and significant
coefficient of the FATA variable lends support to the conjecture that companies in which
expropriation behavior is more likely choose to leave the stock market and exit sooner thantheir counterparts. As companies listed on the stock market were seriously undervalued,
significant gains could be realized by taking over the company and by selling afterwards
its physical assets by pieces. This finding is consistent with the hypothesis that dilution
inflicted to the small shareholders can be a practice associated with the decision to go
private. The low market capitalization made the debt a useless source of financing and going
to private transactions neutral events with respect to taxes. Consequently, the conditions
needed for testing the traditional tax benefit and the wealth transfer hypotheses are notvalidated within the peculiar context of the Romanian market. According to our findings,
the probability of delisting is decreasing in the company’s size. The inherent difficulty tocompletely acquire companies of large size is a common result in the literature.
One of the previous influences, namely the ownership concentration, creates scope forinsider trading based on proprietary information and consequently for market misevaluation. The negative and significant coefficient of the Stock turnover variable lends additional
support to our intuition that the delisting decision concerns mainly public companies obliterated by the investors’ ignorance. This finding is in line with those reported by Jackowicz
and Kowalewski (2005) and Atanasov et al. (2005, 2006) for other emerging markets fromCentral and Eastern Europe and proves that the absence of scrutiny from small investors
could be critical for the survival of public companies.
All in all, our results validate the control and undervaluation hypotheses. The delisting
practices prevailing in Romania bring attention on the operations involving control positions
and to the subsequent effects of the low free float. As the selling of the State’s holdings inpublic companies is an arbitrary choice that can decisively affect the investment incentivesof private players, our results can be viewed as an empirical proof that the law does fit theinstitutional environment expressing the political decisions made during privatization andE R

17

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the interests of those shareholders likely to be more influential.
6.

Conclusion

The expropriation of minority shareholders is one of the main stated concerns, as well as
an empirical regularity in emerging markets from CEE. Atanasov et al. (2005, 2006) provide
evidence on the delisting strategies in Bulgaria that are in line with this view: the minority
freeze—out at large discounts represents an extreme form of financial tunneling, likely tobe promoted in countries with poor legal protection. Besides, Jackowicz and Kowalewski(2005) confirm that agency problems occurred in the post-privatization period are one of
the reasons behind the delisting decision in Poland. While similar in intuition, this study
distinguishes from the previous works in that it addresses the fear that corporate governanceregulation could dissimulate the protection of minority shareholders in emerging markets
behind “politically correct” texts. This approach emphasizes the possibility that the incentives to take advantage of outside shareholders are explained by the very way the initialshareholdings of controlling shareholders were chosen. The interest groups emerged in theearly privatization weakened the regulatory response to corporate governance failures on
Romanian market. Even if the law regulating going private transaction taken as a whole
could be public regarding, the details regarding the fair price standard, the frequent changesof those aspects, as well as the exemptions to the rule in the case of the transactions involving State majority or minority ownership make this law little effective in preventing the
expropriation of minority shareholders.
The conclusion is derived from the consideration of governance and market attributes ofa sample of 2,081companies that were delisted from the Romanian OTC market RASDAQ
and a sample of 1,240 still public firms at the end of December 31st , 2006. Delisting is likely
to occur especially when (1) the block obtained by circumventing the market is large; (2)the companies are more often involved in capital transactions; and (3) the companies areless scrutinized by investors and therefore market prices are less informative. In the lightof our empirical findings, the regulatory provisions seem to perversely defend the sticky
concentrated ownership structures. Beyond the considerations of fair compensations to beoffered to small shareholders, a matter of serious reflection should be the shrink of capital
markets caused by massive delisting.
Growing acquaintance with the market framework should be translated in more pressure
on market authorities to take into account the peculiarity of the governance system andshould encourage the search of solutions for preserving the channel of external financing.
The present study can be extended in at least one interesting way. In order to better
distinguish between the delisting decisions aiming at creating scope for real restructuring
and those followed by the complete eviction of companies from the industrial scene, it would
be informative to track the performance history several years after this momentum event.
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18

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EMERGING CORPORATE GOVERNANCE

