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Dissertation Committee:
Jan Hanousek (chair)
Randall Filer
Evžen Kočenda
Jan Švejnar

Abstract:

The importance of finance for growth has already been confirmed in numerous studies. This relationship is especially crucial for the transition economies where financial systems had to be built from the scratch after the collapse of central planning. This work investigates stock markets that constitute an important part of the developed financial system. Functioning stock markets are found to be necessary even if the country's financial system is bank-based. In fact, in the transition countries stock markets are a relatively new phenomenon. Even though in comparison to the developed countries these markets remain still underdeveloped, they have been evolving as an important complement to the banks in the course of the transition process (EBRD Transition Report 2006). Stock markets emerged to help with the transformation of the state-owned assets to private hands and afterwards also with the rearrangement of ownership structures. They were also expected to assist companies in raising capital; however, the low number of initial public offerings in transition countries confirms that they have not succeeded in doing so. In addition to these functions connected to the transition process, stock markets in emerging countries are necessary in terms of performing the standard roles of financial market that include providing information about possible investment and improvement of resource allocation, monitoring investments and exerting corporate governance, risk diversification and mobilization of savings (Levine, 2005).

Even before the stock markets were established, privatization process was initiated in transition countries. Its main goal was ownership transformation that would create suitable conditions for restructuring and development of the economy. As it is discussed at the beginning of the first chapter, privatization methods differed by countries. Some of them did not have any connection to the stock market, some only indirect one. Mass privatization, however, was pushed forward by stressing that in addition to equal distribution of wealth, it would also contribute to establishing a functioning stock market. Since mass privatization was in different forms implemented in the majority of transition countries, it stands out as an important factor influencing stock market emergence and development. The literature that investigates determinants of stock market development in general considers various institutional and macroeconomic factors, the role of privatization in this process has however not been sufficiently discussed so far.

The first chapter of this dissertation investigates the relationship between mass privatization and stock market development in transition economies. The link is investigated empirically using a panel of data that includes transition countries for which corresponding data is available. The results confirm the hypothesis that mass privatization exerted a negative influence on stock market functioning in the short and medium term. Further, it appears that stock markets in countries with mass privatization were initially perceived as mere byproducts of the privatization process. Such stock markets typically not only failed in their core mission of providing capital for the corporate sector, but generated negative investor sentiment and did little to catalyze economic growth.

The second chapter studies stock market emergence and development in the Czech Republic, one of the first countries where mass privatization was implemented. This economy later also served as a model for other transition countries. Czech privatization can be regarded as an experiment which allows us to conclude under what circumstances a viable market for shares could arise. Unlike the first chapter, where aggregate country data is used, in this study we employ micro level data on firms that participated in the mass privatization. We estimate the determinants of shares delisting e.g. exclusion from public trading on the Prague Stock Exchange (PSE) during the period 1993 – 2004. Unlike its counterparts in Poland or Hungary, exceptionally large amounts of shares were delisted from the PSE. Using the data on listed and delisted companies it is showed that it was possible to prevent massive delisting if certain pre-privatization and privatization characteristics of the companies had been taken into account when deciding which companies to place on the stock exchange for public trading following the mass privatization.

The third chapter deals with the analysis of delisting in the Slovak Republic, where in comparison to the Czech Republic, delisting took place five years later. We utilize a special relationship between the Czech and Slovak economy to investigate the role of delisting in the process of stock market emergence. A close connection between the Czech and Slovak market and a very similar unfavorable development on both markets in the second half of 1990s, despite different institutional changes, emphasize the importance of mass privatization implemented in these countries. Benefiting from the results of our investigation in chapter two, we compare the development in Czech and Slovak economies and analyze the role of delisting in the process of market emergence and also reasons for delisting in both countries. Different delisting strategies and subsequent development on these markets suggest that decisions of the stock exchange authorities are crucial for further functioning of the market.

Full Text: “Privatization and Stock Market Creation: Evidence from Transition Economies” by Zuzana Fungáčová

Dissertation Committee:
Petr Zemčík (chair)
Evžen Kočenda
Mario Nuti
Jan Hanousek

Abstract:

This dissertation consists of three empirical papers on the issues of monetary policy as well as finance in the group of four Visegrad countries, namely the Czech Republic, Hungary, Poland, and Slovakia. The first paper, entitled “Testing Multi-Factor Asset Pricing Models in the Visegrad Countries”, attempts to point to a suitable asset-pricing model that could be used to estimate the cost of equity capital in the Visegrad countries. The Capital Asset Pricing Model (CAPM) that is most often used for this purpose in developed markets has a poor empirical record and is likely not to hold in less developed and less liquid emerging markets. Various factor models have been proposed to overcome the shortcomings of the CAPM. This paper examines both the CAPM and the macroeconomic factor models in terms of their ability to explain the average stock returns using the data from the Visegrad countries. We find, as expected, that the CAPM is not able to do this task. However, factor models, including factors such as: excess market return, industrial production, inflation, money, exchange rate, exports, commodity index, and term structure, can in fact explain part of the variance in the Visegrad countries’ stock returns.

A second paper, “Size and Value Effects in Visegrad Countries”, is an extension of the previous paper. This paper has two main objectives. The first is to test for the presence of the size and book-to-market value effects in Visegrad countries, while the second is to propose a plausible model for the cost of capital estimation in the Visegrad region. Size and book-to-market effects have been found in the United States and many other developed stock markets. We demonstrate that these effects do in fact explain the expected return/cost of capital in Eastern Europe. Based on this result, we proceed by constructing regional size and book-to-market portfolios for a combined Visegrad market. Returns on these portfolios serve as factors in addition to the market portfolio. The regional three-factor model performs as well as country specific versions of the model. However, it can be estimated for a more current sample in Prague, Warsaw, Budapest, and Bratislava. Therefore it is a plausible model for the cost of capital in this region and we use it to calculate the cost of capital for the following industries: banks; capital goods; food, beverage and tobacco; materials; and utilities.

The final third paper (a joint work with R. Horvath), “The Effects of Monetary Policy in the Czech Republic: An Empirical Study”, examines the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of the persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates.

Full Text: “Essays in Finance and Monetary Policy: Evidence from Visegrad Countries” by Magdalena Morgese Borys