IS THERE AN APPROPRIATION OF THE
SOCIAL OWNERSHIP BY MANAGERS OF
SLOVENE FIRMS?
JE “KRAJA” DRUŽBENE LASTNINE RES NAŠ
KLJUČNI PROBLEM?
Janez Prašnikar, Matjaž Koman and Marko Grobelnik*
No. 65
Revised version, June 1998
* J. Prašnikar and M. Koman, Faculty of Economics, Ljubljana, M. Grobelnik, Institute Jozef Stefan, Ljubljana. The paper
was supported by the ACE Project P95-2090-R and Slovene Ministry of Science and Technology, Grant No.
3411-97-25-7863. The authors would like to thank J. Svejnar, University of Michigan Business School for his useful
comments, D. Mladinič, I. Gubanec, E. Bertok, A. Kudič, A. Gruntar, S. Rutar and A. Čibej jr. for their excellent assistance
in data gathering and processing. They are in debt to the Slovene Agency for Privatization, the Agency for Payment, the
Slovene Statistical Office and numerous Slovene enterprises for providing them with the data. The usual caveat applies.
e-mails: [email protected], [email protected], [email protected]
** The paper was presented in Ljubljana, at the Workshop on Second Pillar Issues-23.March 1998, in Split at Okrugli stol “Poduzeće u
tranzicij, 23.April 1998, in Rijeka and in Athens, at the International Conference on Entepreneurship at the Dawn of the 21 st Century, May
29-31.
Abstract
Slovene privatization law is based on the model of mass privatization. It is often said, that
selected method of privatization of socially owned enterprises is not suitable. One of the
reasons is so called wild privatization. Some managers of the firms, which are in the process
of transformation, have establish private firms in order to transfer the business activites to
those firms. In this paper authors use disposable data to study the consequences of
establishing bypass firms, which owners are general managers of enterprises, on behaviour of
firms in the process of transformation. By using investment and labor cost equation they focus
on the investment behaviour of firms and the connected process of bargaining between
managers and workers.
Key words
investment, wild privatization, bypass firms, behaviour of firms, barganing, Slovenia
Povzetek
Slovenski privatizacijski zakon temelji na modelu masovne delitvene privatizacije. Pogosto
pa slišimo mnenje, da izbrani način privatizacije družbenih podjetij ni ustrezen. Eden od
očitkov je, da je omogočil t.i. divjo privatizacijo. Z ustanavljanjem vzporednih (by-pass)
podjetij naj bi zlasti managerji prenašali poslovne učinke matičnih družbenih podjetij v
zasebna podjetja in oškodovali družbeno lastnino. V članku avtorji na podlagi razpoložljivih
empiričnih podatkov analizirajo posledice ustanavljanja vzporednih (by-pass) podjetij, katerih
lastniki so glavni direktorji podjetij, na obnašanje matičnih podjetij. Zlasti jih zanima
investicjsko obnašanje teh podjetij in z njim povezan proces pogajan med managerji in
delavci.
Ključne besed
investicije, divja privatizacija, vzporedna (bypass) podjetja, obnašanje podjetij, pogajanje,
Slovenija
1. Introduction
Almost all countries in Eastern Europe have initiated mass privatization program,
which is characterized by rapid giveaway of a large fraction of previously state-owned assets
to the general population. At first glance this policy does not seem to make much sense
neither on efficiency nor on revenue grounds. But there are strong, mainly political,
arguments in favor of give aways1. Looking more carefully on model of mass privatization,
Schmidt and Schnitzer (1997) and Schmidt (1997) show, that mass privatization can be also
effective from economic point of view. In their model they find, that giving away some
fraction of all shares to the general population may induce more investment, higher expected
profits and higher revenues compared to a policy of selling firm to the highest bidder. It is
also argued (Schmidt, 1997), that insider privatization leads to an inefficient allocation of risk
and generates a political climate which is more prone to expropriation as compared to a
diversified mass privatization program.
Slovenia has, after a long discussion2 in 1993, adopted the Privatization Law, which is
based on the model of mass privatization3. The data show, that Slovene firms have selected
internal buy-out as the main method of privatization4. According to Ribnikar (1996) this is
mainly due to defense mechanism of enterprises against artificially created external
ownership.
An opinion is often raised that Slovene privatization model was not a suitable one. A
popular reproach claims that sets the conditions for so called “wild privatization”. One of the
most common forms of it, is establishment of private parallel (by pass firms) firms by top
managers of socially owned enterprises. Top managers transfer know-how, business
connections and best clients together with portfolio of their orders or contracts about
marketing, tehnological and commercial knowledge, accounting and legal devises,… to the
private (by-pass) firms. Profits of this firms are then financed by losses of parent, socially
owned firms. Second form are managers buyouts, which are based on the value of firm close
to zero. Third form is selling firms to domestic or foreign buyers, where part of the price goes
to the managers (Popovič, 1992) .
On the other hand Bajt argues that this is due to the inconsistency of the Slovenian
privatization model which didn’t fully recognize managers and workers as owners of
enterprises (Bajt, 1992). If this would be the case, managers would be less concerned in
establishing of by pass firms5. As Roland and Sekkat (1996) show, privatization may induce
managers to restructure if they have sufficient degree of insider control. However, the study
by the World Bank suggests no significant differences in productivity of firms in countries
where privatization has been differently carried out (Pohl et al., 1997).
In this paper, based on the accessible data, we analyze the consequences and effects of
1
One of the reason for mass privatization, as stressed in Boycko et al (1994), is that privatization is politically feasible only if
it is supported by most powerful political groups.
2 More on this debate, see Prasnikar and Svejnar (1993 ) and Prasnikar et al (1996).
3 Social owned enterprises were obligated to transfer 20% of shares to the Development Fund, 10% to Pension Fund and 10%
to Compensation Fund. Internal distribution amounts to 20% of shares. The enterprise itself decided how to distribute the
remaining 40% of its shares. They can be sold either to insiders for cash or certificates (internal buy-out) or to the public
(public tender). More on the Slovenian Privatization Law, see Prasnikar and Svejnar (1998).
4 In 89% of the companies, employees would own more than 50% of the company. The total book value of these insider
controlled companies is only 45%. The reason is, that employees of large enterprises were unable to buy a majority of
shares and were forced to offer them to the public (Jaklin, 1996).
5 The majority of by pass firms was established in years 1991 and 1992 due to the uncertainty of the privatization debate
and the possibility of the nationalisation of the social ownership as it was suggested by one of the influential groups.
1
establishing by-pass firms by top managers on the behavior of the parent companies. Namely,
Prašnikar (1998) distinguishes between four types of Slovene companies 6 . A managerial
discretion model relies on an increased role of managers in the decision-making process.
When managers have a sufficiently high level of ownership in a firm, or expect to have it in
the future or if, for a variety of reasons, they behave like outside owners and build their
relations with employees in such a way that the formulation of side-transactions is possible,
we can speak of a managerial discretion model with residual control. This endorses
organizational rent that is the source of greater investment activities in firms. When, on the
other hand, employees do not have residual control, managers may make decisions, which
allows to appropriate a portion of liquidity from the enterprises (by-pass firms). If the
employees have enough power to influence the management, and thus force decisions which
will be useful to them (excessive salaries and over-employment), one can talk about
employeeism7. Investment activities of these companies are weak and focused solely on the
execution of urgent business activities that ensure firms existence. Companies with prevailing
external ownership are still in minority; hence a judgment about their role on business
behavior is still hard to give.
An empirical analysis is based on the behavior of the Slovene firm, analyzed with
enhanced models of an investment equation and a labor cost per worker equation 8. In the
second part we present the model. In the third part we explain the data. In part four we reveal
the results of an empirical analysis of the influence of by-pass firms on investment activities
and labor cost of parent companies. At the end we present our conclusions.
6
By the term Slovene company one comprehends a firm, currently undergoing a process of a social-ownership
transformation.
7 More on that see Nuti (1995)
8 See Prašnikar and Svejnar (1998).
2
2. The Model
Studies of investment behavior have always played a key role in western economics. On
the demand side, much of the literature has focused on establishing the relative merits of the
dynamic structural, Tobin Q, neoclassical, and accelerator models of investment in interpreting
firm`s investment expenses. For the most part they assume that the supply of investment finance
is perfectly elastic. In recent years, an important part of the literature has concentrated on the
supply side, examining potential links between the firm’s availability of internal finance and its
investment (reflecting the possible effects of transaction costs and other market imperfections on
the supply of capital)9. This literature plays an important role in our discussion, since market
imbalances in transition countries are more than obvious.
Slovene firms differ from firms of the developed market economies in the role and
influence that workers have on firm`s economic decisions. This is a result of past economic
development. The tradeoff between investment and workers incomes may therefore be expected
