Financial Systems and Enterprise Restructuring in Eastern Europe

Abstract

This article investigates the effects of financial systems on enterprise restructuring in twenty-six transition economies from 1999 to 2005. It identifies various sources of financing and estimates their respective impacts on enterprise restructuring. Loans from local commercial banks are found to be more effective than any other form of financing at promoting restructuring. Their effect increases as the size of the firm decreases. There is some evidence that the effectiveness of equity financing in restructuring increases over time, suggesting that the equity mechanism takes root in transition economies only gradually. It is also found that restructuring contributes to firm performance, suggesting a linkage among financing sources, restructuring, and firm performance.

Keywords:

• banks
• equity financing
• financing sources
• restructuring
• transition

JEL Classification:

• G32
• P27
• P31

ACKNOWLEDGMENTS

B.-Y. Kim acknowledges the valuable comments and suggestions by participants in the Third Pacific Rim Economic Conference, held in Hawaii, 2014, and in seminars at the Institute of Economic Research at Kyoto University and the Institute for Research in Finance and Economics at Seoul National University.

FUNDING

B.-Y. Kim gratefully acknowledges the financial support from the Institute for Research in Finance and Economics at Seoul National University.

Notes

1. The dominance of formal institutions in facilitating firm growth is typically found in developed economies. For example, Astebro and Bernhardt (2003) argue that having a bank loan is, ceteris paribus, a positive predictor of the survival of start-up companies based on data from Characteristics of Business Owners, launched in 1987 in the United States.

2. Different measures of restructuring have been used in the literature. Most works use an indirect measure of restructuring, such as productivity, profit, and sales (Estrin and Rosevear 1999; Frydman et al. 1999; Lee 1999). Estrin and Rosevear (1999) use changes in the structure of corporate governance and management as a proxy for restructuring. In contrast, Djankov (1999) and Carlin et al. (2001) measure restructuring directly, using renovation of factories and introduction of new products, respectively.

3. The European Bank for Reconstruction and Development (EBRD) index of banking sector reform and non-bank financial institution reform is measured in a range from 1 to 4+, with 1 implying little progress, and 4+ indicating the standards and performance norms of advanced industrial economies.

4. The survey was conducted in 2009, but no questions were asked about restructuring.

5. Some enterprises participated in multiple surveys, rendering the possibility of making a panel dataset. However, a majority of firms participated in the survey only once. The main purpose of this article is to estimate the effect of financing sources on restructuring using the sample data closer to the population. Hence, one particular cross-section dataset is used instead of panel data.

6. The samples were: Central and Eastern Europe (i.e., Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia), South-Eastern Europe (i.e., Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania, and Serbia), and Commonwealth of Independent States (i.e., Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tadzhikistan, and Ukraine).

7. In practice, about 83% of the firms participating in the BEEPS in 2005 replied that they would maintain their employment level or enlarge it in response to the question, “If you could change the number of regular full-time workers your firm currently employs without any restrictions, what would be your optimal level of employment as a percentage of your existing workforce?”

8. The respondents were given four choices: (a) our customers would continue to buy from us in the same quantities as now; (b) our customers would continue to buy from us, but in slightly lower quantities; (c) our customers would continue to buy from us, but in much lower quantities; (d) many of our customers would buy from our competitors instead. The fourth answer was set as a reference variable and the others as dummies.

9. Ownership of firms is measured by asking what percentage of a firm is owned by a private entity or by the government/state. Since the regression results do not show significant differences between domestic and foreign companies in the analysis, they were put together and labeled as private, using a dummy that is one when the firm is owned by private entities and zero otherwise. However, the main results are not affected by the inclusion of these variables and thus the results are reported without the ownership-related variables.

10. The question used was as follows: “Thinking of the most recent loan you obtained from a financial institution, did the financing require collateral?” There were three choices available: yes, no, and no bank loan. This variable was used in three categories: bank loan with collateral, bank loan without collateral, no bank loan.

Additional information

Notes on contributors

Byung-Yeon Kim

Byung-Yeon Kim is a professor in the Department of Economics at Seoul National University, Korea.

Jieun Park

Jieun Park is a researcher at the Korea International Trade Association, Korea.