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Asset Stripping, Rule of Law and Firm Survival: The Hoff-Stiglitz Model and Mass Privatization in Montenegro

  • Koman, Matjaž


    (University of Ljubljana)

  • Lakičević, Milan


    (University of Podgorica)

  • Prašnikar, Janez


    (University of Ljubljana)

  • Svejnar, Jan


    (Columbia University)

We provide the first test of the Hoff and Stiglitz (2004) model predicting whether and under what conditions mass privatizations are accompanied by asset stripping. In addition to directly testing the theory, we also tackle an important policy-oriented issue of why a large number of efficient firms disappeared during mass privatization in a 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 assumed away 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7821.

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Length: 21 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7821
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  1. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  2. Karla Hoff & Joseph E. Stiglitz, 2004. "After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies," American Economic Review, American Economic Association, vol. 94(3), pages 753-763, June.
  3. Djankov, Simeon & Murrell, Peter, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," CEPR Discussion Papers 3319, C.E.P.R. Discussion Papers.
  4. Campos, Nauro F & Giovannoni, Francesco, 2005. "The Determinants of Asset Stripping: Theory and Evidence from the Transition Economies," IZA Discussion Papers 1867, Institute for the Study of Labor (IZA).
  5. Polona Domadenik & Janez Prašnikar & Jan Svejnar, 2008. "Restructuring of firms in transition: ownership, institutions and openness to trade," Journal of International Business Studies, Palgrave Macmillan, vol. 39(4), pages 725-746, June.
  6. Božidar Cerović & Radmila Mitrović, 2007. "Privatisation Effects: Some Evidence from Serbia," Transition Studies Review, Springer, vol. 14(3), pages 469-487, December.
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