to become acute in socially owned firms as the government’s traditional influence over these
firms withered away between 1989 in 1991, while managers and workers continued to share
power and GDP fell in the early phase of the transition. Our analysis hence provides an
understanding of how the former labor-managed firms generate resources and divide them
between investment and wages during the transition process to a market economy, and under the
conditions of underdeveloped capital10 and financial11 markets.
Our empirical model consists of an investment equation and a labor cost per worker
equation. In the investment equation we strive to capture the importance of the firm’s output
demand, cash flow and labor cost as the determinants of its investment. In terms of the
relevant literature, we include sales revenues as a regressor in order to assess the relative
importance of the neoclassical and accelerator models of investment 12. We also include value
added as a broad cash-flow measure of the resources generated by the firm for the purposes of
paying wages and providing internal financing for replacement and net investment 13 . The
measure allows us to test whether the firm’s behavior varies systematically with its internally
generated funds and hence lends itself to testing the financing hierarchy and credit rationing
hypotheses advanced in the western literature14. Finally, in order to capture the bargaining
between workers and management over the allocation of the value added between investment
and wages, we include as a regressor the labor cost agreed upon in collective bargaining.
This latter aspect of the model is a contribution to the western investment literature, as
well as to the recent and ongoing studies of investment in the other transition economies
9
See e.g., Jorgenson (1971), Nickell (1977), Abel (1980), Abel and Blanchard (1986), Shapiro (1986), Fazzari et al. (1988),
Hayashi and Inoue (1991), Blanchard et al. (1990), and Bond and Meghir (1994).
10 In the case of Slovenia, the capital market is not a significant financial intermediator, since only a minimal number of
companies issue securities for financing investments (Mramor, 1996).
11Due to high real interest rates Slovene firms experience credit rationing as proposed by Stiglitz and Weis (1981). In such
cases, firms will use internal sources of financing, since external financing is too expensive. Though the supply of credit
should still be positively related to tangibility and profitability, the demand for credit will be negatively related to
profitability, because high profit firms will be able to finance internally rather than borrow (Cornelli et al., 1996). Since the
Bank of Slovenia is very strict in its requirements and regulations, existing banks are carefully revising the proposals of firms
with more needs for funds and less ability to self-finance, and in most cases they do not accept their proposals. As a result,
the role of Slovene banks in financing enterprises in Slovenia is quite limited.
12 As was shown by Jorgenson (1971), under acceptable assumptions including sales in the investment equation may capture
both the neoclassical and flexible accelerator models. The two models differ only in terms of interpretation of the estimated
coefficients on sales.
13 Value added is measured as a surplus of labor cost, depreciation and profit or loss.
14 See Fazzari et al. (1988) and Gertler (1988) for an overwiev of the literature.
3
(Lizal (1995), Anderson and Kegels (1997) and Lizal and Svejnar (1997)), which all ignore
the potential impact of worker power on firm’s investment behavior. Yet, this aspect is
particularly important in the context of the transition economies, as both workers and
managers have frequently gained significant control over state-owned as well as privatized
firms. Moreover, with the inability of many firms in the transition economies to pay wages,
the tradeoff between using value added for investment versus paying wages and fringe
benefits has become acute.
The basic investment equation may hence be written as
(1)
I/K = a0 + a1(R/K) + a2(VA/K) + a3(LC/K) + a4OWNER + a5 YEAR + a6IND +e1,
where I = the firm’s gross investment, K = the firm’s capital stock, R = sales revenue of the firm,
VA = value added of the firm, LC = total labor cost agreed in the collective bargaining, OWNER
= ownership (or group) dummy variables defined in Appendix and footnotes to tables, YEAR =
annual dummy variables, IND = industry dummy variables, and e1 = the error term.
In terms of our conceptual framework, the neoclassical and accelerator models are
consistent with the hypothesis a1> 0, while the credit rationing (cash-flow) theory implies a2 >
0. Finally, if workers are able to appropriate part of the investable surplus in terms of their wages
or benefits (labor cost), one should find that a3< 0.
Traditionally, investment equations such as (1) are estimated with all non-categorical
variables divided by the capital stock, reflecting the fact that intertemporal profit maximization
with cost of capital adjustment yields Euler equations in the per capital form. The power of
workers in many transition economies calls into question the usefulness of profit as the goal of
the firm. In fact, when one carries out the dynamic maximization with the traditional maximand
of the labor-management literature (i.e., income per worker) in the presence of cost of capital
adjustment, one obtains an Euler equation that is analogous to the one obtained from profit
maximization, except that all variables are scaled by labor rather than capital.
An alternative specification of the investment equation (1) is therefore
(2)
I/L = b0 + b1(R/L) + b2(VA/L) + b3(LC/L) + b4OWNER + b5YEAR + b6IND + e2,
where L = the number of full time equivalent employees, e2 = the error term corresponding to
this specification, and the predictions about the signs of a1, a2 and a3 carry over directly to b1, b2
and b3.
In most investment studies, the issue of endogeneity of regressors is handled by including
their lagged rather than current values of the right hand side of equations. Unfortunately, to the
extent that the error term contains a fixed component, this approach does not eliminate the
correlation of the regressors with the error term. In order to assess the sensitivity of our results to
this problem, we report estimates based on this approach as well as several other methods. In
particular, we also report coefficients that are obtained by ordinary least squares (OLS) and
instrumental variable (IV) with the current values of regressors, as well as OLS and IV estimates
based on first difference (fixed effects) specifications. The lists of instrumental variables that we
use are provided in the footnotes to tables.
We will estimate equations (1) and (2) separately. In the case that equation (1) yields
better results than equation (2), we will conclude that firms tend to maximize profit. If the
opposite holds, we will conclude that firms behave as labor-managed firms and hence maximize
4
income per worker. For this purpose we will also consider the literature about bargaining and
labor-managed firms. In order to stress the importance of employees in sharing profits, we will
complement equation (1) or (2) with the labor cost per worker equation that further illuminates
the extent to which workers share in profit and possibly even appropriate part of the funds that
the firm should set aside for depreciation. In particular, extending the models in Svejnar (1986)
and Prašnikar et al. (1994), we write the first-order labor cost condition of a Nash nonsymmetric
bargaining solution as
(3)
LC/L = c0 + c1(LCa/L) + c2[(R – H – DEPR)/L] + c3(DEPR/L) + c4OWNER +
+c5REGION + c6YEAR + c7IND + e3,
where LC = total labor cost of the firm, LCa = alternative (reservation level) labor cost per
worker defined in the Appendix, H = non-labor cost of production, DEPR = the level of firm’s
depreciation as specified by the Slovene government’s accounting system, and e3 = the error
term.
Equation (3) has the following intuitive meaning. The bargaining model predicts that the
average labor cost per worker consists of the reservation level (alternative) labor cost per worker
(LCa /L) plus a share c2 of the surplus per worker, defined net of the non-labor cost and the
alternative labor cost [(R – H – LCa )/L]:
(4)
LC/L = (LCa/L) + c2[(R – H – LCa )/L].
The share c2 reflects workers’ bargaining power relative to managers and any other party
that may have a claim on the firm’s value added. At one extreme, c2 = 0, and workers get just
their reservation wage and they appropriate no surplus. At the other extreme, c2 = 1, and workers
appropriate all surplus (a pure labor-managed firm). In most cases, 0 < c2 < 1, as workers share
the surplus with managers and other parties.
For estimation purposes it is convenient to rearrange the bargaining condition (4) in the
form of equation (3). In particular, the terms on LCa may be collected to obtain
(5)
LC/L = (1 – c2)(LCa/L) + c2[(R – H)/L],
where R – H is the value added of the firm. Moreover, casual evidence suggests that workers
may appropriate part of the funds that the firm should set aside for depreciation (DEPR), but
doing so is more difficult than sharing in the firm’s surplus over and above this amount (R – H –
DEPR). We test this hypothesis by subtracting DEPR from R - H and entering DEPR/L as a
separate term in equation (3). We then test the hypothesis c2 = c3 against the alternative
hypothesis c2 > c3. In addition we test whether c1 = 1 - c2, as implied by condition (5) of the
bargaining model. Finally, note that if workers appropriate part of the surplus and do so at the
expense of investment, we should observe simultaneously b3 < 0 and c2 >0. We check this
hypothesis by estimating equations (1) or (2) and (3) separately, as well as jointly as a system.
5
3. The Data
The complete data set in our analysis include 1334 companies, to which the Agency for
Privatization had given, up to 10 January 1997, the first permission to begin with the
implementation of privatization program. The latter information is important, because it excludes
all companies to which the Agency had not given the first permission on their privatization
plan15.
The sources of data used in the analysis are as follows:




