Skip to main content

Advertisement

SpringerLink
Log in

Institutions and corporate financial distress in Central and Eastern Europe

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

A Correction to this article was published on 19 June 2021

This article has been updated

Abstract

After a long period of economic and legal transition, new institutions emerged in Central and Eastern Europe (CEE). Firms facing financial difficulties must cope with the quality of those institutions. This study investigates the association between the institutional environment and a firm’s recovery from financial distress. Our analysis relies on a sample of 823 CEE listed firms subject to financial difficulties over the period from 2004 to 2017. After controlling for the endogeneity of institutional quality and financial features, dynamic panel estimates confirm that increased anticorruption efforts contributed to restoring the financial health of CEE firms. By reducing costs resulting from bribes and bureaucracy, efficient anticorruption mechanisms can facilitate firm efforts to overcome financial distress. In addition, several CEE countries created anticorruption agencies, mainly prior to the financial crisis or at the beginning of the postcrisis period. This may partially explain why anticorruption institutions were able to produce positive externalities. The development and independence of such agencies should be highly encouraged in CEE, as financially distressed firms may benefit from anticorruption policies.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Change history

Notes

  1. CPI ranges from 0, which is associated with a highly corrupt environment, to 100, which indicates a very clean environment.

  2. The Shapiro–Wilk test confirms a nonnormal distribution for Z-Score and the institutional variables.

  3. Our dependent variable is based on Altman’s Z-score that is computed using other financial variables such as a firm’s liabilities, market capitalization, working capital or earnings (Table 1). Hence, such financial features are already captured by Z-Score. Therefore, we decided to include only firm’s size and sales growth for the previous year in Eq. (1). As shown in Sect. 5, our estimates are also robust to the inclusion of other financial variables such as free cash flow, indebtedness and market-to-book ratio.

  4. In our sample, the percentage of outstanding shares owned by foreign investors was available only for 14 firms with a total of 42 observations.

  5. As the static approach is sensitive to multicollinearity (Winship & Western, 2016) and insider ownership (Insider) can be the result of management's compensation contracts (Kaserer & Moldenhauer, 2008), Table 8 only reports the estimates with a single institutional variable and without the variable Insider, which can introduce severe endogeneity bias. However, the industry-level random effects approach and industry-level fixed effects approach provide similar results with and without the variable Insider (results available upon request).

  6. As the variable Insider covers only the 2010–2017 period, it was not included in the specifications in Table 9. In addition, estimates from columns (3) and (4) are robust to the insertion of Insider (results available upon request).

References

  • Ágh, A. (2016). The deconsolidation of democracy in East-Central Europe: The new world order and the EU’s geopolitical crisis. Politics in Central Europe, 12(3), 7–36.

    Article  Google Scholar 

  • Aisen, A., & Veiga, F. J. (2013). How does political instability affect economic growth? European Journal of Political Economy, 29, 151–167.

    Article  Google Scholar 

  • Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609.

    Article  Google Scholar 

  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297.

    Article  Google Scholar 

  • Athanasouli, D., & Goujard, A. (2015). Corruption and management practices: Firm level evidence. Journal of Comparative Economics, 43(4), 1014–1034.

    Article  Google Scholar 

  • Avis, E., Ferraz, C., & Finan, F. (2018). Do government audits reduce corruption? Estimating the impacts of exposing corrupt politicians. Journal of Political Economy, 126(5), 1912–1964.

    Article  Google Scholar 

  • Baumöhl, E., Iwasaki, I., & Kočenda, E. (2019). Institutions and determinants of firm survival in European emerging markets. Journal of Corporate Finance, 58, 431–453.

    Article  Google Scholar 

  • Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance, 30(11), 2931–2943.

    Article  Google Scholar 

  • Beck, T., Demirgüç-Kunt, A. S. L. I., & Maksimovic, V. (2005). Financial and legal constraints to growth: does firm size matter? The Journal of Finance, 60(1), 137–177.

    Article  Google Scholar 

  • Berkowitz, D., Lin, C., & Ma, Y. (2015). Do property rights matter? Evidence from a property law enactment. Journal of Financial Economics, 116(3), 583–593.

    Article  Google Scholar 

  • Bhattacharjee, A., Higson, C., Holly, S., & Kattuman, P. (2009). Macroeconomic instability and business exit: Determinants of failures and acquisitions of UK firms. Economica, 76(301), 108–131.

