State ownership and control in the Czech Republic

The key characteristics of a corporate pyramid are ownership and control, which lends the ultimate owner leveraged power over minority shareholders. Already in 1932 Berle and Means had pointed to the existence of a great discrepancy present in corporate pyramids between the ultimate owner’s control and cash-flow rights. These control rights are typically high due to the controlling devices described in the previous paragraphs, while cash-flow rights may be considerably lower as articulated in Bebchuk et al. (2000). Traditionally it is assumed that pyramids are formed to allow the ultimate owner to achieve control over a firm by using only a small cash flow stake. This arrangement inevitably leads to less-than-efficient corporate governance and associated agency problems. However, pyramid structure can also help to decentralize decision rights and makes intervention from the government less likely (Fan et al. 2007). Further reasons for the existence of pyramidal groups include the limited liability of separately registered groups, more space for the promotion of managers to top positions as well as better monitoring of managers, and the provision of capital under favorable conditions to other firms within the structure (Morck et al. 2005). However, despite the ubiquity of pyramidal business groups, no formal theory explains their existence (Almeida and Wolfenzon 2006).

The method of the privatization of each state-owned firm was decided on the basis of an officially accepted privatization project. According to the law, all state-owned enterprises were selected for either the first or the second privatization wave, or they were temporarily exempted. Each selected firm had to submit an official privatization proposal that was usually crafted by the firm’s management under the tutelage (and responsibility) of its sectoral ministry. Any domestic or foreign corporate body or individual was allowed to present a competing project that was to be considered on an equal footing with the official one.

The regulation of PIFs evolved gradually through Decree no. 383/1991, its Amendment No. 62/1992, and Act No. 248/1992. The most important clauses restricted each privatization fund from investing more than 10% of the points acquired in the voucher scheme in a single company and obtaining in exchange more than 20% of the shares in any company. Privatization funds established by a single founder were allowed to accumulate up to 40% of shares in a given company, but this cap was later reduced to 20%. Many privatization funds circumvented the cap through mergers. The Act also prohibited PIFs founded by financial institutions from purchasing the shares of other financial institutions to prevent excessive concentration of financial capital (for details see Kotrba and Svejnar 1994).

Hanousek and Kočenda (2008) provide additional details.

The golden share was introduced by Act No. 210/1993, modifying Act No. 92/1991. The act set the conditions for property transfer from the state to others with the aim of protecting the special interests of the state in firms privatized in large-scale privatization. The veto rights associated with the golden share usually relate to the scope and line of business activity and depend on each company’s charter. When the state sells its golden share, it gives up its rights in the company and the golden share ceases to exist.

The instrument of the golden share in the Czech Republic does not conform fully to that found in other countries since it is limited to being solely an instrument of state control and does not serve as a means of attracting free or less expensive credit (Bortolotti and Faccio 2004).

Chernykh (2008) shows that the Russian state is using this valuable channel to exert its control in numerous companies.

In the Tables describing the level of state control we exhibit numbers for state-controlled firms only, while the remaining sample of privately-held firms without state control is not included.

There are some differences in the number of state-controlled firms reported in Tables 1, 2, 3, 4, 5 and 6 and in Tables 7, 8, 9 and 10. In Tables 1, 2, 3, 4, 5 and 6 we only count firms under any extent of state control and no data are missing. However, in Tables 7, 8, 9 and 10 we perform an econometric analysis using a combination of ownership and firm-level performance data that have some missing values. Due to the missing values in the performance data we are unable to use the full number of firms as in Tables 1, 2, 3, 4, 5 and 6.

Our findings can be further supported by those of Hanousek et al. (2007b) who show that firms in which the state retains a golden share register positive time-varying effects on sales, labor cost and ROA. These effects suggest that the state pursues the objective of increasing employment and output (revenue) while also inducing profit-oriented restructuring relative to assets. Since the state retains golden shares primarily in state-owned and domestic (de jure) private firms, the effect of the golden share moderates the tendency in some of these firms to reduce output (sales) and/or employment.

We acknowledge a referee for suggesting this extension and its general outline.

See Smith and Todd (2005) and Dehejia and Wahba (2002) for details and a discussion of the methodology employed.