balance sheets and income statements for the period 1989-1995, gathered by the Agency for
Privatization, and supplemented with the data from the Agency for the Control of the
Payment System
privatization plans of the analyzed firms, provided by the Agency for Privatization,
investment data for enterprises in the period 1990-1995 from Statistical Office of the
Republic of Slovenia,
data on private enterprises, their founders and owners, which were obtained from the
Directory of Legal Entities in the years 1992/1993.
Most of the variables used to test our model are explained in the Appendix. Our attention
is focused on classification of firms in different groups.
From the privatization plan of a firm one can establish whether the firm has chosen an
internal buy–out as the prevailing form of privatization, or a form that enables the dominance of
external owners. According to that, one can distinguish between firms with predominant internal
ownership (group of firms with internal owners prevailing) and firms with dominant external
owners (group of firms with external owners prevailing). The privatization plan also reveals
whether there had been any known owners beside the social capital in the firm prior to
privatization. Such owners are usually the State, banks, insurance companies, domestic and
foreign enterprises and persons. We classified these firms in a group of firms with previously
known owners prior to the privatization.
In terms of conceptual framework, the stress of our analysis falls on the group of firms,
whose top managers own a private (by-pass) firm. To fully assess the latter, we selected from
among the population those firms which had stated in their privatization programs that they had
equity investments in other firms, excluding banks and insurance companies. There were 418
firms with such characteristics (parent companies). Furthermore, we used the Directory of Legal
Entities for the period 1992/93 to sort out the firms that were partly or fully owned by the CEOs
of the parent companies16.
Following this method we created the first subgroup of firms, where we included parent
companies with equity investments in other firms and where CEOs of parent companies did not
own a parallel firm (80.9% of all firms which had equity investments in other firms). Firms that
represented the remainder had equity investments in other firms, but CEOs owned by-pass
firms (80 firms or 19.1% of all firms which had equity investments in other firms); CEOs could
15
In order to obtain first permission, the company had to abolish any losses of social capital according to the revision of the
opening balance sheet. If the company did not take into account the claims of the revisors, all social capital was transferred to
the ownership and governance of the Development Fund.
16 A year 1992/1993 is chosen, because we presumed that most of the parallel firms operated in this period. The names of
CEOs of parent companies were gathered from the privatization plans. We checked the identity of CEOs and owners of
parallel (by-pass) firms for each firm separately, using permanent addresses found in the phone book.
6
own by-pass firms solely or in companionship with the parent company (mixed ownership)17.
Those firms formed the second subgroup. We formed the third subgroup of firms following the
criterion that CEO owned a parallel firm, but the parent company did not have any capital
investments in other firms. This subgroup is composed of 141 parent companies.
When the parent company is a 100% owner of the firm, this is not considered as a
by-pass firm. In accordance with the Regulation on notification of the privatization plan, every
firm had to include all equity investments in its opening balance sheet in order to get the first
permission from the Agency of Privatization. Considering all accessible data, we included in our
analysis both other subgroups of parent companies. A joint number of firms where CEO also
owned a by-pass firm is 221. Since CEO could own more than one by-pass firm, a total number
was actually higher (244 companies)18 than the number of parent companies. By-pass firms
could be in full private (225 firms or 92.2%) or mixed ownership (19 firms or 7.8%).
If we divide the analyzed firms into production and services firms19, there are among the
parent companies with CEOs owning a by-pass firm, 42.1% production firms. The higher
percent goes to parent companies in the services. Even more obvious is the service-oriented
profile of by-pass firms. Most of them (121 or 49.6% of all by-pass firms) have been registered
for performing financial, technical and managerial services. These are followed by trade (42
by-pass firms or 17.2%) and manufacturing firms (32 by-pass firms or 13.1%). Among 76
by-pass firms that were founded by parent firms which operated in manufacturing, only 14
stayed in these industries, the others moved to services.
In empirical analysis we use complete data for 458 firms. From our data set of privatizing
firms we previously excluded firms in agriculture and fishery, forestry and water regulation,
housing, communal and environmental services, educational and scientific regulations and health
social organizations. They either fall under the provision of special laws in the privatization
process, or are really not commercial organizations. We have also excluded electricity and
mining firms, since they are under governmental control with regulated prices and subsidized
activities. All other missing firms are due to incomplete data20.
In Table 1 we present the means and standard deviations of the principal
variables that we use in our analysis. The values correspond to the 1991-1995 period and are
presented for all 458 firms as well as for the four principal categories of firms: i) 303 firms
that were subsequently privatized to insiders (internal ownership), ii) 105 firms that were
subsequently privatized to outsiders (external ownership), iii) the 82 firms whose CEOs
established separate private firms (CEO bypass firms), and iv) firms that were since the early
1990`s less than 50% in social ownership (previous owner firms.
As may be seen from column 1 of Table 1, during the 1991-95 period the average firm
employed 302 workers, generated 51 million Tolars ($4.7 million ) in value added, paid 38.5
million Tolars ($3.7 million) in wages and fringe benefits, and reported 0.57 milllion
Tolars ($0.054 million) in profit. The average level of gross investment was 11.8 million
17
In the basic population of 1334 firms there are 19 parent companies that have a shared equity investment with CEO in a
by-pass firm (7.8% of all parent companies with equity investments in by-pass firms).