21

Table 1. Descriptive statistics on key explanatory variables
Indep. variables
N
Mean
St. dev.
MedianMin
Max
AVAS_major
2,437
0.52
.
1.00
0.00
1.00
AVAS_maxdir
2,436
55.85
21.46
50.96
0.46
100.00Privatization rounds
2,437
1.23
0.55
1.00
1.00
6.00
ESOP
2,437
0.30
.
0.00
0.00
1.00
Individual
2,437
0.20
.
0.00
0.00
1.00
First Bid_Submitted
855
0.38
0.47
0.25
0.00
5.84
First Bid_Listing
855
1,634.54
918.02
1,578.00
0.00
3,598.00
Nb. Bids
855
1.47
0.88
1.00
1.00
12.00
Bid _Av Price
838
1.78
4.31
1.09
0.00
92.54
Nb. capital changes
1,696
1.82
1.26
1.00
1.00
7.00
Capital change
1,693
6.22
41.17
1.56
0.00
1,116.07
Size
2,879
16.54
2.31
16.73
7.26
24.67
ROE
2,881
-0.24
2.80
0.01
-110.46
9.24
Leverage
2,878
0.76
1.95
0.47
0.00
53.98
Asset turnover
2,881
1.12
1.97
0.78
-0.07
77.08
FATA
2,882
0.56
0.27
0.57
0.00
5.41
Stock turnover
3,160
0.47
1.27
0.18
0.00
52.42
Market trend
3,159
1.35
1.75
1.00
0.00
38.84
Notes: AVAS_major, is a dummy variable that takes the value of 1 if the size of block sold directly by AVAS exceeds
50% and 0 otherwise. AVAS_maxdir is the maximum size of the block dealt with AVAS by circumventing the stock
market. Privatization Rounds represents the total number of privatisation rounds in which the company was
involved. ESOP/Individual is a dummy variable that takes the value of 1 if the block was sold to the company’s
employees/physical person and 0 otherwise. First Bid_Submitted represents the ratio between the number ofshares submitted in the first takeover bid and the number of targeted shares. First Bid_Listed represents thenumber of days between the listing date and the date of the first takeover bid. Nb Bids represents the total
number of takeover bids made for the company's shares. Bid_Av Price is the ratio between the maximum biding
price and the average price on the considered period. Nb Capital Changes is the number of times the company haschanged its total number of shares. Capital Change is the percentage difference between the final number ofshares and the number of shares at the listing date. Size is the logarithm of total assets. ROE is the return on
equity. Leverage is the ratio between the debt and total assets. Assets turnover is the ratio between sales and total
assets. FATA is the ratio between fixed assets and total assets. Stock Tturnover is the ratio between the total
volume and the average number of shares on the considered period. Market Trend is the ratio between last closing
price and the average market price over the considered period.

EMERGING CORPORATE GOVERNANCE

22

Table 2. Logistic regression analysis of the likelihood that firm delists
Indep. variables
AVAS_major

Model 10.054
(0.512)Model 20.257***(0.006)

Model 30.222**(0.020)

