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Alexander Pivovarsky is an Economist in the Expenditure Policy Division of the IMF’s Fiscal Affairs Department. At the time this article was prepared, he was in the IMF’s European I) Department. This article is based on Chapter 1 of the author’s docloral dissertation at Harvard University, He is grateful lo Rachel Glennerstcr, Oleh Havrylyshyn, Jess Hobart, Si in on Johnson, Dwiglu Perkins, Kalharina Pistor, Edgardo Ruggiero, Jeffrey Sachs, and Janusz Szyrmer, as well as an anonymous referee, the participants in the Harvard Institute for tnlemational Development seminar in Kyiv, and the staff of the IMF’s European II Department for valuable suggestions and comments.
I follow the definition of corporate governance provided in Shieifer and Vishny (1997), which deals with the ways in which suppliers of finance to firms assure that they will get a return on their investments.
La Poria. Lopez-dc-Silanes, Shleifer. and Vishny (1998) use six criteria to evaluate the quality of shareholder protections, based on a country’s commercial law. They assign a cumulative score of and -director rights (between zero and six) by adding points if”a eounlry’s commercial code or commercial law meets the criteria of minority shareholder proleclion. Ukrainian corporate law scores relatively well on the anli-director rights index compared with those of other transition countries (Pistor, Raiser, and Getfer, 2000). Countries whose laws are based on the English legal system have the greatest degree of protection provided to minority shareholders (La Poria, Lopez-de-Silanes, Shleifer, and Vishny, 1998).
The EBRD index of extensiveness equals 1 if legal rules arc very limited in scope, 2 if legal rules are limited in scope and may lie die subject of conflicting interpretations. 3 if amended legislation has recently been enacted in at least two of the three areas (pledge, bankruptcy, and company law), 4 if comprehensive legislation exists in at least two of the three areas, and 4+ if comprehensive legislation exists in all three areas and legal rules approach those of more developed countries. The index of effectiveness of legal rules equals 1 if commercial rules are usually very unclear and contradictory and law enforcement is rudimentary, 2 if commercial rules are generally unclear and sometimes contradictory and there are few meaningful procedures in place in order to make commercial laws operational and enforceable, 3 if commercial rules are reasonably clear but are not fully enforced by the court system, 4 if commercial law is reasonably clear and administration and judicial support of the law is reasonably adequate, and 4+ if commercial laws are clear and readily ascertainable.
The score is accompanied by the following explanation: “Although its new constitution legally protects private property, Ukraine has not yet fully established a legal system that sufficiently enforces the laws that protect it. But recent government reforms in the judicial system are improving some courts. Some inefficiencies remain, however. Despite an ambitious government program to privatize large sectors or the economy, property remains subject to government expropriation” (Johnson, Holmes, and Kirkpalrick. 1998, p. 447).
My derivation of the approximation of the total-fat tor-productivity variable is based on several simplifying assumptions. First, I assume that all enterprises employ the same production function. Second, I assume that all enterprises pay the same wages to labor and rents on capital. Finally. I assume that the output price per unit is the same across all enterprises in the sample. Only output volume varies across enterprises along with the variation in the volumes of inputs and enterprise-specific total factor productivity. Given these assumptions, the constant in the equation (1) includes a log transformation of the unit output price. The predicted value of In (sales revenue in 1998)i, predicted is derived by adding the conslanl and the enterpnse-specific values of a In Ki and b In Li, and, thus, leaving the total-factor-productivity approximation ti out. From here, ti is derived by subtracting In (sales revenue in 1998)i, predicted from In (sales revenue in 1998)i, actual.
The March 1992 Law on Privatization Securities gave the citizens of Ukraine ihe right to open individual nonnegotiable privatizalion accounts (which were later transformed into privatizalion certificates). The certificates could he used for acquiring shares in an enterprise (or enterprises) of choice, and Ihe face value of each certificate was equivalent to 1/52,000,000 of the total book value of the asscls privatized.
ln the first-stage regression, enterprise-specific proportions of equity privatized by different methods arc used to generate an estimated, or predicted, value of carrcnl ownership concentration for each enterprise. In the second stage, the predicted values of currcnl ownership concentration are regressed on the measures of enterprise performance. The ordinary-least-squares (OLS) estimates of ownership concentration presented in Table 6 serve as an approximation of the first-stage regression results for the sample of enterprises.