18 In the case of 200 parent companies CEO owns one by-pass firm, in 19 parent companies CEO owns two by-pass firms
and in two parent companies CEO owns three or more by-pass firms.
19 To classify firms we helped ourselves with the Standard Classification of Activities used by the Slovene National Office of
Statistics. Firms classified from 1-5 (manufacturing, mining and electricity supply, agriculture and fishing, forestry and
hunting, water management, construction) are the production firms. Firms classified in industries 6-13 (transport and
communications, hotels, restaurants and travel agencies, crafts and personnel service activities, trade, community service
activities and housing, education, science, culture and information activities, health and social work) are the service firms.
20 If the company failed to produce yearly data on any given variable in the regression analysis, we excluded it from the
analysis.
7
Tolars ($1.1 million), with te average level of capital stock21 being reported at 140 million
Tolars ($13.3 million). 22 All variables show sizable standard deviations, which reflect
significant cross-sectional as well as temporal variations in the values of the relevant
variables. Interestingly, during the 1991-95 period the mean value of gross investment fell
short of the (legally prescribed) mean level of depreciation investment. The phenomenon was
in part brought about by the fact that loss making firms paid wages and fringe benefits out of
funds that were earmarked for depreciation.
In examining the variable values across types of firms in Table 1, one observes that
firms that were subsequently privatized by the internal buy-out method were on average
smaller and less capital-intensive than firms that subsequently used the external method of
privatization (sale to outsiders). Since the Slovene capital market was underdeveloped
throughout the 1990`s, the finding that insiders bought smaller and less capital-intensive firms
is in accordance with expectations.23 The internal buy-out firms were also more profitable,
suggesting that insiders were able to cherry-pick the firms they privatized. In fact, the
negative value of average profit among firms that were subsequently privatized by the
external method reflects the fact that this group contained several firms with sizable losses.
These firms also account for the fact investment on average fell short of depreciation for all
firms taken together.
Firms with previous owners were on average larger than other types of firms. They
reported positive profit and displayed relatively high rate of investment
The firms run by CEOs that established their own private firms on the side (the
“bypass owner” firms) were relatively capital-intensive firms with high value added per
worker. They reported high profits and relatively low rates of investment in comparison to
other types of firms. If we look how this firms operated in year 1991 (Table A1 in
Appendix) we can see that average bypass firm had the better starting point as average firm.
During the five years period their performance declined but it was still in moderate levels.
This suggests that managers who established bypass firms were from smaller and more
successful firms. Due to the uncertainty of the privatization debate 24 , bypass firms were
established as the defence against the possibility of the nationalisation of the social ownership
as it was suggested by one of the privatisation proposals. Since managers claimed that social
ownership in part belongs to them, this was the way how they defend their interest and
distribute the risk.
21
As a messure of capital stock we use real assets.
One U.S.$ was approximatelly 10.5 Tolar (Dinar) and corresponds to period 1990. All Tolar values are namely in
constant prices from year 1990.
23 See Dreze (1989) for the theoretical underpinning of these arguments.
24 More on this debate see in Prašnikar, Svejnar (1993) and Prašnikar, Svejnar (1998).
22
8
Table 1: Means and standard deviations of selected variables over period 1991-95.
No. of Workers
Value Added
Labor Cost
Profit
Revenue
Depreciation
Investment
Capital
Alternatiwe Wage
Profit+Labor Cost
Profit / Value Added
Labor Cost / Worker
Value Added / Worker
Profit / Worker
Revenue / Worker
Depreciation / Worker
Investnment / Worker
Capital / Worker
(Profit+Labor Cost) / Worker
No. of Workers / Capital
Value Added / Capital
Labor Cost / Capital
Profit / Capital
Revenue / Capital
Depreciation / Capital
Investment / Capital
(Profit+Labor Cost) / Capital
Entire Sample
301
(546)
50957
(129013)
38491
(79751)
566
(38985)
205362
(463857)
11899
(48336)
11822
(55397)
140066
(478726)
94.377
(16.807)
39057
(95551)
0.111
(0.765)
127.472
(264.112)
168.754
(427.254)
1.875
(129.109)
680.098
(1536.156)
39.406
(160.075)
39.152
(183.459)
463.857
(1585.397)
129.347
(316.437)
0.002
(0.003)
0.363
(0.921)
0.274
(0.569)
0.004
(0.278)
1.466
(3.311)
0.084
(0.345)
0.084
(0.395)
0.278
(0.682)
458
2290
Internal Owner
252
(475)
36876
(73539)
30058
(56666)
1016
(19362)
142609
(262476)
5801
(11926)
6333
(17846)
69441
(116646)
94.384
(17.185)
31074
(63714)
0.027
(0.525)
119.004
(224.350)
145.999
(291.153)
4.023
(76.660)
564.619
(1039.186)
22.970
(47.218)
25.074
(70.658)
274.930
(461.821)
123.028
(252.255)
0.003
(0.006)
0.531
(1.059)
0.432
(0.816)
0.014
(0.278)
2.053
(3.779)
0.083
(0.177)
0.091
(0.257)
0.447
(0.915)
303
1515
External Owner
397
(652)
78482
(193646)
54977
(110078)
-313
(61321)
328033
(691940)
23818
(80102)
22553
(90986)
278126
(788861)
94.365
(16.054)
54664
(136717)
-0.004
(0.781)
138.469
(277.250)
197.670
(487.728)
-0.788
(154.448)
826.204
(1742.760)
59.989
(201.750)
56.804
(229.163)
700.506
(1986.872)
137.680
(344.343)
0.001
(0.002)
0.282
(0.696)
0.197
(0.395)
-0.001
(0.220)
1.179
(2.487
0.085
(0.288)
0.081
(0.327)
0.196
(0.491)
155
775
Bypass Owner
206
(298)
36408
(76959)
26242
(42114)
2406
(30510)
149627
(262588)
7758
(20191)
9439
(29187)
120619
(425447)
94.627
(17.217)
28649
(61017)
0.066
(0.837)
126.857
(203.580)
175.997
(372.022)
11.634
(147.485)
723.297
(1269.351)
37.505
(97.603)
45.628
(141.094)
583.071
(2056.608)
138.491
(294.959)
0.001
(0.002)
0.301
(0.638)
0.217
(0.349)
0.019
(0.252)
1.240
(2.177)
0.064
(0.167)
0.078
(0.241)
0.237
(0.505)
82
410
Previous Owner
411
(663)
80373
(209137)
56013
(118159)
2431
(29781)
332074
(777043)
21929
(82327)
25292
(105437)
268407
(788959)
93.466
(16.603)
58444
(138912)
0.030
(0.370)
136.255
(287.431)
195.513
(508.740)
5.913
(72.446)
807.792
(1890.208)
53.344
(200.266)
61.526
(256.482)
652.919
(1919.195)
142.169
(337.914)
0.001
(0.002)
0.299
(0.779)
0.208
(0.440)
0.009
(0.110)
1.237
(2.895)
0.081
(0.306)
0.094
(0.392)
0.217
(0.517)
108
540
No. of Firms
No. of Observations
Notes:

Values, except number of workers and ratios are in 1000 SIT in constant prices from year 1990.

Values in parentheses are standard deviations.

Means and standard deviations for ratios were calculated in the following way:
first we created new variables in such a way that we devided numerator for each observations with the mean value of
denomintator ( we take into account the different means of samples)
for new variables we calculate means and standard deviations.
9
4. Empirical results
The estimated parameters of investment equation and labor cost equation for firms whose
CEOs own parallel (by-pass) firms are reported in Tables 2-4.
In our study equation (1) gives more reliable results than equation (2). This is opposite to
findings of Prasnikar and Svejnar (1998) 25 . As a result, we build our conclusions based on
equation (1). The estimates based on equation (1) are reported in Table 2, and the estimates of
equation (2) in Appendix.
As may be seen from Table 2, the estimated coefficients of equation (2) indicate that
investment costs are positively linked to value added and negatively to labor cost.. The
coefficients of both variables are significantly different from zero and have predicted signs in all
estimations.This is in accordance with the study on whole sample by Prasnikar and Svejnar
(1998). We can conclude that cash flow generated by the firm after paying suppliers and other
outside claimants has a positive effect on investment, as is also suggested by the credit rationing
and the cash flow theories. Holding the effect of value added constant, the negative estimated
coefficient on labor cost per worker suggests that there is a trade-off between worker
compensation and amount of investment.
Interesting in our analysis is the positive value of the sales revenue variable, which is
significant in two estimations of equation (1). The same variable is not significant in any
estimation in the study of Prasnikar and Svejnar (1998), which indicates that the data do not
support the accelerator and neoclassical model26. The results of our analysis are hence similar to
the results of a study on the Czech firms (Anderson and Kegels, 1997 and Lizal and Svejnar,
1997), where investment is found to be positively related to the firm’s sale.
In equation (3), shown in Table 3, the expectations about the bargaining model between
workers and managers in Slovene firms are proven to be correct, which is similar to the study of
Prasnikar and Svejnar (1998). Estimated coefficients of alternative wage variable are positive and
statistically significantly different from zero in most estimations, which sets the base for the
bargaining process27. Workers share in the firm’s surplus, but the coefficient c2 is much smaller
than in the study of Prasnikar and Svejnar (1998), and is ranging from 0.09 to 0.28. However,
c3 > c2, which indicates that in analyzed firms workers’ ability to appropriate the depreciation
funds is higher than their ability to share in the firm’s surplus but it is not allways statistically
signifficant.
Since the group of parent companies whose CEOs founded parallel firms is heterogeneous,28
and consists of at least two sets of firms (the ones where managers founded a parallel firm with
parent company’s acknowledgment, to ensure the parallel firm’s existence, and the bigger group
where the foundation of a parallel firm by the manager was not reported to the parent company),
the latter results can be explained. As seen in Table 1, the average labor cost for analyzed firms
deviates the least from the alternative wage. One can conclude that, in the case when a parallel
firm was founded with the parent company’s acknowledgment, the parent company would use
25
Prasnikar and Svejnar (1998) used the same model of investment and wage behavior of Slovene firms but they run in the
whole data set of 458 firms in the period 1991-1995
26 The authors suggest that - in the analyzed period - the Slovene companies still possessed satisfactory equipment and that
the Yugoslav market was soon replaced by exports of goods and services to more developed markets (Prašnikar, Svejnar,
1998).
27 The dummy variables, which represent the group of firms according to the privatization plan, are not significant in our
analysis.
28 See the results of the analyzed variables in Table 1, their mean value and standard deviation., especially when they are
divided by labor and capital.
10
available cash flow primarily to pay the labor cost. The company also ensures payment of
alternative labor cost at the expense of depreciation. Therefore there can not be any participation
in surplus, since there is no surplus. Considering the result of the whole group, the other
companies also can not heavily deviate from the alternative costs. At the same time, the average
value of the variables profit and profit per labor in the group of parent companies is high above
the average of all firms. Even if some problematic parent companies show losses, the positive
effect of other parent companies’ profit in the group prevails. By combining this with other
findings of our analysis, one can suggest that the parent companies whose CEOs are the founders
of a parallel firm, behave in the way of maximizing the profit rather than maximizing the income
per worker.They are closer to the capitalist firms.29 Evidence in support is found in Table 4.
Table 2: Determinants of Investment / Capital Ratio
Variable \ Model
OLS
Levels
IV
Levels
Value Added / Capital
0.146***
(0.022)
-0.124***
(0.024)
0.003**
(0.001)
-0.006
(0.011)
-0.003
(0.017)
Yes
Yes
0.317
410
0.245***
(0.089)
-0.229**
(0.098)
0.006***
(0.002)
-0.012
(0.012)
-0.017
(0.020)
Yes
Yes
0.269
410
Labor Cost / Capital
Revenue / Capital
Group 3
Constant
Year Dummies
Industry Dummies
Adj R-squared
No. of Observations
OLS
First
Difference
0.120***
(0.028)
-0.120***
(0.032)
0.0004
(0.002)
/
IV
First
Difference
0.351**
(0.158)
-0.373**
(0.158)
0.010
(0.008)
/
0.002
(0.005)
No
No
0.044
410
0.016
(0.007)**
No
No
…
328
OLS
Lagged
Levels
0.094***
(0.0256)
-0.073**
(0.028)
0.002
0.001
0.0003
0.011
-0.021
(0.019)
Yes
Yes
0.245
410
Notes:

