Corporate Governance and Stock Market Performance in Centraland Eastern Europe: A Study of nine countries, 1994-2001

This paper offers analysis of corporate governance issues behind the stock market performance(stock returns and activity) in nine Central and Eastern European (CEE) countries: the CzechRepublic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Overthe period June 1994 – June 2001, on average the CEE stock markets have had lower returns andhigher risk than developed markets. This is explained by the negative influence of the two crisisyears (1995 and 1998), the “flight to quality” effect. Among other reasons, there are cases whenprices have been artificially kept down by the controlling owners in order to abuse the minorityshareholders. The evidence shows that the enforcement of law matters more than the quality oflaw on the books, which is in line with previous research (Pistor et al, 2000). I find that theeffectiveness (enforcement) of financial regulations has the highest explanatory power of stockmarket returns in the sample countries. The protection of minority shareholders (Legal index) hasa significant impact on market activity, measured by market turnover to market capitalizationratio.....