Corporate Governance and Investment in Central and Eastern Europe

This article has three major goals: (i) to measure the returns on investment across Central and Eastern Europe (CEE) and compare them with companies in EU-15 countries; (ii) to study under- and overinvestment in CEE focusing on cash flow-investment sensitivity; and (iii) to compare ownership structure in CEE and
EU-15 countries and measure investment performance by ownership group. We find support for the asymmetric
information and managerial discretion hypotheses as explanations of under- and overinvestment.We also test for the presence of soft budget constraints in CEE, but conclude that these have hardened by the 1999/2003 period upon which our study focuses.