Whither Corporate Russia?

Using firm-level information obtained from the Russian Trading System stock exchange from 1998 through 2006, we estimate growth performance of the Russian corporate sector. We find consistently improving growth, and note that higher growth performance is correlated with greater partial state re-acquisition and state corporate governance presence. We argue that the latter served, not only to safeguard against misappropriation of firm assets and government subsidies, but also to discourage managers from opting for shorter than optimal investment durations. Thus state corporate-governance strategy may serve as a second best policy to a more developed property rights system.


INTRODUCTION
This paper uses financial data of companies listed on the Russian Trading System stock exchange (or RTS) to estimate corporate growth performance from the beginning of 1998 through 2006. We are particularly interested in identifying possible causes for the remarkable turn-around in Russian corporate growth over most of this period, especially when contrasted with the previous decade's severe negative growth (À14.5% in 1992). 1 Table 3 (see further text) applies a standard measure of Tobin's Q to compare average corporate growth performance over three sub-periods. The measure essentially captures the ratio between a company's market value divided by the replacement cost of its assets, typically represented by the book value of assets. As we see for the period 1998-1999, Tobin's Q averaged just 0.357, in the period 2000-2002 it averaged 0.432 and in the period 2003-2006 it averaged a remarkable 0.844. Our data set incorporates the last few years of the former Yeltsin regime, which governed for most of the 1990s. For part of this era, Russian corporations suffered from severe disinvestment, leading to high negative growth rates for both the corporate sector and the wider economy. The economic decline over these years is generally attributed to the dramatically increasing proclivity of inside investors to asset strip. During this period, many former state enterprise assets were liquidated and illicitly transferred into overseas accounts (Intriligator, 1998). The degree of corporate asset-stripping behaviour is highly correlated with a descent into bureaucratic regionalization, when former state enterprise managers, often in alliance with regional officers, worked actively to undermine the ability of the central government to safeguard firm assets against misappropriation (Coffee, 1999;Fox and Heller, 2000). The failure of the privatization initiative of the Yeltsin regime, and the ensuing economic collapse is widely attributed to the regime's failure to introduce an effective property rights structure, which is widely assumed to be vital to generate increased levels of firm-level investment (Stiglitz, 2002).
The remarkable turn-around in corporate growth, which began early in the Putin regime, is largely attributed to the significant state subsidies received by many firms located in various strategic industries. Undoubtedly, greatly enhanced subsidies deriving from Russia's substantial but finite resource base played an important part in corporate revival, but it can never be the whole story. Recall, for example, that the Yeltsin regime had also carried out similar investment subsidy allocation schemes to favoured firms, but as we know, severe negative corporate growth persisted, even for those firms most favoured through generous subsidies. This policy failure is attributed to the fact that such funds were often diverted by in situ managers away from legitimate investment projects (Rock and Solodkov, 2001).
Consequently, an important factor in the turn-around in corporate growth must also lie somewhere else. The new regime had earlier introduced a wide range of nominally strong corporate governance reforms, such as those designed to increase transparency and disclosure (Yakovlev and Osteuropa, 2003;Lazareva et al., 2007). For example, Russian firms acquired both ownership and corporate governance qualities similar to that of a Western-style publicly traded firm, including the power to elect boards of directors, the latter acquiring a wide latitude in the determination of corporate strategy (Porshakov et al., 2006). Even if we were to accept that the above mix of policy initiatives had played an important role in guaranteeing outside investors against the most egregious asset-stripping behaviour by inside investors that was so prevalent in the earlier decade, such policies would not have been sufficient to discourage local managers and bureaucrats from adopting sub-optimal duration investment projects due to their having a propensity toward sub-optimal investment horizons. For example, primarily because of a lack of legal protection (Woodruff, 2005;Greenspan, 2008), investors lacked confidence in realizing the full fruits of their investments, particularly those deriving from longer-term lumpy investments. Moreover, the tendency towards shorter-term investments, if anything, can only be aggravated by the higher degree of firm-level state subsidies. This is particularly so when effective state monitoring of such funds is absent within an ineffective legal system.
Given the above environment, while also accounting fully for any bounty stemming from oil and natural resources, we argue that the Putin regime's early strategy reversal of its predecessor's policy for withdrawal from active firm-level investment decision-making may prove to be the most decisive factor for the enhanced corporate sector growth during this period. For example, early in the regime, the state became a substantial co-owner in just about all of the major corporations, and crucially opted to have a significant presence on corporate boards, particularly in corporations receiving substantial investment subsidies. In the first instance, the spread of an evolving new kind of state-private co-partnership system (SPCS) can be rationalized as playing a crucial role as a monitoring mechanism to secure firm-specific investment against expropriation by insecure investor insiders which, as we noted above, was an endemic practice during the 1990s (Goldman, 2003;Gregory and Schrettl, 2004;Bahry, 2005;Dininio and Orttung, 2005;Ivanenko, 2005;Tompson, 2005). Thus a strengthening of SPCS may have served as a second-best substitute for a more effective legal system by assuring expected income flows to outside investors by more effectively preventing asset substitution. As we have suggested, such a possibility is more associated with longer-term and large lump-sum initial outlays. Of course, asset-stripping behaviour by inside managers can be viewed as an extreme form of sub-optimal duration investment behaviour in general. Thus we argue that SPCS may crucially play a subtler role in preventing inside investors from sub-optimally terminating longer-term investment projects, especially those projects receiving state subsidies.