AVAS_maxdir

Model 4Model 5Model 60.005***(0.001)0.004**(0.009)0.006***(0.000)Privatization rounds
ESOP
IndividualFirst Bid_Submitted
First Bid_Listing
Nb. Bidsa-0.508***(0.000)0.372***(0.003)0.641***(0.000)-0. 383***(0.000)0.084(0.545)
1.189***(0.000)-0.358***(0.001)0.103(0.460)1.233***(0.000)-0.424***(0.000)0.040(0.777)1.242***(0.000)-0.388***(0.001)0.060(0.671)-0.345***(0.002)0.100(0.489)Model 70.208***(0.002)-0.376***(0.001)0.115(0.425)0.038***(0.000)0.600***
0.581***(0.000)(0.000)
Bid _Av Price
0.009
0.034
0.058**
0.056*
0.023
0.011
0.013
(0.493)(0.108)(0.053)(0.058)(0.283)(0.520)(0.461)
Nb. capital changes -0.577*** -0.211*** -0.206*** -0.206*** -0.220*** -0.202*** -0.203***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)
a
0.026
0.023
0.021
0.021
0.020
0.018
0.016
Capital change(0.599)(0.762)(0.760)(0.762)(0.753)(0.816)(0.786)Size-1.092*** -1.101*** -1.093*** -1.134*** -1.179*** -1.171***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)
ROE
0.016
0.016
0.015
0.016
0.013
0.015
(0.354)(0.353)(0.372)(0.358)(0.435)(0.339)Leverage
0.059
0.058
0.061
0.064
0.074*
0.078*(0.145)(0.153)(0.135)(0.122)(0.081)(0.071)
Asset turnover
0.137***
0.137***
0.137***
0.126**
0.125**
0.117**(0.006)(0.006)(0.006)(0.011)(0.012)(0.018)FATA
0.440**
0.435**
0.434**
0.444**
0.429**
0.426**(0.025)(0.027)(0.027)(0.024)(0.031)(0.032)
Stock turnover-0.095**-0.091**-0.076**-0.104** -0.125***(0.015)(0.019)(0.031)(0.018)(0.008)bMarket trend
0.003
0.002
0.002
0.003
0.002
(0.406)(0.418)(0.393)(0.377)(0.373)
Intercept
1.126***
8.011***
8.109***
7.954***
8.237***
8.435***
8.450***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)
McFadden R2
0.096
0.197
0.200
0.201
0.202
0.212
0.212
AIC
1.184
1.092
1.090
1.088
1.087
1.072
1.073
N
3,161
2,731
2,731
2,731
2,731
2,731
2,731
Notes: AVAS_major, is a dummy variable that takes the value of 1 if the size of block sold directly by AVAS
exceeds 50% and 0 otherwise. AVAS_maxdir is the maximum size of the block dealt with AVAS by circumventing
the stock market. Privatization Rounds represents the total number of privatisation rounds in which thecompany was involved. ESOP/Individual is a dummy variable that takes the value of 1 if the block was sold tothe company’s employees/physical person and 0 otherwise. First Bid_Submitted represents the ratio between
the number of shares submitted in the first takeover bid and the number of targeted shares. First Bid_Listed
represents the number of days between the listing date and the date of the first takeover bid. Nb Bids
represents the total number of takeover bids made for the company's shares. Bid_Av Price is the ratio between
the maximum biding price and the average price on the considered period. Nb Capital Changes is the number oftimes the company has changed its total number of shares. Capital Change is the percentage differenceEMERGING CORPORATE GOVERNANCE

23

between the final number of shares and the number of shares at the listing date. Size is the logarithm of total
assets. ROE is the return on equity. Leverage is the ratio between the debt and total assets. Assets turnover isthe ratio between sales and total assets. FATA is the ratio between fixed assets and total assets. Stock turnoveris the ratio between the total volume and the average number of shares on the considered period. Market
trend is the ratio between last closing price and the average market price over the considered period.
Probability values are reported in the parenthesis.
*/**/*** denotes significance at the 10%/5%/1% levela-2( x10 )
b-4
(x10 )

EMERGING CORPORATE GOVERNANCE

24

Table 3. Results from Cox Proportional Hazards regressions
Indep. variables
AVAS_major

Model 10.950
(0.273)Model 21.005
(0.922)Model 30.981
(0.720)

AVAS_maxdir

Model 4Model 5Model 60.999
(0.417)0.999(0.273)1.000(0.622)

Privatization rounds
ESOP
IndividualFirst Bid_Submitted
First Bid_Listing
Nb. Bidsa0.734***(0.000)1.162**(0.013)
1.467***(0.000)0.780***(0.000)0.982(0.792)
1.561***(0.000)0.789***(0.000)0.987(0.840)1.578***(0.000)0.796***(0.000)0.996(0.952)
1.576***(0.000)0.797***(0.000)1.005(0.938)0.802***(0.001)1.024(0.731)Model 71.025
(0.501)0.787***(0.000)1.008(0.903)>1.000***(0.000)1.252***
1.254***(0.000)(0.000)
Bid _Av Price>1.000*>1.000**>1.000**>1.000**>1.000**>1.000**>1.000**(0.086)(0.034)(0.035)(0.034)(0.033)(0.034)(0.035)
Nb. capital changes
0.637***
0.773***
0.774***
0.774***
0.776***
0.782***
0.781***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)a>1.000** >1.000*** >1.000*** >1.000*** >1.000*** >1.000*** >1.000***
Capital change(0.037)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)Size
0.759
0.760***
0.760***
0.755***
0.750***
0.750***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)ROE
1.041
1.047*
1.048*
1.049*
1.048*
1.046*(0.093)(0.069)(0.065)(0.059)(0.071)(0.081)
Leverage
0.989
0.989***
0.989***
0.989***
0.989***
0.989***(0.006)(0.005)(0.005)(0.007)(0.006)(0.006)
Asset turnover
1.035
1.037***
1.037***
1.035***
1.035***
1.035***(0.002)(0.001)(0.001)(0.002)(0.002)(0.002)FATA
1.666
1.679***
1.684***
1.698***
1.684***
1.672***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)Stock turnover
0.949*
0.946*
0.953*
0.930**
0.934**(0.060)(0.052)(0.068)(0.020)(0.022)bMarket trend<1.000<1.000<1.000<1.000<1.000(0.571)(0.571)(0.576)(0.566)(0.565)
Number of firms
3,160
2,729
2,729
2,729
2,729
2,729
2,729
Delisted firms
2,030
1,632
1,632
1,632
1,632
1,632
1,632
Log likelihood-15,088.3 -11,682.4 -11,676.3 -11,676.0 -11,690.2 -11,666.5 -11,666.4
LR
504.9***
997.3*** 1,009.5*** 1,010.0*** 981.6*** 1,029.0*** 1,029.2***
Notes: This table presents the estimation results from Cox Proportional Hazards (PH) regressions using various setsof covariates. For ease the interpretation, results are presented in the log relative-hazard metric, e.g. a hazard
ratio equal to 2 means that a one-unit change in the covariate doubles the hazard of “failure”, whereas a hazard
ratio of .3 implies that a one-unit change in the covariate cuts the hazard to one-third. P-values are reported inparenthesis, below each hazard ratio estimate.
***, **, * indicate statistical significance at the 1%, 5%, and 10% respectively

EMERGING CORPORATE GOVERNANCE

25

Table 4. Results from the Generalized Gama Duration regression
Indep. variables
AVAS_major

Model 1
0.009
(0.506)

Model 2–0.003(0.879)Model 30.006
(0.764)

AVAS_maxdir

Model 4Model 5Model 6+0.000(0.353)+0.000(0.221)+0.000(0.525)

Privatization rounds
ESOP
IndividualFirst Bid_Submitted
First Bid_Listing
Nb. Bidsa0.105***(0.000)–0.026*(0.099)–0.083***(0.000)0.100***(0.000)0.007(0.787)–0.176***(0.000)0.096***(0.000)0.006(0.831)–0.181***(0.000)0.091***(0.000)0.001(0.961)–0.180***(0.000)0.091***(0.000)–0.003(0.910)0.087***(0.001)–0.010(0.719)Model 7–0.006(0.704)
0.093***(0.000)–0.004(0.868)–0.000***(0.000)–0.093*** –0.094***(0.000)(0.000)
Bid _Av Price–0.000***–0.000*–0.000*–0.000*–0.000*–0.000*–0.000*(0.000)(0.055)(0.057)(0.055)(0.052)(0.056)(0.058)Nb. capital changes
0.146***
0.100***
0.099***
0.099***
0.099***
0.096***
0.096***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)a–0.000*** –0.000*** –0.000*** –0.000*** –0.000*** –0.000*** –0.000***
Capital change(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)Size
0.107***
0.106***
0.106***
0.109***
0.112***
0.112***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)ROE–0.011–0.013–0.013–0.014–0.012–0.012(0.167)(0.142)(0.136)(0.118)(0.159)(0.166)
Leverage
0.005***
0.005***
0.005***
0.004***
0.005***
0.005***(0.002)(0.001)(0.001)(0.002)(0.002)(0.002)
Asset turnover–0.015*** –0.016*** –0.016*** –0.015*** –0.016*** –0.016***(0.001)(0.000)(0.000)(0.001)(0.001)(0.001)FATA–0.201*** –0.204*** –0.206*** –0.210*** –0.206*** –0.204***(0.000)(0.000)(0.000)(0.000)(0.000)(0.000)Stock turnover
0.021*
0.023**
0.019*
0.031**
0.029**(0.057)(0.046)(0.064)(0.015)(0.017)bMarket trend+0.000+0.000+0.000+0.000+0.000(0.570)(0.570)(0.576)(0.561)(0.560)Intercept
8.239***
6.436***
6.435***
6.422***
6.382***
6.345***
6.360***(0.000(0.000(0.000)(0.000)(0.000)(0.000)(0.000)
Ancillary
0.128
0.401
0.402
0.402
0.402
0.406
0.405
Kappa
4.484***
0.872***
0.866***
0.862***
0.862***
0.838***
0.843***
Number of firms
3,160
2,729
2,729
2,729
2,729
2,729
2,729
Delisted firms
2,030
1,632
1,632
1,632
1,632
1,632
1,632
Log likelihood–2,705.7–1,958.7–1,952.7–1,952.3–1,966.5–1,940.9–1,941.0
LR
431.6***
990.8*** 1,002.8*** 1,003.6*** 975.2*** 1,026.5*** 1,026.2***
AIC
5,431.5
3,947.4
3,939.5
3,938.7
3,967.1
3,915.8
3,916.0
Notes: This table presents the estimation results from the Generalized Gamma Duration regressions using various
sets of covariates. For computational reasons, it is worth noting that the results presented in this table areexpressed in the accelerated failure-time metric, e.g. negative coefficient estimates translate into a positive impact
on the hazard of “failure”, whereas a positive coefficient estimate implies that a change in the covariate decreases
the hazard. P-values are reported in parenthesis, below each coefficient estimate.
***, **, * indicate statistical significance at the 1%, 5%, and 10% respectively

EMERGING CORPORATE GOVERNANCE

26

Appendix 1. The main legal texts regulating takeovers and public to private transactions in Romania
Legal indicator

Takeover Regulation
1996

Market Law
2002

Takeover regulation
2003

Significant shareholders
Takeover bid publicity

5%
by mail or announcement ina national journal

Control stake
Preliminary announcement
Minimum bidding price

33%+1
na
na

Restrictions imposed onofferor and the persons acting
in concert with offerornaOpinion of the Board of
Directors of target company

voluntary recommendation
for accepting or rejecting the
offer

na

na

Restrictions on the decisionsof the Board of Directors

na

na

na

Disclosure Rule
10%
10%announcement in two
announcement in two
national journals
national newspapers during
3 consecutive days
Voluntary Public Offer
33%+1
33%+1
na
na
based on the rules imposed
a. if possible, the maximumby CNVM
price of the price paid for thetarget shares by offeror
during the last 12 months
preceding the offer and theaverage market price during
the last 12 months preceding
the offer
b. if not, based on thecorrected net asset value
the target stocks aremarket transactions involving
suspended from transaction the target stocks are
forbidden

Market Law
2004

Securities Regulation
2006

10%
announcement in a national
and a regional newspaper

10%announcement in a national
and a regional newspaper

33%+1
yes
based on the rules imposedby CNVM

33%+1
yes
the maximum price of thehighest price paid for thetarget shares by offeror
during the last 12 months
preceding the bid and theaverage market price during
the last 12 months preceding
the offer

it is forbidden to make a new
bid for the same shares
during the next 12 months
following the closing date of
the actual bid
within the next 5 days fromthe date of preliminary
announcement, the Board of
Directors must disclose theiropinion on the opportunityof the offertransactions involving thetarget stocks are forbidden
till the bid initiation

after the date of preliminary
announcement, all decisions
likely to affect substantiallythe value of assets of target
are forbidden

within the next 5 days fromthe date of preliminary
announcement, the board of
directors must disclose theiropinion on the opportunityof the bid to shareholders
and employees
after the date of preliminary
announcement, all decisions
likely to affect substantiallythe value of assets of target
are forbidden

EMERGING CORPORATE GOVERNANCE

27

Restrictions on the rival offersnaMajority Position
Qualified Majority Position
Minimum bidding price

50%+1
na
na

na

a. the rival bid has to bemade at least for the same
number of shares targetedin the first bid
b. the document of the rival
bid has to be filled with the
CNVM within the 10transaction days following
the beginning date of thefirst bidc. all rival bids have a single
closing date

Strict Mandatory Bid Rule
50%+1
50%+1
75%+1
75%+1
based on the rules imposed
a. if possible, the maximumby CNVM
price between the price paid
for the targeted shares by
the offeror during the last 12
months preceding the offer
and the average weighted
market price during the last
12 months preceding theoffera. the rival bid has to bemade at least for the same
number of shares targeted in
the first bid
b. the price of the rival bid
has to exceed the previous
bidding price by at least 5%.

a. the rival bid has to bemade at least for the same
number of shares targeted in
the first bid
b. the document of the newoffer has to be filled with the
CNVM within the 10transaction days following
the beginning date of thefirst bidc. the document of the newc. all the rival bids have theoffer has to be filled with the same closing date, but not
CNVM within the 10
later than 60 transaction
transaction days followingdays following the beginningthe beginning date of thedate of the first bid
first bidd. all the rival bids have thed. CNVM organizes ansame closing date, but not
auction for designating thelater than 60 transaction
winning bid; in each auction
days following the beginning round the price has to bedate of the first bid
higher by 5% than in theprevious round50%+1naa. if possible, the price paid
for the targeted shares byofferor during the last 12
months preceding the offer

50%+1
na
a. if possible, the price paid
for the targeted shares byofferor during the last 12
months preceding the offer

EMERGING CORPORATE GOVERNANCE

28
b. if not, based on thecorrected net asset value

Opinion of the Board of
Directors of target company

Restrictions on the decisionsof the Board of Directors

Restrictions on the rival offers

b. if not, based on (1) the
average weighted market
price during the last 12
months; (2) the net assets
value based on the audited
financial statements; and (3)the valuation proposed by anindependent expert.
voluntary recommendation
mandatory disclosure of its
mandatory disclosure of its
for accepting or rejecting the opinion to the offeror, theopinion to the offeror, theoffer
CNVM and the market within
CNVM and the market within
5 days from the preliminary
5 days from the preliminary
announcement of the offer
announcement of the offernaafter the date of preliminary
after the date of preliminary
announcement
announcementa. all transactions with thea. all transactions with thetarget stocks have to betarget stocks have to bedisclosed to the CNVM anddisclosed to the CNVM andmarketmarketb. all decisions likely to affectb. all decisions likely to affectsubstantially the asset value
substantially the asset valueof target, like increasing theof target, like increasing theshare capital, new issues ofshare capital, new issues of
securities providing the rightsecurities providing the rightto subscribe to shares or toto subscribe to shares or toconvert the securities into
convert the securities intoshares, the use as collateralshares, the use as collateralor the transfer of assets
or the transfer of assets
representing 1/3 of the total
representing 1/3 of the total
assets, are forbidden
assets, are forbiddennaa. the rival bid has to bea. the rival bid has to bea. the rival bid has to bemade at least for the same
made at least for the same
made at least for the same
number of shares targeted in number of shares targeted in number of shares targeted in
the first bid
the first bid
the first bid
b. the document of the new b. the document of the new b. the document of the newbid has to be filled with thebid has to be filled with thebid has to be filled with the
CNVM within the 10
CNVM within the 10
CNVM within the 10transaction days following
transaction days following
transaction days following
the beginning date of thethe beginning date of thethe beginning date of thefirst bidfirst bidfirst bidb. if not, based on (1) the
average weighted market
price during the last 12
months; (2) the net assets
value based on the audited
financial statements; and (3)the valuation proposed by anindependent expert.
mandatory disclosure of its
opinion to the offeror, the
CNVM and the market within
5 days from the preliminary
announcement of the offer
after the date of preliminary
announcementa. all transactions with thetarget stocks have to bedisclosed to the CNVM andmarketb. all decisions likely to affectsubstantially the asset valueof target, like increasing theshare capital, new issues of
securities providing the rightto subscribe to shares or toconvert the securities intoshares, the use as collateralor the transfer of assets
representing 1/3 of the total
assets, are forbiddena. the rival bid has to bemade at least for the same
number of shares targeted in
the first bid
b. the document of the newbid has to be filled with the
CNVM within the 10transaction days following
the beginning date of thefirst bid

EMERGING CORPORATE GOVERNANCE

29
c. a single closing date for all
rival bids

c. a single closing date for all
rival bids

c. a single closing date for all
rival bids

c. a single closing date for all
rival bids
d. CNVM organizes anauction for designating thewinning bid; in each auction
round the price has to behigher by 5% than in theprevious round

Conditions to transform apublic company in a privatecompany

Available period for organizing
a buyout transaction
Buyout priceif after the conclusion of ashare buy-back public offer,the company has less than
500 shareholders or its sharecapital is lower than 1 billion
ROL

na

Public to private transactions
a. the majority shareholder
mandatory delisting whenowns at least 90% of thethe majority shareholders
total shares of the company owns more than 90% of theand makes a public offer
total number of sharesaiming at transforming thecompany into a privatecompanyb. based on the decision of
the General Assembly of
Shareholders when the total
number of shareholders islower than 100 and the sharecapital is lower than 100.000
euros
12 months after the
12 months after theacquisition of a stake higher acquisition of a stake higher
than 90%
than 90%

following a public offer, ashareholder has a squeeze
out right if
a. he owns at least 95% of
the total number of shares of
the company;

following a public offer, ashareholder has a squeeze
out right if
a. he owns at least 95% of
the total number of shares of
the company;b. at least 90% of theoutstanding shares havebeen tendered in a previous
purchasing public offer

b. at least 90% of theoutstanding shares havebeen tendered in a previous
purchasing public offernanafair price standard:a. the price accepted in theprevious voluntary or
mandatory bid, assuring
more than 90% of the target
shares is considered a fair
priceb. in all other circumstances,
the fair price will beestablished by anindependent expert inrespect with theinternational valuation
standards.

based on the net assets value the mean of at least two outof the three following prices:a. the average market priceduring the 12 months
preceding the offer;valuated by an independent
experts, at least equal to theaverage price of:a. the average market priceduring the 12 months
preceding the offer;

fair price standard:a. the price accepted in theprevious offer assuring morethan 90% of the target
shares is considered a fair
priceb. the net assets value basedon the IAS

b. the net assets value basedon the IAS

b. in all other circumstances,
the fair price will beestablished by anindependent expert inrespect with theinternational valuation
standards.

EMERGING CORPORATE GOVERNANCE

30
c. the highest price paid byofferor during the previous
12 monthsc. the highest price paid by
the offeror during theprevious 12 months
the transactions with target
stocks are suspended after
the date of preliminary
announcement
the offer price can becontested

Restrictions imposed ontransactions with the target
stocksna

the transactions with target
stocks are suspended after
the date of announcement

Rights of the minority
shareholdersna

the minority shareholders
owning at least 75% of thefree float can contest theoffer price

Obligations of minority
shareholders

na

na

na

Resolution of contested buyout bidsnaa. if the new price is higher
by at least 20% than theinitial price a new valuation
is imposed;
b. if not, the offer price isequal to the mean of prices
valuated by the independent
experts representing the
majority and minority
shareholders, respectively.

Excepted transactionsnaa. if the new price is higher
with at least 20% than theinitial price a new valuation
is imposed;
b. if not, the offer price isequal to the mean of prices
proposed by the
independent experts
representing the majority
and minority shareholders,
respectively.
the acquisition of the stake
triggering the MBR
a. within privatization

the acquisition of the stake
triggering the MBR
a. within privatizationnana

the right to ask the majority
shareholder owning at least
95% of the total shares of
the company to buy out theremaining shares at a fair
pricein the case of the sell out
right, the costs raised by thevaluation of the buyout priceis borne with the minority
shareholdersna

the right to ask the majority
shareholder owning at least
95% of the total shares of
the company to buy out theremaining shares at a fair
pricea. the minority shareholders
has the explicit obligation tosell their shares to a major
shareholder having asqueeze out rightb. in the case of the sell out
right, the costs raised by thevaluation of the buyout priceis borne with by the minority
shareholdersna

the acquisition of the stake
triggering the MBR
a. within privatization

the acquisition of the stake
triggering the MBR
a. within privatization

EMERGING CORPORATE GOVERNANCE

31
b. from the Minister ofFinance, following theexecution of the budgetaryclaimsMultiple classes of shares

Remarksb. from the Minister ofFinance, following theexecution of the budgetaryclaimsb. from the Minister ofFinance, following theexecution of the budgetaryclaims;c. the transfer of shares
between the mothercompany and its subsidiaries
d. following a voluntary
public offer for these shares,
having as object of the offer
all the shares of the companynanana
the obligations imposed tobuyout transactions are
distinctively applicable tovarious classes of shares
the takeover regulation 1996 the obligation to buy out the the takeover regulation 2003 a. the two distinct terms
is founded on the market law minority shareholders is not is founded on the market law regarding the offers for a
1994
applicable in companies
2002
control position and for awhere the Government owns
majority position are noat least 90% of the total
longer used;sharesb. the obligation to refrainfrom transactions with thetarget stocks concerns also
the intermediary of the offerc. the mandatory bid rule isapplicable to shareholders
owning 33% of the voting
rights at the date of theactual rule and who had notrespected the conditions
imposed by the rules
applicable at the date such a
stake had been acquired.

b. from the Minister ofFinance, following theexecution of the budgetaryclaims;c. the transfer of shares
between the mothercompany and its subsidiaries
d. following a voluntary
public offer for these shares,
having as object of the offer
all the shares of the company
the obligations imposed tobuyout transactions are
distinctively applicable tovarious classes of sharesa. the transactions made byofferor with the target stocks
outside the bid have to beconcluded at a price higher
than the bidding price and nolater than 8 days till the endof the bidding periodb. the securities regulation
2006 is founded on themarket law 2004