Investing in Insider-Dominated Firms: A Study of Russian Voucher Privatization Funds

Roman Frydman
Katharina Pistor, Columbia Law School
Andrzej Rapaczynski, Columbia Law School


This paper is based on a survey of 148 Russian privatization investment funds representing, in terms of size, 69 percent of all investment funds created in connection with the voucher privatization of about 14,000 state enterprises. The investment funds surveyed hold shares in about 5,000 privatized enterprises, thus providing a window into the world of corporate governance of a substantial portion of Russian firms. The paper argues that investment funds, like most other outside investors, have relatively small impact on the governance of Russian firms due to the firms' domination by corporate insiders, particularly management. Given high returns from shareholder activism, the investment funds attempt to influence the firms in their portfolios in a variety of ways (through obtaining board seats and providing them with a range of services), but have extremely poor access to information and are largely unable to prod the firms toward more radical restructuring. In particular, the investment funds are only rarely able to effect managerial changes, although a logistic equation model used shows that firms which do participate in more that one dismissal of top managerial personnel seem to be interested in fundamental restructuring. The paper also describes the main features of the emerging Russian capital market and analyzes the determinants of the trading activity of the investment funds.