# _Further Sensitivity Analysis_

One potential problem with the data is its different sources. In particular, one may suspect that the data for the Czech Republic and Hungary are biased towards better firms, since "bad" firms are less likely to cooperate on a voluntary basis with private surveys. In both cases, however, this is not an important issue. In Hungary, the data provider is contracted by the government to collect information on all firms which employ more than twenty-five workers. Such information is collected through the regional business registries. In the Czech Republic, our data provider is contracted by the government to collect and distribute information on all firms listed on the Prague Stock Exchange or the electronic stock market (RM-System). Thus although the survey is run by a private firm, replies are mandatory. A bias of a different nature exists, however. The majority of the 2,100 firms listed on either exchange in the Czech Republic are medium- and large-size. The sample, as is the case in Hungary, is biased away from small-size firms.

How does the sample selection affect our results for the Czech Republic and Hungary? We are likely to underestimate the effect of privatization on enterprise performance. This is because small firms are usually privatized to their managers and the principal agent problem between owners and managers, which is present in larger firms, is alleviated. In the Polish case, the scarcity of liquidation-privatization types also leads to a similar bias. This privatization route was designed primarily for management buy-outs where the new (old) management would be able to buy the firm through a highly leveraged deal, and at the same time (because of liquidation) declare the previous labor contracts void. Since these sales were primarily financed by borrowing, the ability of the firm to generate cash flow in the short to medium run (during the term of the loan) was an important factor in deterrnining whether management would decide to launch the liquidation procedure.

To test for possible selection biases across all countries, we restrict the samples in the other five countries to firms that also have more than twenty-five workers and operate in manufacturing sectors. These restrictions do not qualitatively affect our results once we re-run all regressions using the truncated samples (not reported). They also alleviate the endogeneity of privatization (the coefficient on MILLS in the second-step estimation becomes insignificant), as argued in Barberis et al., 1996. The reason is that the most likely candidates for endogeneity are precisely firms which underwent management buy-outs - managers had the insider knowledge to proper evaluate the firms and their decision to buy could be treated as a signal of "hidden" value.

The use of balanced samples could also lead to a selection bias if less productive firms offered for privatization were not sold and subsequently exited. It could also lead to an overestimate of the performance of state enterprises as liquidated state enterprises performed worse. Given the lack of data that allow us to use unbalanced samples, and since the number of liquidated firms in the seven countries was negligible prior to 1996,6 we assume that this oniission

> 6 Previous studies have argued that liquidation of firms in Hungary during 1992-93 led to significant exit. This is not the case. Although many firms applied for liduidation, the majority of them were still in operation at the

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