Abstract
This paper investigates whether and to what extent corporate governance mechanisms affect the efficiency of State Owned Enterprises (SOEs) operating in transition economies. Furthermore, it examines the relationship between corporate governance practice and its impact on both wholly state run SOEs and majority state run SOEs. We employed a unique dataset of corporate governance ratings (related to quality of transparency, quality of board, and quality of strategic planning, implementation and control) of commercial Lithuanian SOEs relating to the period following the introduction of the corporate governance reforms in the years 2012-2013. In order to investigate our research hypotheses, we set up a two-stage empirical research strategy that combined a non-parametric efficiency estimator (i.e., Data Envelopment Analysis) with a bootstrapped truncated regression. We built two aggregate indexes of corporate governance ratings to represent one dimension of corporate governance quality. We then ran a battery of regressions using both the aggregated and the single corporate governance indexes as independent variables. First, the paper finds that the wholly state ownership model of SOEs is positively correlated to efficiency (i.e., wholly SOEs are more efficient than majority SOEs). Moreover, overall corporate governance practices are efficiency-enhancing; more specifically, board quality and strategic planning seem to be effective internal governance mechanisms in promoting overall organizational efficiency. Interestingly, we uncovered that there exists a relationship between concentration of ownership and corporate governance practices, but this mitigated efficiency enhancement in wholly state run SOEs compared to majority state run SOEs. This effect was driven by the lower quality of the board. Overall, our findings illustrate that corporate governance reforms have enhanced efficiency, but wholly SOEs require a better implementation in order to achieve full efficiency gains.
Highlights
Corporate governance has become a mainstream concern in the aftermath of the financial crisis and corporate governance scandals in the United States and Europe that triggered some of the largest insolvencies in history
Following our research methodology and the research questions that emerged from the descriptive analysis, we first present the estimates from the efficiency analysis relating to the performance of StateOwned Enterprises (SOEs), considered as a whole and across the two groups, wholly vs. majority SOEs
To examine the role of corporate governance mechanisms in improving the efficiency of Lithuanian SOEs, we estimated a battery of regressions based on the econometric model described in Equation (3), adopting the SOE bias-corrected inefficiency score as the dependent variable and corporate governance indexes, both at aggregate and disaggregated level, as independent variables
Summary
Corporate governance has become a mainstream concern in the aftermath of the financial crisis and corporate governance scandals in the United States and Europe that triggered some of the largest insolvencies in history. SOEs are enterprises where the State is the exclusive or dominant owner that controls or has an influential role on the board of directors, and determines the objectives of the business according to the public interest, the OECD stated that good governance of SOEs is essential, for efficient and open markets at both the domestic and international level. Ensuring that SOEs operate in a sound competitive and regulatory environment through good corporate governance is crucial to maintain an open trade and investment environment that underpins domestic and international economic growth In this regard, the OECD in the “Guidelines on Corporate Governance of State-Owned Enterprises” argues that public ownership does not intrinsically produce inefficiency within an enterprise and that possible inefficiencies can be likely removed through reforming the way the government exercises its ownership and regulatory powers, as well as providing profit incentives
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