Endogenous Ownership Structure: Factors Affecting the Post-Privatisation Equity in Largest Hungarian Firms

Abstract

Using a data set for 162 largest Hungarian firms during the period of 1994-1999 this paper explores the determinants of equity shares held by both foreign investors and by Hungarian corporations. We find evidence of a post-privatisation evolution towards more homogeneus equity structures, where dominant categories of owners aim at achieving controlling stakes. Here, the foreign investors and Hungarian corporations play the major role. In addition, focusing on firm level characteristics we find that the exporting firms attract foreign owners, who acquire controlling equity stakes. Similarly, the firm size measurements are positively associated with the presence of foreign investors. However, they are negatively associated with 100% foreign ownership, possibly because the marginal costs of acquiring additional equity are growing with the size of the assets. We interpret the results in light of the existing theory. In particular, following Demsetz and Lehn (1985) and Demsetz and Villalonga (2001) we argue that equity should not be treated as an exogenous variable. As for specific determinants of equity levels, we focus on informational asymmetries and (unobserved) ownership specific characteristics of foreign investors and Hungarian investors. 1. Introduction: endogenous equity Much of the existing literature takes ownership variables as given, i.e. considers them exogenous. This approach has been typical for most of research on privatisation outcomes in the former state-owned enterprises in central and eastern Europe and the former Soviet Union (FSU). Thus, in the economics of transition research, arguments based on agency theory within a partial equilibrium framework have played by far the predominant role, with the development and testing of models describing the impact of the newly created structures of corporate governance on firm performance using large samples and statistical methods. A major theme of this research is that ownership change would create new incentives or impose new control structures upon managers of the § This research forms a part of the ACE-Phare Project P-981048-R on 'Corporate Governance, Relational Investors, Strategic Restructuring and Performance in Hungary and Poland'. The authors are grateful to the European Commission for its support. The content of the publication is the sole responsibility of the authors and it in no way represents the views of the Commission or its services. In addition, we wish to thank Zoltan Adam, Slavo Radosevic, Adam Torok and Peter Vince for providing useful comments. We would also like to thank participants of the workshops at the Brighton University

Ownership structure and investment finance in transition economies A survey of evidence from large firms in Hungary and Poland1

“…Interestingly, the same two results hold for the provision of finance from abroad, where the effect of past profitability is significant and positive, while the effect of size is positive and marginally insignificant. The results for these two firm‐level factors are consistent with general findings on a firm's ability to attract foreign investment (Bishop, Filatotchev and Mickiewicz, 2002; Dahlquist and Robertsson, 2001; Kang and Stultz, 1997).…”

The choice of ownership structure: Evidence from Russian mass privatization

“…We take their hypotheses for possible determinants of the ownership structure as a basis of our empirical analysis. Bishop et al (2002) investigate the determinants of the post-privatization ownership structure in Hungary and find for example that exporting firms and larger firms are more likely to be acquired by foreign owners. Grosfeld and Hashi (2007) analyze two sets of firm-level data for Poland and the Czech Republic.…”

“…It turns out that the capital stock and volume of sales are positive predictors of ownership by oligarchs. 9 Bishop et al (2002) use logit and multinomial logit regressions for five categorial variables based on the ownership stakes of domestic and foreign owners, and Grosfeld and Hashi (2007) use probit regressions for the event that the stake of the largest shareholder increases and for the existence of a large shareholder. 10 For more details on the Russian privatization program see Frydman et al (1993), Boycko et al (1995), Blasi et al (1997) and Hare and Muravyev (2003).…”

Determinants of Ultimate Control of Large Firms in Transition Countries: Empirical Evidence

“…Bishop, Filatotchev, and Mickiewicz (2001), for example, study large firms in Hungary during the period 1994-1999, and find firm size positively associated with the presence of foreign investors. Jones and Mygind (1999) study the postprivatization ownership change in Estonia in 1995-1997, and find that large firms have higher ownership stakes of outside owners and that profitability is not an important factor for ownership structures.…”