Under SPCS, firms would continue to be owned, often predominately so, by outside shareholders. Indeed, company shares would continue to be freely traded through organized exchanges. This has the advantage that corporations maintain or acquire the ability to raise capital through new shares issues, but through provisions that place central state representatives on corporate executive boards. In this way SPCS would also better ensure that inside investors adhere to all pre-conditions associated with any subsidized state loans.
As an aside, ceteris paribus, the SPCS system would not infringe on the ability of Russian corporations to determine their optimum output level according to relatively free-market-determined prices. Although any statedirected investment allocation system can be expected to seriously distort the output mix of the overall economy away from its optimum, mitigating this possibility is the fact that such an investment strategy should be less distortionary the more certain relative corporate-sector technologies can be known. In the case of Russia, this is more likely as it should be able to successfully imitate its neighbours, having more advanced market economies. Consequently, when the above is combined with knowledge of firmlevel market determined opportunities, the state should theoretically be able to estimate the optimal level and duration of each corporation's investment projects, and thereby also an estimate of each firm's optimal subsidy amount. Thus, though the modern Russian state differs fundamentally from its tsarist ancestor, its investment strategy can be defined as Gerschenkron-esque.
The remainder of this paper is structured as follows. The next section examines the adverse effects of the privatization initiative, which in large part is traditionally attributed to a poorly developed property rights system. It also provides a description of SPCS, outlining the rationale for the evolving substitute monitoring mechanism. The subsequent section provides data description and summary statistics, while the latter section interprets empirical results. The final section offers conclusions and ideas for further research.

A FALTERING STEP TOWARD PRIVATIZATION AND THE SUBSEQUENT INTRODUCTION OF SPCS
The Putin regime's motivation for introducing the SPCS may be better understood by first providing a short summary of the previous regime's policy reforms that are widely held to be the cause of Russia's dramatic economic contraction. Russia experienced a catastrophic decline of industrial output from the early 1990s, which lasted up to the turn of the new millennium. Specifically, the negative economic shock is largely attributed to the Yeltsin regime's badly executed strategy, aiming to free the nation's industrial enterprises from its traditional state-centred planning system to one allowing a much freer market-price allocation. This included allowing each commercial enterprise to set its own investment strategy. An important aspect of the regime's economic reforms was to rapidly transfer state enterprise ownership into private hands. Thus, by 1996 approximately 77.2% of large and medium size firms were acquired by private owners, and this figure corresponds to 88.3% of Russia's industrial output at this time (Debardeleben, 1999).
From the perspective of this paper, during this period the distributional effects caused by the rapid privatization programme are of greater interest. For example, despite well-intentioned early schemes to allocate share ownership across a broad spectrum of the Russian public, ownership of large firms located in major Russian industries passed into the hands of a small elite oligarchy. 2 As is well known, the decade of the 1990s is aptly described as an era plagued by insider dealings, theft and extensive hidden money flows (Hoffman, 2002). Company managers are widely believed to have bribed politicians  in order to seize sizable ownership stakes in many of the recently privatized firms at substantially subsidized prices. For instance, strategically placed investors acquired substantial ownership shares of major industrial enterprises through a state 'loans for shares scheme' launched in 1995. Under this scheme, banks and similar institutions advanced loans to the government for which shares of many of the nation's leading state enterprises acted as security. When the government inevitably defaulted on its bank obligations predominately due to the collapsing economy, the collateralized equity of the state-owned enterprises had to be sold. Typically state-enterprise equities were sold through auctions, which were held under fairly restrictive conditions, permitting the participation of only the most politically connected bidders, with the consequence that such shares were traded at artificially low prices (Dyck, 2002;Puffer and McCarthy, 2003). It is also of interest to note that at this time, the nation's large private banks were typically controlled by the friends of prominent elements of the regime (Thomson, 2002;Spicer and Pyle, 2003).
The new owner-managers, who later became known as oligarchs, despite having great initial success in gaining de facto ownership of a large fraction of the former state enterprises, (Braguinsky and Yavlinsky, 2000;Shleifer and Treisman, 2005), lacked security of title because their ownership claims carried little legal or moral validity (Clarke and Kabalina, 1995;Nellis, 1999;Stiglitz, 2002;Hoff and Stiglitz, 2004). 3 Consequently, as many authors have 2 When vouchers worth 10,000 roubles were allocated to citizens in order for them to acquire shares in formerly state-owned enterprises, they ended up trading at 60% discount not only because of economic hardship, but also because ordinary investors became dubious of receiving any substantial amount of income from voucher ownership (Broadman, 1999). 3 Intriligator (1994) suggests that this is perhaps not least because of the illegality in the way the oligarchs had acquired the enterprises.
described, the class of rising oligarchs soon began to asset-strip their respective firm's resources (Rapaczynski, 1996;Alexeev, 1999;Black et al., 2000;Sonin, 2000;Kuznetsov and Muravyev, 2001;Brown et al., 2006). Wholesale managerial misappropriation of firms' assets was also facilitated by the collusion of corrupt elements of the regime, particularly with the connivance of regional state officials, the latter had become more powerful during the period (Robinson, 2002;Guriev and Rachinsky, 2005). Several authors (eg Stiglitz, 2002) point out that the severe asset-stripping behaviour by the rising oligarchs was a predictable consequence of an inadequate property rights system; but their propensity to asset-strip became even more widespread soon after capital controls were eased, making it easier for them to export liquid assets, through a complicit domestic private banking system serving as an intermediary (Wintrobe, 1998;Ross, 2004).
