The development of equity capital markets in transition economies : privatisation and shareholder rights
The thesis focuses on two issues that have arisen during the development of equity capital markets in transition economies. First, it has typically been observed that the divestiture of state assets in Russia has not been implemented comprehensively. Following an introductory chapter, the second chapter develops a model to explain this observation in an environment where the objective of the state is to maximize revenues from the sale of its shares on the equity capital markets. If the state has private information about the future macroeconomic environment or about potential improvements of the firms' qualities due to improved corporate governance it can signal its private information to investors. This can be achieved by choosing a percentage of the state's shareholdings to be held back from the immediate sales. A second issue which has typically slowed down the development of capital equity markets in transition economies has been the violation of shareholder rights. Governments have often not guaranteed such rights. However, management might have incentives to introduce shareholder rights voluntarily. The third chapter develops a simple static framework to think about the issue of shareholder rights and tests some of its predictions. The chapter presents evidence from a sample of the 140 largest Russian joint stock companies. Only a minority of firms in this sample do honour shareholder rights and the chapter analyzes which firms are more likely to do that. It turns out that large firms are more likely to introduce shareholder rights, possibly because the expected value of stealing profits is smaller. Furthermore, there is some evidence that large outside blockholders, as well as the state in its role as shareholder, are able to press for shareholder rights. The fourth chapter develops a dynamic model for the introduction of shareholder rights where the firm's ownership is endogenised. The chapter shows that in the short nm, management might be willing to introduce shareholder rights in case it has received a sufficiently large portion of the firm's voting shares in the privatization process. In the long term, more firms will introduce such rights, but only after they have stolen a sufficient part of the firms profits to build up a large equity stake.