Asset stripping and firm survival in mass privatization: Testing the Hoff-Stiglitz and Campos-Giovannoni models in Montenegro

We provide the first test of and find support for the Hoff and Stiglitz (2004a,b) model predicting under what conditions mass privatizations are accompanied by asset stripping. We also test and do not find support for the main prediction of the Campos and Giovannoni (2006) model. In addition to testing the theory, we tackle an important policy-oriented issue of why a large number of efficient firms disappeared during mass privatization in the booming economy of Montenegro. Econometrically, we present the first study to look at firms that disappeared during a mass privatization transition, improving upon prior studies that focused only on existing firms and ignored survival bias. Our analysis suggests that asset stripping and firm disappearance were present, and that asset stripping was a likely reason for the loss of efficient firms. We show that because more productive firms were liquidated, it is important to model survival bias in the selection of firms remaining in samples when estimating the effects of privatization or other ownership changes. We also show that one needs to distinguish between true start-ups and liquidated firms that re-appear as start-ups. In the absence of the rule of law, many firms that appear to have disappeared were in fact appropriated by managers and politically connected individuals.