As evidenced by rapid GDP growth and increased domestic and foreign investment, Russia returned to economic growth at the beginning of 2000. This revival is largely attributed to a rise in world oil prices (Tabata, 2006), but increased state intervention in corporate investment strategy of selected firms may also be an important factor (Nikonov, 2005;Melkumov, 2009). Anderson (2008) estimates that by the mid-decade of the new millennium half of all industrial output had passed into the hands of the state. By 2006 this corresponded to 150 billion USD in revenue. In terms of total market capitalization, Grozovskii (2007) estimates that the government increased its overall ownership stake in corporate equity from 20% in 2003 to 35% in 2007. Typically, the government took an effective ownership stake of about 50%, but it was also common for it to be satisfied with a 25% ownership stake, an amount typically sufficient for it to achieve an effective blocking strategy over corporate investment decisions when required (Durand, 2006).
The above statistics indicate that though the new regime had eschewed outright re-nationalization, it nevertheless acquired a sizable stake in many of the nation's dominant enterprises, particularly those located in strategic industries, including the all important energy sector.
Correspondingly, with its increase in corporate ownership, the state also re-claimed its traditional role in influencing the investment strategies of leading corporations (Nikonov, 2005;Tompson, 2008). The extent of government influence on corporate boards is open to debate. For example, in his study of the Russian banking industry, Vernikov (2010) argues that he finds little evidence that government delegates on bank boards actually dictate specific firm strategy, and believes that there exists a high degree of democratic decision-making on key investment decisions. Nevertheless, Vernikov's view is difficult to reconcile with the case of Sberbank, which is the largest majority state-owned bank in Russia, but where in 2003 there were 11 government representatives on a 17-member board (Judge and Naoumova, 2004).
In the first instance, we should expect that government decision-making influence over firm-investment to roughly correspond with its ownership share. Indeed, Russian corporations typically operate a 'one share one vote' system (Butler and Gashi-Butler, 2000). But government influence on corporate governing boards should be greater than this as the government in many instances often invokes a 'golden share' rule, which empowers it to exercise influence over many firms in excess of its cash flow rights, including veto power over strategic decisions (Buck, 2003;Chernykh, 2008). In addition, the state can also reserve the right to assign state representatives to key corporate positions, a provision that often enables it to select its preferred corporate executives, including the selection of independent boards of directors (McCarthy and Puffer, 2002;Radygin, 2004;Puffer and McCarthy, 2007;Tompson, 2008;Anderson, 2008).
The government is also able to influence a firm's choice of investment projects through its subsidized corporate programme. As the size of the loan-fund programme relies ultimately on energy sector rents, the state's re-acquisition of national resources during this period, concomitant with its high level of control over its oil and gas assets through the sale of exploration licences to both domestic and foreign energy firms, is understandable (Durand, 2006;Rutland, 2006;Barnes, 2007). However, successful foreign energy companies are required to form partnerships with quasi-state companies. Russia's partnership policy is similar to that of many other developing economies, but it is generally believed that such arrangements are sufficient to assure foreign companies a risk-adjusted competitive return (Reynolds and Kolodziej, 2007). The strategy can be rationalized on the basis that it acts to eventually broaden the technological know-how within the domestic industry. In this way competition among bidding firms will eventually increase. Consequently, energy-sector rents are more likely to accrue to the state rather than to energy companies.
During the period, the channelling of energy-sector rents into investment projects located in other industrial sectors were usually in the form of direct funds, but often were in the form of subsidized-interest-rate loans or loans carrying credit guarantees (Rabushka and Bernstam, 2006;Vedev, 2008). 4 Between 2000 and 2006, subsidized investment funds that were shepherded through the banking sector increased by more than 10 times, and there was also a major expansion in long-term credit instruments (Sutela, 2005). 4 Also see Semi Organisation Report on Russian Spending Continues, April 2009. In this paper, thus far our discussion has been limited to simply describing the SPCS as it evolved under the early Putin regime. However, from this period through to the present, Russia is often described as a simple rentier economy (Wagstyl, 2011). Indeed, Citigroup strategist Kingsmill Bond has even attempted to quantify energy-sector rent distribution flows to the various stakeholders, including oligarchs. Nevertheless, we argue that the simple rentier view does not fully describe many of the important elements of the system outlined above. In contrast, we argue that a better explanation is that the system is better explained as one that has evolved to provide more effective state monitoring system which, in the first instance, acts to safeguard against the previous practice of widespread asset-stripping. Secondly, and more subtly, the system also serves to discourage insider investors from adopting investments with shorter than optimal investment duration. Nevertheless, from a simple rentier perspective, perhaps one response to this argument is that the whole SPCS acts to ensure that maximum rents accrue only to top-state aparaticks? Yet, this view is also unsatisfactory as it fails to explain why energy-sector rents are redistributed to other industrial sectors in the first place rather than directly deposited into central state coffers. More significantly, a simple rentier economy would be even less credible if under SPCS subsidized investment funds were to generate higher corporate growth. This is the focus of our empirical section below.
