Capital Markets, Financial Intermediaries, and Corporate Governance: An Empirical Assessment of the Top Ten Voucher Fund

Voucher privatization was expected to result in widely dispersed ownership with little effect on firms' governance. But in the first wave of privatization, more than 70 percent of Czech vouchers went to investment funds and the 10 largest Czech and Slovak investment funds (surveyed for this study) acquired roughly half of all voucher points. And the large funds can influence corporate governance. Also, a fund's actual role depends on the sponsoring institution's or individual's incentives structure. Banks and investment funds lack the skills and incentives to initiate corporate restructuring, but funds with significant stakes can readily compare managers' performance and remove underperforming executives and can counterbalance the control of management and employees. Funds can also effectively monitor firms on behalf of groups of small investors. After privatization, most Czech assets are now owned by funds affiliated with banks. In market economies, a close relationship between banks and enterprises can be seen as a conflict of interest. In transition economies, banks and funds have spontaneously developed a relationship as a way for banks to get information about firm performance. Bank-sponsored funds reduce banks' information and monitoring costs and hence lending risk and costs. They also facilitate the informal workout of problem loans