Corporate Governance of SOEs and Performance in Transition Countries. Evidence from Lithuania

This paper investigates whether and to what extent corporate governance mechanisms affect the efficiency of State Owned Enterprises (SOEs) operating in transition economies. Furthermore, it examines the relationship between corporate governance practice and its impact on both wholly state run SOEs and majority state run SOEs. We employed a unique dataset of corporate governance ratings (related to quality of transparency, quality of board, and quality of strategic planning, implementation and control) of commercial Lithuanian SOEs relating to the period following the introduction of the corporate governance reforms in the years 2012-2013. In order to investigate our research hypotheses, we set up a two-stage empirical research strategy that combined a non-parametric efficiency estimator (i.e., Data Envelopment Analysis) with a bootstrapped truncated regression. We built two aggregate indexes of corporate governance ratings to represent one dimension of corporate governance quality. We then ran a battery of regressions using both the aggregated and the single corporate governance indexes as independent variables. First, the paper finds that the wholly state ownership model of SOEs is positively correlated to efficiency (i.e., wholly SOEs are more efficient than majority SOEs). Moreover, overall corporate governance practices are efficiency-enhancing; more specifically, board quality and strategic planning seem to be effective internal governance mechanisms in promoting overall organizational efficiency. Interestingly, we uncovered that there exists a relationship between concentration of ownership and corporate governance practices, but this mitigated efficiency enhancement in wholly state run SOEs compared to majority state run SOEs. This effect was driven by the lower quality of the board. Overall, our findings illustrate that corporate governance reforms have enhanced efficiency, but wholly SOEs require a better implementation in order to achieve full efficiency gains.