Above we have hypothesised that SPCS may act as a substitute for a legal system capable of protecting investor property rights. Yet, at least since 2004, the Russian corporate legal code has steadily developed properties under which investors are guaranteed better contract and other property rights protection (Lavelle, 2004;Tompson, 2004). This legal development, at first glance, must cause us to query a continued need for a substitute state monitoring device. This apparent anomaly, however, can be explained by noting that any legal code, in order to become effective, must be at least respected by members of the lower and regional elements of the state apparatus. Thompson and Hickson refer to such a bureaucracy having such an ethic as being 'civilly reverent' (Thompson and Hickson, 2001, p. 128). Hence, rather than a consequence of an imperfect legal code issue per se, the state's direct representation on corporate boards may be more to discourage potential hold-ups stemming from the predations of regional bureaucrats, the latter's behaviour in turn aggravating similar rent-seeking behaviour by oligarchs.
Putin lower tolerance towards regional officials is well known, as is his enmity towards any oligarch attempting to amass too much independent economic and political power (Tompson, 2004). For example, on the back of his popular presidential mandate, Putin led the fight to eliminate direct elections of regional officials. His regime also enhanced the power of the executive at the expense of the legislature. We argue that the regime's immediate lurch towards greater autocratic practices can be better understood once we recognise the threat to the regime's corporate strategy posed by any potential coalition of oligarchs operating within an environment dominated by rent-seeking bureaucrats.
The re-emergence of a more authoritarian state executive outlined above sheds light on the regime's general economic relationship with existing oligarchs. Tompson (2004) describes the oligarchs as having little bargaining power with the state because they often rely on state patronage through state licensing and substantial subsidized investment funding. Tompson's view raises a real prospect that the state may become more predatory sometime in the future, creating what economists call a time inconsistency problem. The latter, incidentally, providing a further rationale for state monitoring of corporate investment strategies. Nevertheless, state expropriation of investors is only possible once and the more unlikely the more the regime perceives itself as secure. Consequently, it would be counterproductive to any long-term investment strategy. In trying to assuage such fears, the state often reiterates that its long-term goal is to sponsor economic development with private investment funds and to create 'a climate of confidence between the authorities and businesses' (Nikonov, 2005, p. 80). Perhaps the credibility of such statements can be better assessed over a longer time period.
This view is compatible with the argument noted above that Russia's ruling elites have long ago eschewed a policy of widespread nationalization of industry in favour of corporate co-partnership with private investors. In other words, they believe that such a strategy will be the best choice to enhance not only their welfare, but also the welfare of the general Russian population.
In the general context of a developing economy, we acknowledged above that a state-private investor corporate partnership system, in contrast to an effective legal system respectful of property rights, may be less able to protect against politically expedient private-investor expropriation by the state. For example, other authors cite numerous examples where political elites use their power to pursue non-optimal objectives, such as excess employment (Shleifer and Vishny, 1994;Dewenter and Malatesta, 2001), or the over-production of luxury goods. Often such choices are made at the cost of longer-term investments (Anastassopoulus, 1981). Alternatively, Boardman et al. (1986) argue that a state-private co-partnership may be a more efficient way to combine profitability with social welfare objectives.
In a similar vein, Eckel and Vining (1985) argue that a trade-off between social goals may be better achieved through a state enterprise system, but argue that this may come at the expense of lower production output levels that would otherwise result when private firms can freely operate within a free-market environment. But one questions whether Eckel and Vining in their efficiency calculations are ignoring the social cost of rent-seeking behaviour when there is an absence of a well-functioning legal system.
From another angle, many development economists argue that wholly or partially state-owned enterprises, operating in competitive market environments, are better at investing in high start-up-cost projects than privately owned firms (Brandao and Castro, 2007). Significantly, Doh et al. (2004) and Vaaler and Schrage (2009) find that partially state-owned firms enhance corporate growth in economies that lack sophisticated capital markets, as well as having ineffective legal systems. In this paper, we also argue that SPCS played an important role in improving corporate growth performance in Russia from 1998 to 2006.

Methodology and description of variables
The aim of this research is to measure any effect on corporate growth attributable to the introduction of SPCS by the early Putin regime. We look at firm performance as well as possible growth prospects. Our regression takes the following form, where X1 denotes ownership type, while X2 represent a number of control variables: Our analysis employs a random effects panel regression on the RTS's stock exchange annual firm-level data, obtained from company financial statements available on SKRIN database for the period 1998-2006. 5 RTS was formed in 1995 as the first regulated stock market in Russia, and serves as the main benchmark for the Russian securities industry. It is based on the 50 most liquid and capitalized shares and represents the largest over-the-counter market (Hare and Muravyev, 2003). Thus our firm sample captures trading activities of Russia's most desirable enterprises from the investors' point of 5 All financial data were recorded at the end of the trading year. A Hausman test was used to determine if a fixed or a random effects model was suitable. The test showed that the null hypothesis of both estimation methods yielding similar coefficients was not rejected; hence, the random effects model was used as it produced more efficient estimators.
