Privatization and Principal-Principal Conflicts in Transition Economies

The corporate governance literature identifies two major governance models. The first is based on equity finance, controlled by capital markets, and mostly seen in common law system countries such as the United Kingdom and the United States. The second is based on debt finance, controlled by financial institutions, and mostly seen in continental European countries (such as Germany) and Japan. Because both equity and debt markets were underdeveloped, transition economies (also some South American and Asian countries) have introduced a third model characterized by concentrated ownership (Estrin, Hanousek, Kočenda, & Svejnar, 2009; Pistor, 2006). Transition economies are formerly socialist countries and are distinguished by a number of institutional and organizational features that introduce peculiar problems and may dictate differences in corporate governance mechanisms. In fact, “no other place in the world offers such ample and creative corporate governance pathologies” (Fox & Heller, 2006: 391). In particular, principal-principal (PP) conflicts, which refer to the potential expropriation of minority shareholders by controlling owners, are among the most well known corporate governance problems in transition economies (Young et al., 2008).