DOES CORPORATE GOVERNANCE PREDICT FIRM PERFORMANCE THE CASE OF UKRAINE

1
DOES CORPORATE GOVERNANCE PREDICT FIRM
PERFORMANCE? THE CASE OF UKRAINE
Privatization is no great achievement it can
occur whenever one wants if only by giving away
property to ones friends. Achieving a private,
competitive market economy, on the other hand, is
a great achievement, but this requires an
institutional framework, a set of credible and
enforced laws and regulations. (Stiglitz, 1999,
p. 10, 19)

• Vitaliy Zheka
• Central European University, Budapest and
• Ukrainian Productivity and Efficiency Group, Kyiv

2
Overview

• Ukraine 16 years of transition, 8 years of high
  growth
• Question Why firms do not improve their
  corporate governance?
• Hypothesis Is it really rewarding?
• Methodology standard production function, FE/FD
  and IVs estimators
• Findings
• We document causal relationship (govgtperform)
• The relationship is economically and
  statistically strong
• All aspects of governance are important, economic
  magnitudes are different

3
Ukraine

• Big-Bang privatization in 90s (mostly
  1994-1998) resulted in
• gt about 10-12,000 open JSC
• gt millions of shareholders (47m population)
• No reform of corporate governance
• fraud and mismanagement were often as a rule
  rather than an exception
• Russian proverb No lieNo life

4
Ukraine
Privatization is no great achievement it can
occur whenever one wants if only by giving away
property to ones friends. Achieving a private,
competitive market economy, on the other hand, is
a great achievement, but this requires an
institutional framework, a set of credible and
enforced laws and regulations. (Stiglitz, 1999,
p. 10, 19)
5
The Main Question and Policy Implications

• Will a corporation still benefit from exercising
  good corporate governance even in the environment
  of cheating?
• Or, is it more optimal to behave like others?
• When in Rome do like Romans ?
• If it is indeed helping firms perform better,
  then which particular governance elements are
  more important?
• Policy Implications
• for governments strengthen law and enforcement
• for firms take action on voluntary basis

6
Literature

• Some most closely related papers for emerging
  economies are
• Russia
• Radygin and Entov (2001),
• Turuntseva, Woodward and Kozarzewski (2004)
• Black (2001)
• Ukraine
• Zelenyuk and Zheka (2006), Zheka (2005)
• Across developing transitional economies
• Durnev and Kim (2004),
• Korea
• Black, Jan and Kim (2005 )

7
Hypotheses

• Main Hypothesis is
• There exist a positive relationship between
  overall corporate governance quality and firms
  performance.
• we test the same hypothesis separately for
  corporate governance elements, i.e. shareholder
  rights, transparency and SB arrangements.

8
Data

• Source Annual financial statements publicly
  available at istock.com.ua or sma.ua.
• Unbalanced panel of about 6,000 firms 2000
  through 2002
• In total about 18,500 firm-year observations
  covering all regions and all industries

9
Methodology

• SPF Approach, IV Analysis (Wooldridge, 2002)
• yit zit ? wit d ci uit ,
• y (Output) is Total Net Revenue (in UAH)
• i for firms, t for years
• E(zis uit ) 0, for all s, t
• Inputs Fixed Assets (UAH) and Employment (number
  of workers)
• Controls industry, region, and year dummies
  business environment variable and ownership
  characteristics
• ci firm heterogeneity (fixed effects)
• E(wis uit ) ? 0
• uit idiosyncratic errors

10
CG Elements (1) Shareholder Rights (2)
Transparency
11
CG Elements
12
Trust and Governance
Social Trust (political ethnic diversity,
religion)
Corporate Governance Practices (as culturally,
historically determined phenomena)
Corporate Performance
Business Environment (ethics, standards, etc)
13
Plausibility of Our Instruments

• Murray, M. Avoiding Invalid Instruments and
  Coping with Weak Instruments, JEP 2006
• Consistency with theory, previous literature and
  intuition
• Significance and estimated signs consistent with
  instruments rationale
• Omitted explanatory variable
• Extensive control variable (including business
  environment)
• FE, FD, two sets of IVs
• Tests of overidentifying restrictions
  (instruments validity)
• Weak instruments tests

14
Instrumental Variables

• Two sets
• 1. All time invariant variables can be used as
  IVs at the second stage after FD
• 2. Social Trust Variables
• Ethnic Diversity
• Political Diversity
• Religious Factor

15
OLS results (year, industry, region dummies are
included)
16
IV Analysis (pooling over time)
17
Tests
18
Panel Estimators (all control variables are
included)
19
Panel IV Analysis
Instruments levels of regional, industry, year,
business environment dummies, political and
ethnic diversity, labor and capital, and
D.religion In all cases the null that UCGI is
exogenous is rejected
Size-adjusted tests based on Moreira's (2002)
conditional approach reject H0 bD.UCGI 0.0
20
Summary of Results for UCGI
21
Results for subindices
22
Results for individual elements

• All but one significant, often highly significant
• Nine significant and one marginally significant
  with positive sign
• Two significant with negative sign
• Both shareholder registrar variables

23
Conclusions

• We document strong causal relationship between CG
  and performance
• OLS results suggest that one-point improvement in
  our UCCG index entails a 0.2-0.5 increase in
  net revenues
• Worst to best change in UCGI predicts about
  20-40 improvement in performance
• Strong effects of shareholder rights,
  transparency and board independence
• Marginally significant negative impact of outside
  Chairman issue

24
Thank you and Comments are welcome!