view. We note that between 1998 and 2006 the number of companies listed on RTS in our sample grew by approximately 70%, and in 2006 RTS Index captured 85% of total market capitalization, which corresponds to total market capitalization to GDP ratio of approximately 90%. 6 The sample consists of firms located in all of the important sectors, including energy, metallurgy and mining, manufacturing, communications, banking and services, food and retail, transport and utility. The sample is nonetheless necessarily skewed towards the natural resources, utility and manufacturing sectors (see Table 1). RTS contains a substantial number of wholly privatised, as well as partially privatised corporations. It is believed that the structure of corporations is likely to be similar to those not listed on the exchange (with the exception of wholly state-owned firms), as Russia had privatised the majority of its firms during the restructuring era. However, it can be intuitively suggested that firms not listed on RTS are smaller and have fewer investment opportunities. SKRIN database was established by shareholders of National Association of Securities Market Participants in 1999 and provides information on Russian firms by offering Russia's joint-stock companies' annual and quarterly reports. Key balance sheet figures were provided by Russian SKRIN database, ownership data, and other firm-specific information, for example, each company's age was also provided by SKRIN; while financial market capitalisation figures and share prices were provided by RTS. Both SKRIN and RTS prove to be dependable Russian sources; however, if outliers were suspected to be caused by incorrect information, alternative sources such as companies' websites and news reports were used. The data set was originally comprised of 329 companies, which was the full sample of firms listed on the RTS stock exchange. However, due to the absence of important information, the final sample was reduced to 253, resulting in 1,737 observations. 7 The remaining 76 firms (which are not included in our analysis) represent, in most cases, banking subsidiaries of listed firms, dealing with the financial position of a company and its investment opportunities. There is also a number of small companies for which there is inadequate financial information and which do not have freely traded shares. For example, a finance department of a regional administration office (we find several administration offices) can outline investment perspectives in a given region, but investors can only negotiate with a regional office.
The dependent variable in this study is Tobin's Q, which is a measure of a company's corporate growth performance. We specifically chose Tobin's Q over a return variable due to a potential problem associated with the latter measure, which reflects short-term opportunism instead of long-term performance. Tobin's Q can be calculated by dividing the market value of outstanding stock and debt by replacement value of production capacity. However, in this paper, we proxy Tobin's Q as the sum of book value of debt and market value of equity, divided by total assets (Chen et al., 2005;Fama and French, 2005;Aggarwal and Samwick, 2006).
The key explanatory variable of interest is the effect on company growth performance after the introduction of the new SPCS. This system is meant to capture the effect of the state's co-ownership, given its representation on a specific company's executive board. The effect is captured by the SPCS variable, which is given a value of 1 if the firm has adopted the new stateprivate co-partnership status and 0 otherwise. Key shareholders are identified from company annual or quarterly reports (we have also acknowledged a number of firms in which the central state held shares indirectly). Although company reports disclose all shareholders who own 5 or more percent of capital, and we classify an owner who holds more than 5% of company's stock as a 'major shareholder', we find that Russian corporate ownership exhibits a high concentration level, with the average fraction of capital held by the principal shareholder being approximately 50%.
We also use several dummy variables to take account of the effect of other types of largest shareholder. For example, to capture the difference between traditional state ownership and SPCS, we include a dummy variable for traditional state ownership. The traditional state ownership dummy 7 Because of the missing observations for both at least one time period and at least one entity, we have an unbalanced data set. simply recognizes government control over a firm over the period, reflecting the case where the state is the continuous, single largest owner. In contrast, under the co-ownership system, the government and a private investor are both principal owners. Similarly, using the equivalent method, we include a dummy variable to capture any influence on firm growth performance due to a large ownership share on the part of a regional and foreign investor.
As traditional state-owned enterprises often target social objectives as well as conforming political agendas instead of maximizing investment returns, it is unlikely that this type of ownership has a positive effect on firm Tobin's Q, and it is possible to even pick up a negative impact on firm growth performance. Regional state ownership is not expected to have a positive effect on firm Tobin's Q either, as lower level bureaucrats, as we have argued above, may tend to exercise any executive power to usurp control of assets and possibly engage in wealth tunnelling. Finally, while we should expect foreign ownership to be highly correlated with superior standards of corporate governance, the lack of well-defined property rights may prevent foreign owners from fully utilizing a superior corporate governance code. This may encourage them to opt for shorter-term, rather than longer-term profits.
We also include a number of control variables to capture other firm characteristics which can influence firm performance. For example, as firm growth is affected by its size, we include the proxy of natural log of total assets (Salancik and Pfeffer, 1980;Berger and Ofek, 1995;Faccio et al., 2001). Similarly, as the level of firm debt is generally recognised as also affecting growth, we include a commonly accepted proxy for leverage in the form of the ratio of book long-term and short-term debt to total assets (Rajan and Zingales, 1995;Lang et al., 1996;Boubakri and Cosset, 1998). As we are more interested in long-term growth than in short-term performance, we do not include short-term debt in our leverage proxy. This measure has the advantage that it more accurately picks-up the effect on firm growth due to subsidized long-term loans from the state to favoured firms. These loans represent natural resource rents, which are being actively channelled to many industries (Vdovichenko and Voronina, 2006;Hanson, 2007).
Finally, we include a few other measures commonly applied in firmgrowth studies. First, as the level of firm profitability is known to affect the sales firm growth, we include the net profit before interest and taxes, divided by the sales variable. This follows the method employed by Machin and Van Reenen (1993), Schranz (1993) and Loughran and Ritter (1997). Second, as the age of a firm can affect its growth performance, we include a longevity dummy variable, which takes on the value of 1 if the firm has operated for at least 10 years prior to the initiation of the economic restructuring policy, and 0 otherwise. Finally, to measure the potential effect on firm growth of ownership concentration, we include a proxy for the percentage of capital owned by the largest shareholder variable. Table 2 offers a summary description of variables used in our regression analysis. Table 3 reports the number of firms trading on the RTS included in our sample over the period beginning in 1998 through 2006. For comparative purposes, the data set is sub-divided into three periods of interest. In each period, the size of the sample is noted, and for each of the relevant variables of interest to our study, the sample mean, standard deviation, the maximum and minimum values and skewness are reported.