    Article  Google Scholar 

  • Bjørnskov, C. (2011). Combating corruption: On the interplay between institutional quality and social trust. The Journal of Law and Economics, 54(1), 135–159.

    Article  Google Scholar 

  • Blazy, R., & Stef, N. (2020). Bankruptcy procedures in the post-transition economies. European Journal of Law and Economics, 50(1), 7–64.

    Article  Google Scholar 

  • Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

    Article  Google Scholar 

  • Bose, G. (2004). Bureaucratic delays and bribe-taking. Journal of Economic Behavior & Organization, 54(3), 313–320.

    Article  Google Scholar 

  • Bottazzi, G., Grazzi, M., Secchi, A., & Tamagni, F. (2011). Financial and economic determinants of firm default. Journal of Evolutionary Economics, 21(3), 373–406.

    Article  Google Scholar 

  • Carney, M., Estrin, S., Liang, Z., & Shapiro, D. (2019). National institutional systems, foreign ownership and firm performance: The case of understudied countries. Journal of World Business, 54(4), 244–257.

    Article  Google Scholar 

  • Cieślik, A., & Goczek, Ł. (2018). Control of corruption, international investment, and economic growth—Evidence from panel data. World Development, 103, 323–335.

    Article  Google Scholar 

  • Col, B., Durnev, A., & Molchanov, A. (2017). Foreign risk, domestic problem: Capital allocation and firm performance under political instability. Management Science, 64(5), 2102–2125.

    Article  Google Scholar 

  • Colonnelli, E., & Prem, M. (2020). Corruption and firms. Available at SSRN 2931602.

  • Colonnelli, E., Lagaras, S., Ponticelli, J., Prem, M., & Tsoutsoura, M. (2020). Revealing corruption: Firm and worker level evidence from Brazil.

  • Cruz-Gonzalez, M., Fernández-Val, I., & Weidner, M. (2017). Bias corrections for probit and logit models with two-way fixed effects. The Stata Journal, 17(3), 517–545.

    Article  Google Scholar 

  • Dass, N., Nanda, V., & Xiao, S. C. (2016). Public corruption in the United States: Implications for local firms. The Review of Corporate Finance Studies, 5(1), 102–138.

    Article  Google Scholar 

  • Daude, C., & Stein, E. (2007). The quality of institutions and foreign direct investment. Economics & Politics, 19(3), 317–344.

    Article  Google Scholar 

  • Davies, J. R., Hillier, D., & McColgan, P. (2005). Ownership structure, managerial behavior and corporate value. Journal of Corporate Finance, 11, 645–660.

    Article  Google Scholar 

  • Demirgüç-Kunt, A., & Maksimovic, V. (1998). Law, finance, and firm growth. The Journal of Finance, 53(6), 2107–2137.

    Article  Google Scholar 

  • Douma, S., George, R., & Kabir, R. (2006). Foreign and domestic ownership, business groups, and firm performance: Evidence from a large emerging market. Strategic Management Journal, 27(7), 637–657.

    Article  Google Scholar 

  • Enyedi, Z. (2020). Right-wing authoritarian innovations in Central and Eastern Europe. East European Politics, 36(3), 363–377.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1998). Value versus growth: The international evidence. The Journal of Finance, 53(6), 1975–1999.

    Article  Google Scholar 

  • Fernández-Val, I., & Weidner, M. (2016). Individual and time effects in nonlinear panel models with large N, T. Journal of Econometrics, 192(1), 291–312.

    Article  Google Scholar 

  • Gilbert, L. R., Menon, K., & Schwartz, K. B. (1990). Predicting bankruptcy for firms in financial distress. Journal of Business Finance & Accounting, 17(1), 161–171.

    Article  Google Scholar 

  • Greenaway, D., Gullstrand, J., & Kneller, R. (2009). Live or let die? Alternative routes to industry exit. Open Economies Review, 20(3), 317–337.

    Article  Google Scholar 

  • Griffin, J. M., & Lemmon, M. L. (2002). Book-to-market equity, distress risk, and stock returns. The Journal of Finance, 57(5), 2317–2336.

    Article  Google Scholar 

  • Gungoraydinoglu, A., Çolak, G., & Öztekin, Ö. (2017). Political environment, financial intermediation costs, and financing patterns. Journal of Corporate Finance, 44, 167–192.

    Article  Google Scholar 

  • Hanousek, J., & Kochanova, A. (2016). Bribery environments and firm performance: Evidence from CEE countries. European Journal of Political Economy, 43, 14–28.

