Pajuste, A.; (2002) Corporate governance and stock market performance in Central and Eastern Europe: a study of nine countries, 1994-2001. (Economics Working Papers 22). Centre for the Study of Economic and Social Change in Europe, SSEES, UCL: London, UK.

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Abstract

This paper offers analysis of corporate governance issues behind the stock market performance (stock returns and activity) in nine Central and Eastern European (CEE) countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Over the period June 1994 - June 2001, on average the CEE stock markets have had lower returns and higher risk than developed markets. This is explained by the negative influence of the two crisis years (1995 and 1998), the 'flight to quality' effect. Among other reasons, there are cases when prices have been artificially kept down by the controlling owners in order to abuse the minority shareholders. The evidence shows that the enforcement of law matters more than the quality of law on the books, which is in line with previous research (Pistor et al, 2000). I find that the effectiveness (enforcement) of financial regulations has the highest explanatory power of stock market returns in the sample countries. The protection of minority shareholders (Legal index) has a significant impact on market activity, measured by market turnover to market capitalization ratio.

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