Legal Systems, Corporate Governance, and Firm Performance in the Czech Republic: The Case of Sellier and Bellot

Abstract

In 1993, Sellier and Bellot (S&B) went public as part of Czech voucher privatization. Legal and regulatory system deficiencies, weak capital markets, and exogenously imposed diffuse ownership contributed to poor S&B performance between 1993 and 1998. In 1999, one blockholder with access to private capital acquired control. New management was hired, monitoring and incentives were improved, debt was reduced, and currency hedging was adopted. Company performance soared. This study documents the interaction of legal systems, corporate governance, and firm performance in the Czech Republic, drawing on the experience of S&B between 1993 and 2002. Results are consistent with the view that concentrated ownership is optimal in economies with weak legal systems and less developed capital markets.