    Article  Google Scholar 

  • Haselmann, R., Pistor, K., & Vig, V. (2010). How law affects lending. The Review of Financial Studies, 23(2), 549–580.

    Article  Google Scholar 

  • Houston, J. F., Lin, C., & Xie, W. (2018). Shareholder protection and the cost of capital. The Journal of Law and Economics, 61(4), 677–710.

    Article  Google Scholar 

  • Hu, Y., & Zhou, X. (2008). The performance effect of managerial ownership: Evidence from China. Journal of Banking & Finance, 32(10), 2099–2110.

    Article  Google Scholar 

  • Iwasaki, I., & Kočenda, E. (2020). Survival of Service Firms in European Emerging Economies. Applied Economics Letters, 27(4), 340–348.

    Article  Google Scholar 

  • Iwasaki, I., Kočenda, E., & Shida, Y. (2021a). Distressed acquisitions: Evidence from European emerging markets. CESifo Working Paper No. 9026 (forthcoming in Journal of Comparative Economics).

  • Iwasaki, I., Kočenda, E., & Shida, Y. (2021b). Institutions, financial development, and small business survival: evidence from European emerging markets. Small Business Economics, 1–23.

  • Jensen, M. C. (1989). The eclipse of the public corporation. Harvard Business Review, 5, 61–74.

    Google Scholar 

  • Jõeveer, K. (2013). Firm, country and macroeconomic determinants of capital structure: Evidence from transition economies. Journal of Comparative Economics, 41(1), 294–308.

    Article  Google Scholar 

  • Julio, B., & Yook, Y. (2012). Political uncertainty and corporate investment cycles. The Journal of Finance, 67(1), 45–83.

    Article  Google Scholar 

  • Kaserer, C., & Moldenhauer, B. (2008). Inside ownership and corporate performance: evidence from Germany. Review of Managerial Science, 2, 1–35.

    Article  Google Scholar 

  • Kočenda, E., & Iwasaki, I. (2020). Bank survival in Central and Eastern Europe. International Review of Economics and Finance, 69, 860–878.

    Article  Google Scholar 

  • Koh, S., Durand, R. B., Dai, L., & Chang, M. (2015). Financial distress: Lifecyle and corporate restructuring. Journal of Corporate Finance, 33, 19–33.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58(1–2), 3–27.

    Article  Google Scholar 

  • Lee, T., & Yeh, Y. (2004). Corporate governance and financial distress: evidence from Taiwan. Corporate Governance, 12(3), 378–388.

    Article  Google Scholar 

  • Lee, S. H., Oh, K., & Eden, L. (2010). Why do firms bribe? Management International Review, 50(6), 775–796.

    Article  Google Scholar 

  • Li, D., & Ferreira, M. P. (2011). Institutional environment and firms’ sources of financial capital in Central and Eastern Europe. Journal of Business Research, 64(4), 371–376.

    Article  Google Scholar 

  • Liu, X. (2016). Corruption culture and corporate misconduct. Journal of Financial Economics, 122(2), 307–327.

    Article  Google Scholar 

  • Martins, L., Cerdeira, J., Teixeira, A. C., & A. . (2020). Does corruption boost or harm firms’ performance in developing and emerging economies? A Firm-Level Study. the World Economy, 43(8), 2119–2152.

    Article  Google Scholar 

  • McNulty, J. E., Harper, J. T., & Pennathur, A. K. (2007). Financial intermediation and the rule of law in the transitional economies of Central and Eastern Europe. The Quarterly Review of Economics and Finance, 47(1), 55–68.

    Article  Google Scholar 

  • Neyman, J., & Scott, E. L. (1948). Consistent estimates based on partially consistent observations. Econometrica: Journal of the Econometric Society, 16, 1–32.

    Article  Google Scholar 

  • Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica: Journal of the Econometric Society, 49, 1417–1426.

    Article  Google Scholar 

  • North, D. C. (1993). Institutions and credible commitment. Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift für die gesamte Staatswissenschaft, 11–23.

  • Randøy, T., & Goel, S. (2003). Ownership structure, founder leadership, and performance in Norwegian SMEs: implications for financing entrepreneurial opportunities. Journal of Business Venturing, 18, 619–637.

    Article  Google Scholar 

  • Roe, M. J., & Siegel, J. I. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279–309.

    Article  Google Scholar 

  • Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.

    Article  Google Scholar 

  • Roodman, D. (2009). A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135–158.