Summary statistics
Panel A covers the years 1998 and 1999, corresponding to the end period of the Yeltsin regime, and which also coincides with the mature effects of its privatization strategy. The subsequent period's comparative statistics,  Tobin's Q (V t +LTD t +STD t )/A t . The market value of equity plus book value of debt, divided by total assets (Fama and French, 2005;Chen et al., 2005;Aggarwal and Samwick, 2006). Size LnA t . The natural log of total assets. Long-term debt LTD t /A t . The ratio of book value of long-term debt to total assets. Profitability E t /Sales t . The ratio of earnings before interest and taxes to sales (Machin and Van Reenen, 1993;Schranz, 1993;Loughran and Ritter, 1997 Panel A clearly exhibits statistics consistent with the overall poor economic performance of Yeltsin's 'laissez faire' policy. Unsurprisingly, during this period, the overall number of listed firms is low and the average Tobin's Q value is particularly low. It also picks up the August 1998 financial crisis, which had an adverse effect on firm growth and profitability. Panel B indicates noticeable improved corporate performance -Tobin's Q grew steadily and there was notably increased profitability. Finally, Panel C indicates a dramatic improvement in the Tobin's Q for a list of firms, signalling superior company performance as well as corporate growth. Interestingly, we can also note a sharply increasing standard deviation of Tobin's Q variable over the given period, which signals a wide variation in firm corporate growth performance. This may indicate that investors' confidence in certain business sectors has increased dramatically when compared to other sectors. More importantly, we see that positive skewness has also been increasing rapidly, demonstrating that more and more firms are exhibiting superior growth performance over the period. Significantly, the proportion of long-term debt in firm capital structure also increased over time (the mean almost doubling from 0.033 in the first period to 0.064 in the last period). This is consistent with the regime's policy of providing subsidized bank loans to finance targeted investment projects and firms actively employing such long-term loans in their capital structure. The size ratio gradually declined over the 1998-2006 time period. This, however, can be explained by steady firm formation, where companies, which were not characterized as having large fixed assets, entered the market (for example, service firms). Firm profitability mean also increased from 0.080 in the initial period to 0.096 in the final period. Firms located in other sectors also generally benefited from energy-sector rent redistribution, but also the summary data indicate that the new SPCS effectively prevented managers and local bureaucrats from siphoning off firm earnings, allowing higher growth and increased profitability. Finally, the level of ownership concentration in Russia remained high throughout the given period.
Lastly, Table 4 reports the number of firms having different category types of largest shareholders present across Russia's corporate sector between 1998 and 2006.
In Table 4, 'traditional state' ownership corresponds to a number of companies in which the state held a majority stake throughout the given period. 8 Significant presence of state shareholder is attributed to a large number of electricity companies in the firm sample, which are the subsidiaries of the United Energy Systems of Russia (in which the state is the largest investor), trading on the RTS. The increasing number of such companies is consistent with the restructuring of RAO Unified Energy Systems in 2005 and 2006. Financial institutions and other corporations are primarily the private investors in the new SPCS type firms. The central state usually participates through direct or indirect holdings. For instance, from 2002 onwards, the government owned shares in many enterprises through financial institutions, for which it had partial control. It is evident from the table that since the advent of the Putin regime, the number of firms characterized by the stateprivate co-partnership mechanism increased dramatically. The 'non-state ownership' status describes firms without central state presence in their ownership structure. We identify four types of private owners -domestic corporation or financial institution, foreign corporation or financial institution, individuals and regional state. It is important to note that approximately 80% of corporate ownership structure is represented by two or more large investors (eg the firm is owned by a foreign corporation and a domestic financial institution). We also note a decline in regional government investor type in the latter period. This is consistent with renewed efforts by the central state to reduce the level of corporate control of regional officials.

EMPIRICAL RESULTS
The effect of SPCS on firm Tobin's Q Table 5 presents results from the regression analysis. 9 From our findings in column 1 we note that the variable denoting the presence of SPCS has a relatively large positive effect on firm Tobin's Q (the coefficient has a value of 0.179, which is statistically significant at 5% level). This is consistent with our hypothesis that SPCS had a favourable impact on firm growth performance in accordance with the positive response that the system received from outside investors. Our result is also consistent with the findings of Chernykh (2004), who argues that private-state cooperation had improved company performance, which the author also attributes to an enhanced monitoring mechanism. Other forms of ownership, such as traditional state ownership, regional state ownership and foreign ownership, have no apparent effects on firms' Tobin's Q. We find that the traditional state ownership variable coefficient is negative but small in magnitude and statistically insignificant. As we said above, the negative sign can be rationalized by the fact that state-owned firms may often pursue noneconomic objectives, and perhaps also by the fact that traditional state ownership dummy variable picks up the poor growth performance of state-owned firms during the period of economic stagnation. We find that the regional state ownership variable has a positive coefficient in regressions, but 9 We include year dummies and industry dummies (industry dummies were constructed based on our industry categories in Table 1) in all of our regressions in order to account for any macroeconomic and industry-specific effects. the variable is insignificant. This is consistent with our predictions that regional government ownership is not likely to have a favourable impact on corporate growth performance.