Values in parentheses are standard errors.

In Group 3 are firms which established bypass firms, where not partlly owned by known (private) owner and the prevaling method
of privatization was internal.

In model IV Levels we used following instruments : all dummy variables, lagged value added/capital, lagged revenue/capital, lagged
labor/capital and lagged (profit+labor cost)/capital. In model IV First Difference instruments are the same, except that instead of lagged
levels we used lagged first differences.

In the estimates for levels, the constant reflects the year 1991, firms in manufacturing industry and firms wich had bypass firms and
also known (private) owner before privatization plus firms with external ownership, bypass firms but withought known (private)
owner before privatization.

*
- significant at 10%
**
- significant at 5%
*** - significant at 1%
29
This is not the case for whole sample of 458 firms. Prasnikar and Svejnar (1998) stress that despite the ongoing
privatization process Slovene firms are still closer to the participatory firms described by Prasnikar and al. (1994) than to
capital firms
11
Table 3: Labor Cost Equation
Variable \ Model
OLS
Levels
Alternative Labor Cost / 0.400
(0.384)
Worker
(Profit+Labor Cost ) / 0.144***
(0.013)
Worker
0.395***
Depreciation / Worker
(0.050)
5.256
Group 3
(5.44)
22.682
Constant
(30.400)
Yes
Regional Dummies
Yes
Year Dummies
Yes
Industry Dummies
0.708
Adj R-squared
410
No of Observations
IV
Levels
0.439
(0.420)
0.253***
(0.027)
0.402***
(0.104)
4.833
(4.682)
23.558
(33.446)
Yes
Yes
Yes
0.658
410
OLS
First
Diffrence
1.632***
(0.125)
0.090***
(0.0158)
0.155***
(0.052)
/
IV
First
Diference
1.664***
(0.501)
0.252***
(0.079)
0.878
(0.259)
/
15.479***
(1.690)
No
No
No
0.388
410
9.730***
(3.298)
No
No
No
…
328
OLS
Lagged
Levels
0.678***
(0.284)
0.284***
(0.021)
0.219***
(0.050)
-0.926
(3.662)
-32.181**
(13.918)
Yes
Yes
No
0.681
410
Notes:

Values in parentheses are standard errors.

In Group 3 are firms which established bypass firms, where not partlly owned by known (private) owner and the prevaling method
of privatization was internal.

In model IV Levels we used following instruments : all dummy variables, alternative wage, lagged alternative wage, lagged
depreciation/worker, lagged capital/worker and lagged (profit+labor cost)/worker. In model IV First Difference instruments are the
same, except that instead of lagged levels we used lagged first differences.

In the estimates for levels, the constant reflects the year 1991, firms in manufacturing industry, firms in the Ljubljana region and firms
wich had bypass firms and also known (private) owner before privatization plus firms with external ownership, bypass firms but
withought known (private) owner before privatization.

*
-significant at 10%
**
- significant at 5%
*** - significant at 1%

We tested hypothesis that c1 = 1 - c2. Values of F-statistics for OLS Levels, IV Levels, OLS First Difference, IV First Diference and
OLS Lagged Levels are 1.39, 0.52, 34.70, 3.68, and 0.11 respectively.

We tested hypothesis that c2 = c3. Values of F-statistics for OLS Levels, IV Levels, OLS First Difference, IV First Diference and OLS
Lagged Levels are 1.56, 1.41, 5.73, 1.19 and 4.35 respectively.
12
Table 4: Simultaneous Investment and Labor Cost Equation
Variable \ Model
Investment Equation
Value Added / Capital
Labor Cost / Capital
Revenue / Capital
Group 3
Constant
Year Dummies
Industry Dummies
Labor Cost Equation
Alternative Labor Cost / Worker
(Profit+Labor Cost ) / Worker
Depreciation / Worker
Group 3
Constant
Levels
2SLS
Levels
3SLS
First
Difference
2SLS
First
Difference
3SLS
Lagged
Levels
2SLS
0.198***
(0.042)
-0.179***
(0.047)
0.006***
(0.002)
-0.010
(0.011)
-0.013
(0..018)
Yes
Yes
0.197***
(0.041)
-0.177***
(0.046)
0.005***
(0.002)
-0.010
(0.011)
-0.012
(0.017)
Yes
Yes
0.155**
(0.080)
-0.176**
(0.083)
0.010
(0.007)
/
0.148**
(0.079)
-0.173**
(0.082)
0.012*
(0.007)
/
0.013**
(0.006)
No
No
0.013
(0.006)
No
No
0.1855***
(0.0655)
-0.159**
(0.072)
0.003
(0.003)
-0.002
(0.014)
0.003
(0.021)
Yes
Yes
0.445
(0.416)
0.244***
(0.027)
0.388***
(0.102)
4.923
(4.632)
4.677
(33.086)
Yes
Yes
Yes
0.356
(0.401)
0.241***
(0.026)
0.404***
(0.099)
5.005
(4.481)
11.663
(31.911)
Yes
Yes
Yes
1.732***
(0.450)
0.227***
(0.070)
0.657***
(0.213)
/
1.690***
(0.446)
0.228***
(0.070)
0.645***
(0.211)
/
10.762***
(2.940)
No
No
No
10.941***
(2.918)
No
No
No
0.757***
(0.150)
0.416***
(0.034)
0.208***
(0.083)
-1.570
(4.673)
36.467**
(16.424)
Yes
Yes
No
Regional Dummies
Year Dummies
Industry Dummies
Notes:

Values in parentheses are standard errors.