    Article  Google Scholar 

  • Rose-Ackerman, S. (1997). The political economy of corruption. Corruption and the Global Economy, 31, 60.

    Google Scholar 

  • Sequeira, S., & Djankov, S. (2014). Corruption and firm behavior: Evidence from African ports. Journal of International Economics, 94(2), 277–294.

    Article  Google Scholar 

  • Smith, J. D. (2016). US political corruption and firm financial policies. Journal of Financial Economics, 121(2), 350–367.

    Article  Google Scholar 

  • Staszkiewicz, P., & Morawska, S. (2019). The efficiency of bankruptcy law: Evidence of creditor protection in Poland. European Journal of Law and Economics, 48(3), 365–383.

    Article  Google Scholar 

  • Stef, N. (2015). Cost sharing and bankruptcy law orientation. Research in Law and Economics, 27, 181–207.

    Article  Google Scholar 

  • Stef, N. (2018). Bankruptcy and the difficulty of firing. International Review of Law and Economics, 54, 85–94.

    Article  Google Scholar 

  • Stef, N., & Dimelis, S. (2020). Bankruptcy regime and the banking system. Economic Modelling, 87, 480–495.

    Article  Google Scholar 

  • Stef, N., & Jabeur, S. B. (2018). The bankruptcy prediction power of new entrants. International Journal of the Economics of Business, 25(3), 421–440.

    Article  Google Scholar 

  • Stef, N., & Zenou, E. (2021). Management-to-staff ratio and a firm’s exit. Journal of Business Research, 125, 252–260.

    Article  Google Scholar 

  • Thakor, A. V. (2015). The financial crisis of 2007–2009: why did it happen and what did we learn? The Review of Corporate Finance Studies, 4(2), 155–205.

    Article  Google Scholar 

  • Timoneda, J. C. (2021). Estimating group fixed effects in panel data with a binary dependent variable: How the LPM outperforms logistic regression in rare events data. Social Science Research, 93, 102486.

    Article  Google Scholar 

  • Tykvová, T., & Borell, M. (2012). Do private equity owners increase risk of financial distress and bankruptcy? Journal of Corporate Finance, 18, 138–150.

    Article  Google Scholar 

  • Uddin, M. A., Ali, M. H., & Masih, M. (2017). Political stability and growth: An application of dynamic GMM and quantile regression. Economic Modelling, 64, 610–625.

    Article  Google Scholar 

  • Uhrig-Homburg, M. (2005). Cash-flow shortage as an endogenous bankruptcy reason. Journal of Banking & Finance, 29(6), 1509–1534.

    Article  Google Scholar 

  • Ullah, B. (2020). Financial constraints, corruption, and SME growth in transition economies. The Quarterly Review of Economics and Finance, 75, 120–132.

    Article  Google Scholar 

  • Van Vu, H., Tran, T. Q., Van Nguyen, T., & Lim, S. (2018). Corruption, types of corruption and firm financial performance: New evidence from a transitional economy. Journal of Business Ethics, 148(4), 847–858.

    Article  Google Scholar 

  • Whitaker, R. B. (1999). The early stages of financial distress. Journal of Economics and Finance, 23(2), 123–133.

    Article  Google Scholar 

  • Winship, C., & Western, B. (2016). Multicollinearity and model misspecification. Sociological Science, 3(27), 627–649.

    Article  Google Scholar 

  • Zhang, J., Quan, S., & Jiang, J. (2019). Corruption and private firms’ survival in transition economies: Evidence from China. China Economic Review, 57, 101339.

    Article  Google Scholar 

Download references

Acknowledgements

The author acknowledges support from the Bourgogne-Franche-Comté Regional Council, Caisse d’Épargne de Bourgogne Franche-Comté and Banque Populaire Bourgogne Franche-Comté. This study benefited from insightful comments by three anonymous reviewers and the participants in the World Finance Conference 2020

Author information

Authors and Affiliations

  1. CEREN EA 7477, Burgundy School of Business, Université Bourgogne Franche-Comté, Department of Accounting, Finance & Law, Dijon, France

    Nicolae Stef

Authors
  1. Nicolae Stef
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Nicolae Stef.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Stef, N. Institutions and corporate financial distress in Central and Eastern Europe. Eur J Law Econ 52, 57–87 (2021). https://doi.org/10.1007/s10657-021-09702-9

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-021-09702-9

Keywords

JEL Classification

Search

Navigation