Figure 1.
Comparison of legal acts relating to company statutory bodies
| Poland | Lithuania | Latvia | Estonia | |
|---|---|---|---|---|
| Name of the legal act | Act of September 15, 2000, Code of Commercial Companies (JL of 2020, Item 1526) | Act of July 13, 2000, Law on Companies, No. VIII-1835 (entry into force: 01.07.2015) | Act of June 1, 2000, Commercial Law (entry into force: 01.08.2021) | Act of September 1, 1995, Commercial Code (entry into force: 01.07.2017) |
| Structure of legal act in relation to statutory bodies | Title: Capital companies Department: Limited liability company Chapter: Company bodies Section: Management board, Supervision Department: Simple joint-stock company Chapter: Company bodies Section: Management board, Supervisory board, Board of directors Department: Joint-stock company Chapter: Company bodies Section: Management board, Supervision | Chapter: Management of company, Articles: e.g., Manager of the company | Division: Limited liability company Chapter: Administration of the company Section: Council, Board | Chapter: Management Paragraphs: e.g., the company’s management board |
| Number of articles relating to statutory bodies* | 168 (216) | 38 (49) | 42 (51) | 21 (45) |
| Participation of the parties in the regulations of statutory bodies with regard to the entire legal act | 13% | 7% | 7.5% | 9% |
| Name of the owners’ general meeting | General meeting of partners/shareholders | General meeting of shareholders | General meeting, general meeting of stockholders | General meeting of shareholders |
| Statutory bodies in a two-tier system | ||||
| Name of the body responsible for managing the company | Management of the company (in Poland – zarząd) | Management body/ Board of the company | Board of the company | Management board/Board of the company |
| Name of the statutory body responsible for supervising the company | Supervisory board (in Poland- rada nadzorcza) | Supervisory board | Management of a council | Supervisory board |
| Statutory bodies in a one-tier system | ||||
| Statutory bodies in a one-tier system | Board of directors | Manager of the company – as a manager in a one-tier system | x | x |
| Number of board members | Min. 1 person | No regulations | Min. 1 person | Min. 1 person |
| Number of members of the supervisory board | Min. 3 people | 3–15 people | 3–12 people | Min. 3 people |
| Number of members of the board of directors | Min. 1 person | No regulations | No regulations | x |
| Length of the term of office of the management board | No information (included in the agreement/ resolution of the company) | No information (included in the agreement/resolution of the company) | No information (included in the agreement/resolution of the company) | Indefinite period of time |
| Length of the term of office of the supervisory board | No regulations | Max. 4 years | Max. 5 years | No regulations |
| Length of the term of office of the board of directors | No regulations | No regulations | No regulations | No regulations |
| Number of words present: board | 396 | 32 | 36 | 564 |
| Number of words used: supervisory board | 210 | 123 | 169 | 352 |
| Number of words used: board of directors | 22 | x | x | x |
Baseline regression: relationship between rule of law and stock returns
| Model No. | Dependent variable: firm market performance | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Fraser Institute | Worldwide Governance Indicators | V-Dem Institute | |||||||