In Group 3 are firms which established bypass firms, where not partlly owned by known (private) owner and the prevaling method
of privatization was internal.

In the estimates for levels in investment equation, the constant reflects the year 1991, firms in manufacturing industry and firms wich
had bypass firms and also known (private) owner before privatization plus firms with external ownership, bypass firms but
withought known (private) owner before privatization.

In the estimates for levels in labor cost equation, the constant reflects the year 1991, firms in manufacturing industry, firms in the
Ljubljana region and firms wich had bypass firms and also known (private) owner before privatization plus firms with external
ownership, bypass firms but withought known (private) owner before privatization.

*
- significant at 10%
**
- significant at 5%
*** - significant at 1%

In Level models exogenous variables are all dummy variables, alternative wage, lagged alternative wage, lagged capital/worker,
lagged depreciation/worker and lagged (profit+labor cost)/worker, lagged worker/capital, lagged value added/capital and lagged
revenue/capital. In First Difference and Lagged Level models exgogenous variables are the same, except that instead of lagged levels
we used lagged first difference or twice lagged levels.
13
5. Summary
If the Slovene economy could achieve a higher rate of savings, many economic
problems would be solved. Firms would increase their investments and a higher and more stable
economic growth would be achieved.
Our analysis confirms the results of the previous study30 that, in terms of soft budget
constraints and underdeveloped capital and financial markets, the investment activity of
companies is largely dependent on their ability to raise internal resources. The higher value
added per firm and the bigger the tendency towards using value added for investments, the higher
are investment activities of Slovene companies. The results also match with the conclusions of an
aggregate analysis of wages and labor costs (Bole 1997), which indicates that appropriation of
rents leads the segmentation of labor market. This causes the raise of aggregate level of wages
and the share of labor costs in the total cost of the economy, and which deteriorates the
competitive positions of Slovene firms in the world economy.
According to the experience of similar countries in transition31, the taxation of excess
wages is a necessary measure to restore macroeconomic stability. As Crombrugghe and Walque
(1997) pointed out, the tax can also fulfill two microeconomic goals. Firstly, it helps avoid
decapitalization. Secondly, it makes it more costly for firms to give in to insider pressure to raise
wages far above the opportunity cost of labor, when they should instead be absorbing some of
the unemployed, new entrants in the labor market, or the underemployed workers in declining
sectors.
Western literature defines the instruments of Tax–Income Policy (TIP) as short term and
second best instruments32. They should be implemented only to strengthen strict monetary and
fiscal policy if they are thought to be too slow or too costly to keep wages in check33. Long-term
stability of wages can only be assured by a competitive labor market, which on the other hand
requires efficient allocation of ownership rights. In the process of privatizing state (socially)
owned companies, those rights should go to the ones who value them most and are interested in
efficient transformation of their companies (Schmidt, Schnitzer 1997).
Due to inefficient allocation of the ownership rights implemented by the Law on
Privatization34, Slovene managers have founded private (by-pass) firms. We are aware of the
limitations of our analysis35, however the results indicate, that in the case of parent companies
where CEOs have founded a private by-pass firm, those firms were in principle small sized and
more profit-oriented than other firms analyzed.
Implementing performance-based incentive plans is a necessary step to encourage
managers to consider the long-term aspect of crucial business decisions. A high-powered
incentives system36 should stimulate the achievement of preset goals and emphasize managers’
tendency to risk, since managers possess the longest time horizon among all participants of the
Prašnikar, Svejnar (1998)
See the analysis of the fiscal policy measures on wages in the case of Poland; Crombrugghe, Walque (1997)
32 This policy shows promissing results in Slovenia in 1997 and in 1998. The raise of wages almost stopped and the
economy is achieving substantial growth, 3.8% in 1997 and 6.5% in first four months of 1998.
33 See, Wallich. Weintraub (1971), Seidman (1978), Crombrugghe, Walque (1997).
34 Bajt’s (1992) opinion is that the ownership rights of the managers in the privatization process should be enhanced,
otherwise they will find an equivalent way of getting hold of socially owned capital.
35 The analysis was based on the accessible data, which do not include all possible ways of appropriating social capital. The
Agency for Privatization had not given the first permission to some of the companies, thereby excluding some of the most
obvious violations.
36 The manager can be paid the variable part of his salary in company's shares, if the realistically planned profit is achieved
(threshold).
30
31
14
privatization process. The question who should monitor their decisions, still remains. Cornelli et
al. believe this task in the transition process should belong to the banks (Cornelli et al., 1997)37.
Others believe that, in the case of Slovenia after the reform of its pension system this task, would
also be better performed by the capital market38.
37
Using empirical analysis, the authors argue that the highest estimate of the proportion of investment finance coming
through the stock exchange is 10% in Poland. Other capital markets of the transforming countries do not perform so well. In
other words, there are no large shareholders who can undertake the role of monitoring the managers. (Cornelli, Portes,
Schaffer, 1997, pg. 8)
38 See, Ribnikar (1998), Mramor (1998) for the solution how to fill in the gap caused by a surplus of voucher certificates
collected by investment funds over the value of the social ownership to be distributed to the public. Owners of shares of
investment funds should be allowed to invest their shares in the second pillar, introduced by the reform of the Slovene
pension reform. In this way, many imbalances restricting present functioning of the capital market would be resolved.
15
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17
APPENDIX
Table A1: Means and standard deviations of selected variables for year 1991.
No. of Workers
Value Added
Labor Cost
Profit
Revenue
Depreciation
Investment
Capital
Alternatiwe Wage
Profit+Labor Cost
Profit / Value Added
Labor Cost / Worker
Value Added / Worker
Profit / Worker
Revenue / Worker
Depreciation / Worker
Investment / Worker
Capital / Worker
(Profit+Labor Cost) / Worker
No. of Workers / Capital
Value Added / Capital
Labor Cost / Capital
Profit / Capital
Revenue / Capital
Depreciation / Capital
Investment / Capital
(Profit+Labor Cost) / Capital
Entire Sample
356
(555)
47396
(89334)
33428
(54470)
2682
(50971)
228616
(484923)
11285
(33302)
11429
(37534)
199466
(588007)
89
(14)
36111
(78307)
0.056
(1.075)
93.726
(152.724)
132.891
(250.477)
7.522
(142.913)
640.994
(1359.628)
31.642
(93.374)
32.045
(105.239)
559.264
(1648.652)
101.249
(219.556)
0.001
(0.002)
0.237
(0.447)
0.167
(0.273)
0.013
(0.255)
1.146
(2.431)
0.056
(0.166)
0.057
(0.188)
0.181
(0.392)
458
Internal Owner
299
(519)
36560
(69092)
26567
(46398)
3855
(23309)
161676
(295042)
6137
(12528)
6080
(16977)
98153
(155387)
89
(15)
30423
(59423)
0.105
(0.637)
88.601
(154.737)
121.929
(230.418)
12.859
(77.737)
539.181
(983.951)
20.467
(41.782)
20.277
(56.619)
327.337
(518.209)
101.461
(198.173)
0.003
(0.005)
0.372
(0.703)
0.270
(0.472)
0.039
(0.237)
1.647
(3.005)
0.062
(0.127)
0.061
(0.172)
0.309
(0.605)
303
External Owner
467
(605)
68579
(116786)
46840
(65645)
389
(81463)
359474
(707854)
21349
(53191)
21885.7
(58730)
397517
(958648)
90
(14)
47230
(105281)
0.005
(1.187)
100.150
(140.357)
146.630
(249.701)
0.832
(174.178)
768.595
(1513.47)
45.647
(113.728)
46.793
(125.571)
849.935
(2049.695)
100.983
(225.102)
0.001
(0.001)
0.172
(0.293)
0.117
(0.165)
0.001
(0.204)
0.904
(1.780)
0.053
(0.133)
0.055
(0.147)
0.118
(0.264)
155
Bypass Owner
268
(366)
39435
(72633)
25073.35
(35765)
5536.01
(33234)
176267.3
(287020)
8826.08
(23390)
13680.01
(42948)
217666.1
(734694
89
(15)
30609
(56036)
0.140
(0.842)
93.340
(133.145)
146.806
(270.394)
20.608
(123.721)
656.190
(1068.492)
32.856
(87.076)
50.926
(159.886)
810.306
(2735.051)
113.949
(208.609)
0.001
(0.001)
0.181
(0.333)
0.115
(0.164)
0.025
(0.152)
0.809
(1.318)
0.040
(0.107)
0.062
(0.197)
0.140
(0.257)
82
Previous Owner
465
(530)
68276
(96131)
46895.33
(64378)
5449.37
(29422.)
375215.1
(806681)
15931.99
(28718)
22612.96
(61430)
343727.8
(722554)
88
(15)
52344
(78248)
0.079
(0.430)
100.816
(138.402)
146.781
(206.663)
11.715
(63.253)
806.641
(1734.211)
34.250
(61.740)
48.613
(132.064)
738.949
(1553.354)
112.531
(168.219)
0.001
(0.001)
0.198
(0.279)
0.136
(0.187)
0.015
(0.085)
1.091
(2.346)
0.046
(0.083)
0.065
(0.178)
0.152
(0.227)
108
No. of Firms
Notes:

Values, except number of workers and ratios are in 1000 SIT in constant prices from year 1990.

Values in parentheses are standard deviations.

Means and standard deviations for ratios were calculated in following way:
first we created new variables in such a way that we devided numerator for each observations with the mean values of
denomintator ( we take into account the different means of samples),
for new variables we calculate means and standard deviations.
Table A2: Determinants of Investment / Labor Ratio
Variable \ Model
OLS
Levels
IV
Levels
Value Added / Worker
0.230***
(0.020)
0.189***
(0.071)
-0.0003
(0.003)
-1.619
(5.788)
-27.70***
(9.995)
Yes
Yes
0.432
410
0.231**
(0.094)
-0.012
(0.391)
0.002
(0.008)
-1.790
(5.933)
-12.208
(18.219)
Yes
Yes
0.416
410
Labor Cost / Worker
Revenue / Worker
Group 3
Constant
Year Dummies
Industry Dummies
Adj R-squared
No. of Observations
OLS
First
Difference
0.246***
(0.025)
0.085
(0.068)
-0.0004
(0.006)
/
IV
First
Difference
0.338***
(0.044)
-0.199
(0.176)
0.025
(0.027)
/
0.444
(2.753)
No
No
0.222
410
1.387
(4.985)
No
No
0.149
328
OLS
Lagged
Levels
0.180***
(0.041)
0.157
(0.101)
-0.003
(0.004)
-3.217
(6.935)
-18.887
(13.599)
Yes
Yes
0.190
410
Notes:

In Group 3 are firms which established bypass firms, where not partlly owned by known (private) owner and the prevaling method
of privatization was internal.

Values in parentheses are standard errors.

In model IV Levels we used following instruments : all dummy variables, lagged value added/worker, lagged revenue/worker,
lagged capital/worker and lagged (profit+labor cost)/worker. In model IV First Difference instruments are the same, except that instead
of lagged levels we used lagged first differences.

In the estimates for levels, the constant reflects the year 1991, firms in manufacturing industry and firms wich had bypass firms and
also known (private) owner before privatization plus firms with external ownership, bypass firms but withought known (private)
owner before privatization.

*
- significant at 10%
**
- significant at 5%
***
-significant at 1%
i
Data description
R
= revenue
= pure revenue from sales
I
= investment
= paid for investments in real assets
K
= stock of capital
= real assets
= depreciation
= depreciation of nonobject assets, long range assets and real assets
DEPR
LC
= labor cost
= cost of labor
LCa/L)
= alternative labor cost per worker
= AIW*(1-UR)+UC*UR,
where AIW = average annual wage per employee in industry, UR regional
annual unemployment rate and UC = average annual unemployment
compensation
L
= number of employees
= average number of employees according to working hours
PROFIT
= net profit
= net profit/net loss
VA
= value added
= PROFIT+LC+ DEPR
OWNER
= ownership dummy variables
INTERNAL OWNER = firms which have chosen internal method of
privatization
EXTERNAL OWNER = firms which have chosen external method of privatization
BYPASS OWNER = firms whose managers own so-called by-pass firms
PREVIOUS OWNER = firms which had an already known owner before the process
of privatization
REGION
= regional dummy variables
= firms were classified into 7 regions
IND
= industry dummy variables
= firms were classified into 12 industries
YEAR
= annual dummy variables
ii