3 the direct involvement of owners in many important decisions and day-to-day monitoring.

5. Finally, the environment of transition is characterized by a high degree of uncertainty and deep institutional change. Under these conditions, standard rules-driven behavior brings relatively meager competitive advantages. Success calls for spontaneity and innovation that can only be provided by the owner - indeed, not just any owner, but a private owner who is actively engaged in the running of the business.

If, therefore, different types of owners differ in their ability to improve their firms' performance, the environment of Central and Eastern Europe should magnify such effects and allow for their more accurate measurement and analysis.

## 2. METHODOLOGY

# _Evaluating the impact of ownership_

There are two ways in which the relation between ownership and performance can be evaluated. The first is to compare pre- and post-privatization performance of selected privatized firms. Although intuitively appealing, this "historical" approach can suffer from the difficulty of sorting out a potential variety of causal factors. Pre- vs. post-privatization comparisons are more meaningful if they involve privatization programs through which significant numbers of state companies are transferred to the private sector. Such programs, however, usually come as parts of broader shifts in economic policies, often including, in addition to privatization, such changes as tighter financial discipline and a reduction in subsidies. As a result, it is difficult if not impossible to separate the effect of new ownership from the impact of the new policies.<sup>5</sup> Moreover, traditional privatizations frequently involve significant injections of funds into the firms to be privatized and are usually preceded by extensive preparations during which management and organizational structures are revamped.<sup>6</sup> The impact of these preparations may well account for some or all post-privatization improvements and cloud the impact of ownership change on company performance.<sup>7</sup> 5This is also true in transition economies, where, as a result of variety of policy changes, restructuring of operations is common to privatized _and_ state firms alike and thus cannot be attibuted to ownership changes alone.

**6** British Steel, for example, is reported to have reduced its employment by 40% prior to privatization while keeping revenues constant; British Airways reduced its labor force by the same percentage, while actually increasing the number of flights. Djankov and Pohl (1977).

7Among the "historical" studies using privatized firms in predominantly market economies, the most important is Megginson _et al._ (1994), who compare the pre- and post-privatization peiformance of 61 firms in 18 countries and find that privatization increases profitability, output per employee, investment, and employment, as well as leading to lower leverage and higher dividend payouts. But the study does not control for changes in the econonic environment or most fonns of pre-privatization restructuring. Moreover, although the authors try to reject the possibility that the improvements they noted were a result of significant injections of funds into the privatized companies, the rejection is based on a lack of reports of such injections in a few Western newspapers, and as such may not be overly reliable. Most of the remaining pre-