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Ownership structure, corporate governance, and enterprise performance: empirical results for Ukraine.

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Abstract

This paper examines the effect of ownership structure on corporate governance and performance of privatized enterprises in transition. The data are taken from a survey conducted in 2001 on 202 medium and large firms in Ukraine for the period 1998-2000. The ownership structure is measured by the percentage of shares held by each type of owner (state, managers, workers, Ukrainian concentrated outsiders, foreign concentrated owners, and stake-holding shareholders). Performance is measured by sales per employee. Regression analysis is used to test the hypothesis that concentrated outside ownership influences performance positively and to detect non-linear effects of ownership variables on performance. In contrast, with important previous studies on enterprise restructuring in Ukraine [Estrin and Rosevear, 1999], significant ownership effects on performance are found. Insider ownership (being a special case of stakeholding ownership) is found to have a significant non-linear effect on performance--positive within a lower range but negative from a threshold close to majority ownership onwards. In general, Ukrainian outside owners do not have a significant effect on performance. However, stakeholding ownership by customers affect sale prices and performance negatively. The most robust results are obtained for the effects of concentrated foreign ownership, both for levels of the respective variables in each year and for changes from one year to the other. The impact of foreign ownership on performance is significantly non-linear: its effect is positive only up to a level that falls short of majority ownership. It is concluded that this non-linearity is due to an institutional environment still adverse to foreign direct investment. (JEL P31, L33, G30)

Introduction

In earlier studies, the factors exerting a positive effect on enterprise restructuring in transition economies ownership emerged, besides competition and hard budget constraints, as a decisive determinant. The focus in these studies was directed mainly at the dichotomization into state versus private ownership. Privatization was generally found to have had a beneficial effect on the restructuring measures of former State-Owned Enterprises (SOEs) and their performance [Megginson and Netter, 2001; Djankov and Murrell, 2002]. One may question whether and how the ownership structure affects the performance of enterprises in transition. Different types of owners (insiders versus outsiders or concentrated versus dispersed owners) may differ in their impact on enterprise performance in transition since the ownership structures created in the privatization process have not yet adjusted themselves equally according to the corporate governance requirements for value maximizing management of the enterprises. Ownership structure matters because it contributes to the solution of corporate governance problems.

In this paper, the findings are reported about the effect of ownership structure on performance from a survey of 202 medium and large industrial firms from four regions in Ukraine. In the two best known studies on enterprise performance, corporate governance and ownership in Ukraine [Estrin and Rosevear, 1999 a, b], no positive performance effects from outsider (including foreign) ownership were detected. Rather, restructuring improvements were related to insider ownership, while the apparent failure of outsider ownership seemed hard to explain. In this paper, the author draws on the view, emphasized by Nuti [1997], that corporate governance is not just confined to the principals-agent problem of monitoring and controlling the management in order to ensure value maximization in the interest of shareholders, but also involves the solution of principals-principals problem of conflict of interest between shareholding stakeholders in the firm and pure shareholders. This perspective on the corporate governance problem implies the hypothesis of a non-monotonic relationship between performance and the size of shareholding by stakeholders. The aim of this paper is to test this hypothesis.

The next section of the paper delineates the two aspects of the corporate governance problem relevant for enterprises in transition. Then, data are briefly described. The following section describes and interprets the results from the regression analysis in which significantly positive non-monotonic impacts of manager, worker, and in particular, foreign ownership on performance measured by sales per employee is found.

Ownership Structure and Performance: Theoretical Considerations

Corporate governance problems do not arise from separation of managerial control from ownership per se but from multiple ownership in a company. In case of a single non-managing owner, the agency problem can be solved by monitoring mechanisms and incentive schemes that make the management pursue the owner's interests if the costs of monitoring are outweighed by the benefits accruing to the owner who bears the costs of monitoring. In fact, in this case, the separation of ownership from management is even more likely to result in performance of the firm closer to value maximization than in the case of owner-managed enterprises, since owner-managers derive satisfaction from non-pecuniary aspects of their engagement which they trade off against profits [Jensen and Meckling, 1976; Demsetz, 1983]. This internal trade-off by utility-maximizing owner-managers does not necessarily lead to any social inefficiency nor does the incurrence of agency costs by the single outside owner due to this voluntary separation from management.

In enterprises in which ownership (control rights and residual profit rights) is shared between several individuals with different preferences about non-pecuniary outcomes or the timing of profit payoffs, conflicts may arise if the transferability of ownership rights is restricted either by law, as with partnerships and closed corporations, or by imperfections of the stock market. Such conflicts lead to policies which are sub-optimal relative to the criterion of value maximization on which the non-managing shareholders of a public (open) corporation (the shares of which are traded on an efficient stock exchange) would be able to agree. Therefore, in developed market economies, partnerships and closed corporations are typically formed by owners with similar tastes (family businesses) or are found in fields of activity where the specific human capital, provided by the owners, matters most and the owners are financially well diversified [Fama and Jensen, 1985]. This does not hold true for a country such as...

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