Extensive privatization programmes supported the transition to market economies in Central and Eastern Europe. The withdrawal of the state, along with the changes in the institutional infrastructure, was meant to bring along substantial improvements in financing, decision-making and consequently, in the performance of the privatized firms. Performance was expected to improve also due to some redistribution of ownership in the post-privatization period, which should have directed shares into the hands of the most interested owners. Notwithstanding the differences in the privatization models, firm ownership and control has been in fact concentrating in all these countries (Berglof and Pajuste, 2003). Ownership concentration should in principle provide firms with owners that have the incentive to monitor managers and guide their behaviour towards firm-value maximization. However, it also makes it possible for the large owners to divert firm value to the cost of minority shareholders. The negative effects associated with the extraction of these so-called private benefits may even offset any value increases due to improved monitoring. The prevalence of one or the other effect seems to depend on the blockholders’ identity, their willingness, motivation and ability to monitor firm management (Koke and Renneboog, 2003), their interaction with other owners (Earle et al., 2003), as well as on the regulatory and institutional environment in which the firms operate.2
Most of the empirical studies so far evaluate the impact of privatization on the different measures of firm economic and financial performance, while more or less successfully addressing the problem of the endogeneity of the ownership structure. Our study partly avoids the latter problem by relying on alternative yet related analyses. It evaluates ownership redistribution, via the stock price reactions to the entry of a new blockholder and the premiums paid for large share blocks. Stock price reactions reflect the ‘shared benefits of control’, in other words how the market estimates the management and monitoring capabilities of the block purchasers and, consequently, their contribution to a firm's value. Block premiums, on the other hand, approximate the ‘private benefits of control’, that is the value that large investors attribute to holding control. Our study is one of very few3 that analyses the benefits of control and uses appropriate methods to tackle the specifics of the stock markets in transition countries (where the illiquid trading of shares is pervasive). The analysis is based on a set of share-blocks exchanged in the organized markets of the Ljubljana Stock Exchange in the first post-privatization year (2000 and 2001). Although limited in number, they represent a substantial part of all ‘officially disclosed’ acquisitions of qualified holdings in Slovenian public corporations in the period of our analysis. Given that we are able to distinguish the identity of the block buyers, we provide new and, in our opinion, more direct evidence on the role of privatization investment funds (PIFs) in privatized firms and discuss their incentives for creating rather than expropriating corporate value. The ability of PIFs to become involved in the supervision of companies and to help resolve the collective action problem was in fact among the main motives for mass privatization (Frydman and Rapaczynski, 1993).
Our analysis of stock price reactions to the acquisition of a share block by a PIF provides no support for the superiority of PIFs as corporate monitors. Any positive market reactions preceding the entrance of a new PIF as the largest shareholder are in fact reabsorbed within 20 days of the block trade announcement. More pronounced positive effects are observed only when the block buyer is an industry-related non-financial firm (industrial owner). However, in all the cases analyzed here the industrial firms acquiring the blocks also announced a takeover within six months of the block acquisition. Positive price reactions could thus be largely driven by the expectations of an imminent takeover rather than by the expected contribution of the industrial owner to firm performance. At the same time, non-majority share blocks trade at relatively high premiums in relation to the exchange price, indicating that even minority control is valuable. We find that the premiums increase with the percentage of a firm's shares transferred in a block and with the incontestability of the blockholder's control.
The main explanation of the observed results in our view lies in the characteristics of the Slovenian institutional framework, particularly in the interface between the newly emerging rules and the distribution of power between different interest groups at the time of privatization. Apart from preserving state influence, the Privatization Law (1992) introduced substantial employee ownership and thus firmed up the employee and management role in the privatized firms.4 At least initially, corporate decision-making in Slovenia could thus be described as a form of bargaining between the main constituencies from the pre-transition period5 and the new owners, namely PIFs and, later on, domestic non-financial firms. We believe that PIFs in particular lacked financial resources, accountability and proper incentives to confront firm managers and actively promote corporate restructuring. And, most importantly, they were left with an absence of opportunities for value extraction at both the firm and the fund level. In such an environment, we would expect that factors other than the owners themselves induced firm restructuring. These factors include product market competition and the characteristics of firm managers (their concern for reputation as well as their ability and motivation). In fact, there is a ‘leading’ group of Slovenian firms with dominant management that are export-oriented, promote internationalization and growth and have borne the largest share of the burden of the Slovenian transition (Domadenik, Prasnikar and Svejnar, 2006; Prasnikar and Gregoric, 2002).
The paper is structured as follows. Section 2 provides an overview of the Slovenian privatization and the dynamics of ownership in the Slovenian post-privatization period. The results of an event study of stock price reactions to trades of large blocks are presented in Section 3. An empirical model estimating the private benefits of control and the related results are discussed in Section 4. Section 5 concludes with final remarks.