/ Transition Economics Series No. 5
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The Limits of Discipline
Ownership and Hard Budget Constraints in the Transition Economies
Roman Frydman, Cheryl Gray, Marek Hessel,
Department of Economics
New York University, New York, NY 10003, U.S.A.
The World Bank
1818 H Street, NW, Washington, DC 20433, U.S.A.
Fordham University School of Business
New York, NY 10023, U.S.A.
Columbia University School of Law
New York, NY 10027, U.S.A.
Institut für Höhere
Studien (IHS), Wien
Institute for Advanced Studies, Vienna
The Institute for Advanced Studies in Vienna is an independent center of postgraduate training and research in the social sciences. The publication of working papers does not imply a transfer of copyright. The authors are fully responsible for the content.
This paper, based on a large sample of mid-sized manufacturing firms in the Czech Republic, Hungary, and Poland, examines differences in the behavior of state and private companies in short-term credit markets in transition economies. The study offers three main conclusions. First, we find that state enterprises represent a higher credit risk both because of their inferior economic performance and because of their lesser willingness or propensity to meet their payment obligations. Second, the brunt of the state firms' lower creditworthiness is borne by their state creditors, as state enterprises deflect the higher risk away from private creditors. Third, this transfer of risks from private to state creditors is possible because state creditors impose significantly "softer" financial discipline on state firms. Inasmuch as such softness may reflect unwillingness to accept a likely demise of a large number of state firms that are in principle capable of successful restructuring through ownership changes, we conclude that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance.
Ownership; financial discipline; performance; transition
G32, P17, P27, P31
The authors would like to thank Joel Turkewitz for his contributions to the design and implementation of the survey instrument and Mihaela Popescu for her extraordinary assistance in the analysis of the data. The authors also thank Sarbajit Sinha for computer support in the initial stages of research. Helpful conversations with, and comments from, Marvin Chirelstein, Stijn Claessens, Simeon Djankov, William Greene, Glenn Hubbard, and Mark Roe are also gratefully acknowledged.
The authors are grateful to the CEU Foundation, the Open Society Institute and the World Bank for supporting research on this paper. CV Starr Center for Applied Economics at New York University has provided additional support for Roman Frydman's research. None of these institutions are responsible for the opinions expressed in this paper.
II. Ownership, Performance, and Credit Areas: An Overview 4
III. Measurement and Evaluation of Debtors' and Creditors' Behavior 7
IV. Ownership, Revenue Performance, and Creditworthiness 11
V. Creditor Behavior and the Developing Credit Markets in the Postcommunist Transition 21
VI. Long-term Debt 26
VII. Conclusions 28
Appendix A: Sample Description 31
Appendix B: Regression Estimates with the Revenue Performance of State Firms Evaluated over 1990-93 35