Priorities and sequencing in privatization: Evidence from Czech firm panel data

While privatization of state-owned enterprises has been one of the most important aspects of the economic transition from a centrally planned to a market system, no transition economy has privatized all its firms simultaneously. This raises the question of whether governments privatize firms strategically. In this paper we examine the determinants of the sequencing of privatization. To obtain testable predictions about the factors that may affect sequencing, we investigate the following competing government objectives: (i) Maximizing efficiency through resource allocation; (ii) maximizing public goodwill from the free transfers of shares to the public; (iii) minimizing political costs; (iv) maximizing efficiency through information gains; and (v) maximizing privatization revenues. Next, we use firm-level data from the Czech Republic to test the competing predictions about the sequencing of privatization. Consistent with the hypotheses of a government priority on revenues and public goodwill, we find strong evidence that more profitable firms were privatized first. The sequencing of privatization is also consistent with maximizing efficiency through information gains. Our results indicate that many empirical studies of the effects of privatization on firm performance suffer from a selection bias.     

Reluctant regulation

We study the effect of state ownership on the market-to-book ratios of publicly traded European utilities from 1994 to 2005. We find that when the company is subject to independent regulation, state ownership seems positively associated with firm value. This relation tends to appear in countries where weak checks and balances and political fragmentation do not constrain the power of the executive. Our results suggest that, where political institutions are weak, politicians may influence regulatory agencies in order to benefit state-owned firms.     

Signalling,Disclosure And The Implications Of Financial Structure For Uk Corporate R&D ∗

This paper investigates the impact of R&D disclosure and finance variables on the level of R&D expenditures. The question addressed is: what is the impact of changes in disclosure requirements on the relationship between R&D expenditure and the financing of firms? The question is motivated by the possible signalling role that elective disclosure may have had prior to changes in accounting practices to ensure R&D disclosure.     

International trade,foreign direct investments,and firms’ systemic risk : Evidence from the Netherlands

This paper measures the contribution of firms in the financial and non-financial sectors to systemic risk. We quantify systemic risk as possible risk spillovers from individual firms to the economy by taking into account time-varying linkages between the firm and the economy. Based on a novel dataset that combines data on international trade and foreign direct investments with daily stock data for 67 Dutch listed companies from 2006–2015, our results indicate that high systemic risk contributions are not only present in the financial sector, but also occur in other sectors of the economy. We find that firms within the financial sector are more capable than non-financial firms of reverting to their pre-financial crisis level of systemic risk contribution. Having examined the potential role globalization fulfills in determining systemic risk, we find two main opposing effects. First, firms in internationally trade-intensive sectors contribute less to systemic risk than firms in sectors with low trade intensity. Second, systemic risk rises when firms are engaged in foreign direct investment activity, suggesting that international networks and global supply chains contribute to systemic risk propagation. Our empirical results imply that macro-prudential policy aimed at monitoring systemic risk should be extended to non-financial sectors and should take into consideration globalization measures, such as foreign direct investments and global supply chains.     

Political instability: Effects on financial development, roots in the severity of economic inequality

We here bring forward strong evidence that political instability impedes financial development, with its variation a primary determinant of differences in financial development around the world. As such, it needs to be added to the short list of major determinants of financial development. First, structural conditions first postulated by Engerman and Sokoloff (2002) as generating long-term inequality are shown here to have strong empirical support as exogenous determinants of political instability. Second, that exogenously-determined political instability in turn holds back financial development, even when we control for factors prominent in the last decade’s cross-country studies of financial development. The findings indicate that inequality-perpetuating conditions that result in political instability and weak democracy are fundamental roadblocks for international organizations like the World Bank that seek to promote financial development. The evidence here includes country fixed effect regressions and an instrumental model inspired by Engerman and Sokoloff’s (2002) work, which to our knowledge has not yet been used in finance and which is consistent with current tests as valid instruments. Four conventional measures of national political instability – Alesina and Perotti’s (1996) well-known index of instability, a subsequent index derived from Banks’ (2005) work, and two indices of managerial perceptions of nation-by-nation political instability – persistently predict a wide range of national financial development outcomes. Political instability’s significance is time consistent in cross-sectional regressions back to the 1960s, the period when the key data becomes available, robust in both country fixed effects and instrumental variable regressions, and consistent across multiple measures of instability and of financial development. Overall, the results indicate the existence of an important channel running from structural inequality to political instability, principally in nondemocratic settings, and then to financial backwardness. The robust significance of that channel extends existing work demonstrating the importance of political economy explanations for financial development and financial backwardness. It should help to better understand which policies will work for financial development, because political instability has causes, cures, and effects quite distinct from those of many of the key institutions most studied in the past decade as explaining financial backwardness.     

Foreign direct investment and economic growth: Is more financial development better?

We investigate the extent to which an increase in financial development affects the positive effect of foreign direct investment on economic growth. Although the financial sector is beneficial for economic growth, the effect of further financial development on growth is found to become insignificant. Using a dynamic panel threshold model on 62 middle- and high-income countries spanning the period 1987–2016, we re-examine the possible nonlinearity between finance, foreign direct investment, and growth. Consistent with the “vanishing effect” of financial development, we find significant evidence that foreign direct investment fosters growth in general, but the growth effect of foreign direct investment becomes negligible when the ratio of private sector credit to gross domestic product exceeds 95.6%. This finding is robust to different econometric methods, various subsamples and interaction analyses, and distinct financial development indicators.     

Changing International Financial Architecture: Growing Chinese Influence?

It is often said that the 21st century will be the Asian century. Based on population and gross domestic product projections, it certainly looks as if this will be so. Will the existing international financial institutions give more voices, votes, and top positions to Asia? Or will Asia create its own institutions that would rival the old architecture? This present paper argues, first, that China, and possibly India, will be in a position to be so influential that the international financial architecture may have to go through significant changes. Second, the three large crises in the last 20 years have made Asian countries more confident that they can manage capital flows by accumulating large foreign reserves and by adopting sound macrofinancial policies. After 2009, China started to push various initiatives that will amount to creating its own sphere of influence with new regional institutions in the future.