Managerial Ownership and Corporate Performance in Slovenian Post-Privatisation Period

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The Slovenian post-privatisation period has been characterised by a decline in the ownership by non-managerial owners (employees) and state-controlled funds. On the other hand, domestic and foreign nonfinancial firms, Privatisation Investment Funds and managers have been increasing their holdings. The latter, namely the growing managerial ownership, is likely to feature in future ownership dynamics in Slovenia. In fact, in 2002 the desired (optimal) ownership stakes estimated by Slovenian managers were 10.8 percentage points higher than their actual stakes. The aim of our paper is to describe the main trends in the ownership of Slovenian corporations in the post-privatisation period and to provide an answer to the basic economic question: what is the influence of the ongoing consolidation of managerial ownership on the performance of Slovenian firms. The empirical analysis testing this relationship is based on a panel of 182 Slovenian firms in the 1995-99 period and does not provide relevant evidence of any positive effects of the increasing managerial control on Slovenian firms' performance. If any, a positive incentive effect is only observed in those firms whose managers' holdings exceed 10-percent, only with regards to firms' financial performance (but not total factor productivity) and only in firms that are not listed on the capital market. Further, the negative effect of the current gap between the desired and actual managerial ownership seems to exceed any positive incentive effect arising out of managerial ownership

JEL Classification: G30

Keywords: managerial ownership, ownership consolidation, corporate performance, corporate governance, transparency

1. Introduction

The Slovenian Law on Ownership Transformation (1992) introduced the change from social3 to private ownership through a combination of voucher and cash privatisation; it provided for the allocation of 20 percent of firms' shares to insiders, 20 percent to the Development Fund for further sale to Privatisation Investment Funds (PIFs), 10 percent to the Pension Fund and 10 percent to the Restitution Fund4. Workers' councils in the firms were then empowered to allocate the remaining 40 percent to either firm insiders (through insider buy-outs) or outsiders (through a public tender). More than 90 percent of firms undergoing privatisation opted for the first alternative (insider privatisation); inside owners ended up holding about 40 percent of the social capital subject to privatisation, 25 percent went to Privatisation Investment Funds, 22 percent to the Pension and Restitution Funds, while the remaining 13 percent was publicly sold in exchange for ownership certificates5. Insider ownership prevailed mostly in smaller firms; inside owners obtained at least 60 percent of the voting rights in about 24.4 percent of firms, while their ownership did not exceed 10 percent in about 6.3 percent of (mostly large) firms (Report of the Agency for Privatisation, 1999). Hence, Slovenia's privatisation brought about two large groups of owners: inside owners (employees, including managers, former employees and their relatives) and outside owners (Pension and Restitution Funds, Privatisation Investment Funds). Within the group of insiders, managers ended up holding only minority stakes (3.86 percent) with the support of the employees as the main mechanism for ensuring their discretionary power and fighting the influence of outsiders (Prasnikar and Gregoric, 2002; Gregoric, 2003).

Due to the shrinking employee ownership and hence the reduction of the 'hidden' support for managers in the post-privatisation period, Slovenian managers have started strengthening their power by expanding their ownership stakes6. These increases have been most prominent in non-listed firms in which the transfer of ownership involves relatively low prices and mostly remains undisclosed to the public. Further, the remaining dissatisfaction of managers (at the end of 2002 the optimal or desired ownership stake of the average Slovenian manager exceeded their actual ownership stake by 10. …