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THE INTERNATIONAL BUSINESS CENTER |
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FOREIGN OWNERSHIP IN NEWLY PRIVATIZED FIRMS: AN AGENCY PERSPECTIVE |
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Anil K. Makhija Michael H. Spiro |
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Occasional Paper No. 2 |
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The Katz Graduate School of Business |
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University Center for International Studies |
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ABSTRACT |
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Despite investment incentives, foreign ownership has played a minor role in the privatization process in Central and Eastern Europe. This paper examines the effect of ownership on managerial agency costs, aspects ignored in traditional Jorgenson-style analyses of investment behavior. As a legacy of their communist past, managerial agency problems are particularly severe in the region. Compared with atomistic stockholders who face a free-rider problem, block foreign ownership is desirable, since it can be expected to undertake costly monitoring and mitigate the agency problems. However, insiders in state enterprises are entrenched in ways such that foreign owners can not costlessly transfer nor readily apply the usual control mechanisms used in the developed market economies. This has a detrimental effect on foreign investment. When foreign ownership is observed, we expect larger holdings in firms that represent better opportunities for value creation through the mitigation of agency problems. Empirical evidence from recently privatized Czech firms is consistent with such investment behavior. Agency costs have not been emphasized in the literature on the determinants of foreign investment. Our analysis suggests that these costs can be important, at least in the decision by foreigners to invest in firms in the ex-Soviet bloc countries. |
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