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | |
| Independent variables | |||||||||
| Judicial independence | -10.35*** (1.956) | -13.58*** (3.252) | |||||||
| Impartial courts | -16.57*** (4.528) | -31.61*** (9.648) | |||||||
| Rule-of-law estimate | -1.954*** (0.595) | -4.622*** (1.494) | |||||||
| Rule-of-law index | -17.49*** (3.630) | -19.17*** (5.394) | |||||||
| Market value | 2.160*** (0.589) | 2.063*** (0.589) | 2.353*** (0.601) | 2.259*** (0.579) | 2.270*** (0.600) | 1.953*** (0.590) | 2.877*** (0.647) | 2.093*** (0.582) | 2.325*** (0.601) |
| Leverage | -1.010* (0.603) | -1.094* (0.608) | -1.072* (0.603) | -1.035* (0.606) | -1.039* (0.601) | -1.062* (0.602) | -1.070* (0.647) | -1.097** (0.604)** | -1.075* (0.601) |
| Return on assets | 0.0961 (0.104) | 0.102 (0.101) | 0.0994 (0.100) | 0.0968 (0.101) | 0.0974 (0.101) | 0.101 (0.102) | 0.0824 (0.104) | 0.102 (0.101) | 0.0996 (0.100) |
| P/BV | 2.083* (1.083) | 2.123** (1.043) | 2.099** (1.050) | 2.160** (1.055) | 2.121** (1.052) | 2.098** (1.049) | 2.240** (1.122) | 2.094 (1.047) | 2.093** (1.052) |
| EPS | 0.819* (0.426) | 0.753* (0.411) | 0.753* (0.394) | 0.775* (0.415) | 0.776* (0.408) | 0.779* (0.423) | 0.782* (0.443) | 0.757* (0.408) | 0.757* (0.397) |
| Index return | 0.679*** (0.0547) | 0.678*** (0.0550) | 0.656*** (0.0537) | 0.633*** (0.0609) | 0.584*** (0.0611) | 0.658*** (0.0576) | 0.651*** (0.0545) | 0.680*** (0.0548) | 0.666*** (0.0536) |
| Unemployment | 0.502 (0.540) | 3.216*** (0.760) | 3.620*** (1.072) | 1.037** (0.514) | 1.697** (0.777) | 1.327** (0.570) | 1.040 (0.679) | 3.401*** (0.845) | 3.302*** (1.116) |
| GDP growth | -5.933*** (0.852) | -5.996*** (0.852) | -6.028*** (0.857) | -5.857*** (0.841) | -5.754*** (0.842) | -6.314** (0.905) | -5.871*** (0.887) | -5.749*** (0.832) | -5.755*** (0.841) |
| Constant | -4.619 (8.756) | 41.81*** (12.88) | 53.94*** (16.02) | 95.82*** (30.43) | 186.3*** (58.24) | 6.785 (9.778) | 17.77 (11.04) | 133.1*** (30.67) | 145.1*** (42.76) |
| Country-fixed effects | No | No | Yes | No | Yes | No | Yes | No | Yes |
| Observations | 2124 | 2124 | 2124 | 2124 | 2124 | 2124 | 2124 | 2124 | 2124 |
| Firms | 228 | 228 | 228 | 228 | 228 | 228 | 228 | 228 | 228 |
| Wald p-value | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| Overall | 0.168 | 0.178 | 0.182 | 0.173 | 0.175 | 0.171 | 0.176 | 0.177 | 0.179 |
| Between | 0.154 | 0.194 | 0.206 | 0.171 | 0.184 | 0.175 | 0.191 | 0.200 | 0.200 |
| Within | 0.175 | 0.184 | 0.186 | 0.179 | 0.179 | 0.177 | 0.180 | 0.182 | 0.183 |
Distribution of firm-year observations
| Year | Firms | |||||
|---|---|---|---|---|---|---|
| All | Poland | Estonia | Latvia | Lithuania | ||
| N | % | |||||
| 2010 | 149 | 7.19 | 127 | 10 | 0 | 12 |
| 2011 | 166 | 7.99 | 130 | 9 | 9 | 18 |
| 2012 | 175 | 8.33 | 139 | 10 | 9 | 17 |
| 2013 | 188 | 8.93 | 148 | 13 | 9 | 18 |
| 2014 | 202 | 9.52 | 162 | 12 | 9 | 19 |
| 2015 | 211 | 9.92 | 168 | 13 | 9 | 21 |
| 2016 | 208 | 9.72 | 172 | 13 | 9 | 14 |
| 2017 | 210 | 9.82 | 173 | 12 | 10 | 15 |
| 2018 | 210 | 9.82 | 170 | 13 | 10 | 17 |
| 2019 | 210 | 9.77 | 170 | 14 | 10 | 16 |
| 2020 | 195 | 8.98 | 165 | 14 | 9 | 7 |
| Firm-year observations | 2,124 | 100.00 | 1,724 | 133 | 93 | 174 |
Definitions of the variables
| Variable | Description | Source |
|---|---|---|
| Judicial independence | