Corporate governance and equity
            prices : evidence from the Czech and Slovak Republics
The 1992 Czechoslavakia mass
            privatization program involving about 1,500 eneterprises and
            implemented through a voucher scheme with competitive
            bidding was a bold step in changing the ownership and
            governance of a large part of the economy. It represents a
            clear test case of one approach, and other countries may
            benefit from its lessons. At the time, much skepticisism was
            voiced about mass privatization: it would lead to diffuse
            ownership, and no effective corporate governance would
            result. But innovative forces led to the emergence of
            investment funds that collected much of the
            individuals' voucher points, leading to a much more
            concentrated ownership structure. It has been expected that
            this concentrated ownership would lead to improved corporate
            governance. But the jury is still out. So far, only limited
            and largely anecdotal evidence is available on the impact
            investment funds have on the way firms are being managed.
            Too little time has passed and too many shocks have occurred
            (for example, the split of the Czech and Slovak Republics)
            to expect to find discernible changes in corporate
            governance on measures of actual firm performance. An
            alternative approach is to investigate whether firms that
            ended up with more concentrated ownership -- and possibly
            improved governance -- sell for higher prices, either in the
            last voucher round or in the secondary market since then. In
            a forward-looking financial market, one can expect prices to
            incorporate the effects of better ownership on future firm
            performance and associated dividends to shareholders. Put
            differently, one would expect that two firms with different
            shareholding structures, but otherwise identical, would
            trade at different prices -- with the firm with a more
            concentrated ownership, and presumably better corporate
            governance, trading at a higher price. On a cross-sectional
            basis, ownership structure may thus be significant in
            explaining (relative) share prices. The author explores this
            line of reasoning. Controlling for a number of firm and
            sector-specific variables: he finds: 1) Majority ownership
            by a domestic or foreign investor has a positive influence
            on firm prices. 2) Firms with many small owners have lower
            prices. 3) Ownership by many small scale investors makes it
            easier for any single investor to establish effective
            control, but such control does not necessarily translate
            into higher prices. The author also provides two possible
            explanations of why higher prices appear to be associated
            only with majority ownership by a single investor: he finds:
            1) The corporate legal framework and the difficulty in
            collecting proxy votes in the Czech and Slovak Republics may
            prevent a small investor from making the necessary changes
            in the way firms are managed, thus keeping prices low; and
            2) Commercial banks are both managers of invesment funds and
            creditors of individual firms. Funds managers may face
            conflicts of interest and not be interested in increasing
            the value of equity alone but also the value of credits.
            This could explain why prices are relatively lower for those
            firms in which investment funds have effective control.