Contrary to other studies, as expected, we find that foreign ownership has no significant effect on firm performance. This finding contrasts with that of Yudaeva et al. (2003) who found foreign firms to be more efficient than their domestic counterparts during Russia's privatization process. Similarly Carlin et al. (1995) find that, during the early transition period, firms in Russia, Czech Republic, Hungary and Bulgaria benefited from major foreignrun investment programmes and Smith et al. (1997) had similar results for Slovenia. But as we suggested above, domestic and foreign entities may also have to adapt when operating in insecure property rights environments. We find that a firm's long-term debt is positively associated with its Tobin's Q. The magnitude of the long-term debt variable coefficient is relatively large (0.503), and the variable is significant at the 5% level. As mentioned above, from the advent of the Putin regime, financial institutions serve as conduits for subsidized loans. Consequently, we should expect a positive effect on firm-growth performance associated with higher levels of long-term bank loans. It is also worthy to note that state subsidies may occasionally take the form of direct funds, and consequently one may argue that SPCS type firms gain a competitive advantage, as such firms are the likely recipients of such funds.
Traditional state-owned companies do not have access to private capital and thus receive substantial direct state subsidies perhaps to an even greater extent than SPCS type corporations. Consequently, as expected, our results fail to find any link between traditional state ownership and improved firm growth performance. 10 Therefore, while subsidized loans play an important role in generating corporate growth, the effect of the new SPCS must still be acknowledged.
Our results find that firm size, as measured by the natural log of total assets, does not affect firm growth performance. This finding is consistent with the hypothesis that larger fixed assets, which account for a larger proportion of assets in our size measure, while generating higher future cash flows, are also subject to higher potential hold-up costs.
We find that profitability has a positive effect on Tobin's Q. This is consistent with the findings of many studies documenting a favourable market reaction to positive earnings announcements. For instance, Barberis et al. (1998) and Daniel et al. (1998) show that investors tend to over-react to a series of good news, even if only in the short-term period. The positive effect of earnings on growth is found to be more widespread in countries with a well-defined legal system, which is characterized by superior insider trading regulations and strong shareholder protection (DeFond et al., 2007). Bhattacharya et al. (2000) believe that unrestricted insider trading can lead to all information being absorbed into stock prices prior to the actual announcement, hence no positive effect of earnings on growth. But in the Russian case, our positive finding may be attributable to the fact that the 10 Following the argument that improved firm growth performance is all attributable to substantial subsidies provided by the state under SPCS, and as long-term debt variable 'increases' Tobin's Q variable, the effect of SPCS on Tobin's Q is overstated, we re-run our regression excluding the long-term debt component from our Tobin's Q measure. We find that while the magnitude and significance of SPCS variable has diminished slightly (the variable has a coefficient of 0.127, which is statistically significant at 10 percent level), the co-partnership effect is still noteworthy, and SPCS is the only form of ownership that remains significant. capital market became freer from insider dealing due to SPCS style monitoring.
Our results also indicate that the degree of ownership concentration has a significant but slightly positive effect on firm Tobin's Q. The finding is consistent with the view that ownership concentration may also act to discourage wealth tunnelling and to encourage longer-term investment projects. For example, Xu and Wang (1999) find a strong positive correlation between ownership concentration and profitability in China, and Joh (2003), using a large data set of 5,829 Korean firms during the 1993-1997 period, finds that low ownership concentration tends to lead to low profitability.
Our results show that Tobin's Q measure of performance is adversely affected by firm longevity. The longevity parameter estimate is both large (À0.501) and significant. This may at first appear an unsurprising finding given that 'old' firms generally tend to exhaust any growth opportunity (Evans, 1987a, b;Variyam and Kraybill, 1992). However, as many 'old' Russian enterprises (for instance, utility) received substantial investment funds over the sample period, the negative effect is nonetheless surprising. But it can be rationalized by the fact that the longer-lived firm dummy variable in the sample was adversity impacted by the early disastrous privatization process and August 1998 crisis.
In column 2 we incorporate the natural log of oil prices to measure the direct effect of increased energy prices on Tobin's Q for the whole corporate sector portfolio over the sample period. Unsurprisingly, oil prices had a significant impact. The variable coefficient has a value of 1.400 and is statistically significant at the 5% level. Significantly, we find that oil prices do not explain the whole improved Tobin's Q statistic, and the oil price effect inclusion did not affect the magnitude and significance of the SPCS variable. Finally, in columns 3 and 4, we re-group our ownership dummy variables in order to create another three distinct ownership categories. We include a dummy variable for traditional state ownership and SPCS, as well as private ownership, the latter consisting of firms which have private domestic or foreign owners (our data set also contains a regional state ownership dummy variable, which does not enter our equation). We introduce a private ownership dummy variable in order to directly compare the impact of government, state-private, and wholly private ownership on firm growth performance. Our results show the SPCS variable again is the only significant form of ownership, having a coefficient of 0.173 that is statistically significant at 5% level. In comparison both the traditional state ownership variable and the private ownership variable exhibit negative coefficients that are also insignificant.

