The Vicious Circles of Control : Regional Governments and Insiders in Privatized Russian Enterprises
How can one account for the puzzling behavior of insider-managers who, in stripping assets from the very firms they own, appear to be stealing from one pocket to fill the other? The authors suggest that such asset-stripping and failure to restructu...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/02/438380/vicious-circles-control-regional-governments-insiders-privatized-russian-enterprises http://hdl.handle.net/10986/22338 |
| Summary: | How can one account for the puzzling
behavior of insider-managers who, in stripping assets from
the very firms they own, appear to be stealing from one
pocket to fill the other? The authors suggest that such
asset-stripping and failure to restructure are the
consequences of interactions between insiders
(manager-owners) and regional governments in a particular
property rights regime. In this regime, the ability to
realize value is limited by uncertainty and illiquidity, so
managers have little incentive to increase value. As the
central institutions that rule Russia have ceded their
powers to the regions, regional governments have imposed
various distortions on enterprises to protect local
employment. Prospective outsider-investors doubt they can
acquire the control rights they need for restructuring firms
and doubt they can avoid the distortions regional
governments impose on the firms in which they might invest.
The result: little restructuring and little new investment.
And regional governments, knowing the firms' taxable cash
flows will have been reduced through cash flow diversion,
have responded by collecting revenues in kind. To
disentangle these vicious circles of control, the authors
propose a pilot for transforming ownership in
insider-dominated firms through a system of simultaneous
tax-debt-for-equity conversion and resale through
competitive auctions. The objective: to show regional
governments, for example, that a more sustainable way to
protect employment is to give managers incentives to
increase enterprises' value by transferring effective control
to investors. The proposed mechanism would provide cash
benefits to insiders who agree to sell control to outside
investors. The increased cash revenue (rather than in-kind
or money surrogates) would enable regional governments to
finance safety nets for the unemployed and to promote other
regional initiatives. |
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