Robustness checks
Although we have determined that a random effects model is most suitable, we also re-run our regression using a fixed effects model, in order to control for possible selection of firms which may become a target of SPCS. Our findings are reported in Table 6, columns 1 and 2. The results show that co-partnership still has a notable effect on firm growth performance. The SPCS variable coefficient has an average value of 0.156 and is statistically significant at 5% level. 11 So far we have obtained consistent results that SPCS is the only form of ownership that has a positive effect on company Tobin's Q. We next address a possible problem of endogeneity due to the possibility that the state may have simply cherry-picked firms for co-ownership because of their high growth. We test this possibility by first establishing whether companies, which were partially re-acquired by the state (or adopted SPCS) in period t, exhibited high Tobin's Q prior to acquisition in period tÀ1. Table 7 shows the number of companies partially re-acquired by the state across nine major economic sectors. First, we note that the state did not primarily target energy sector firms (consistent with Tompson, 2008), which are undoubtedly characterized by the highest growth potential given continually increasing energy prices during the period. It can be seen from the table that the state also re-acquired a significant number of utility and manufacturing firms. More importantly, when we compare firms' Tobin's Q in the period of acquisition with their Tobin's Q in the period preceding it, we find that in most cases the Tobin's Q of companies was substantially lower before SPCS was introduced. These findings signal that the state did not merely pursue a self-enrichment agenda by acquiring most profitable firms.
Significantly, in order to determine whether the adoption of the stateprivate co-ownership mechanism in tÀ1 period leads to higher Tobin's Q in the following period, we repeat the regression analysis, substituting the SPCS variable with its lagged term, which now serves as an instrumental variable. 12 Thus we employ a Two-Stage Least Squares (2SLS-IV) instrumental variable approach to address the problem of endogeneity. This procedure follows Aschauer's (1989) method of estimating causation between public capital and productivity. 13 Column 3, Table 6 shows that the coefficient of this variable 11 It can also be seen that the size variable became negative and significant, while firm longevity and ownership concentration no longer affect Tobin's Q. 12 In this regression analysis we are only interested in the effect of SPCS adoption in period t-1 on firm growth performance in period t, therefore we do not include other ownership variables in the regression. 13 Fearon and Laitin (2003) also address the endogeneity problem by employing a lagged value of per capita GDP as explanatory variable when establishing a relationship between civil war and GDP. has increased dramatically to 0.258, which is statistically significant at 10% level. The test gives further robustness to the hypothesis that firms tend to exhibit higher Tobin's Q by adopting the SPCS, rather than simply targeting high-value companies for state re-acquisition.  As both long-term debt and total assets variables can be found on both sides of the equation (Tobin's Q is defined as the sum of book value of debt and market value equity, divided by total assets), for a further robustness check we run an additional regression without these control variables. The produced findings in column 4, Table 6 show that there are no significant changes in the remaining variables, and more importantly, the new SPCS still has a positive and statistically significant impact on Tobin's Q.
As a further robustness check, in Table 8 we replace the Tobin's Q estimator with the second, and then a third proxy. The second proxy (TQ1) is the market value of all shares plus book value of long-term debt and the difference between current liabilities and current assets, divided by the total value of firm's assets (Chung and Pruitt, 1994). The third proxy (TQ2) serves is a variation of the first proxy -it is the annual change in the above variable (delta Tobin's Q). This variation seeks to capture the sensitivity of the corporate value with respect to change in independent variables. 14 For TQ2, the estimation equation is It can be seen from the table that the size variable is significant for TQ1, while the profitability variable becomes insignificant for TQ1. We also note a largely reduced R-squared and Wald chi-squared value for TQ2, where firm longevity no longer affects company growth performance. Nevertheless, under all new proxies, our analysis seems to indicate that the SPCS has a positive influence on firm Tobin's Q, which is consistent with our initial findings.

CONCLUSION AND IMPLICATIONS
We argue above that, over our sample period, the significantly improved growth performance of the Russian corporate sector is partially attributable to the adoption of the co-partnership system between the state and private investors. We argue that SPCS works to constrain the proclivity of corporate insiders and local bureaucrats from adopting a shorter than optimal investment projects. In this sense SPCS acts as a substitute for a more efficient property rights system. The state has an additional incentive to monitor firm-level investment because of its extensive system of investment subsidies.
Our findings support the hypothesis that the new SPCS has a positive impact on firm growth performance, which is consistent with the possibility that outside private investors view the state's co-ownership as both an assurance against potential wealth tunnelling by corporate insiders, but also more generally as a check against inside investors adopting a shorter than optimal investment time horizon.
Further research issues, arising from the main proposition of this paper on the efficiency of the co-partnership system, should in general concentrate on a more 'micro' level, for example, on measuring the impact on growth due 14 It can alternatively be suggested that other performance measures, such as the return on assets or return on sales can potentially serve as robustness checks. However, while these variables capture firm performance, they are not designed to capture its growth prospects, which is a fundamental aspect of this study. For example, when we re-ran our regressions substituting Tobin's Q with above proxies, we found that only the size variable was significant when the dependent variable was return on assets, and no variable was reported to be significant when the dependent variable was return on sales, while R-squared statistic was 0.012 and Wald Chi squared statistic showed that the variables do not carry any explanatory power. Therefore, we argue that Tobin's Q remains the most powerful dependent variable, as it incorporates firm growth opportunities. to the fortuitous rise and decline in energy prices. The analysis can be extended by updating the data set to include the period characterized by falling energy prices in order to test how the SPCS responded to the adverse events of falling growth rates across the different corporate sectors. Further work would also benefit from more micro corporate level data on corporate executive boards.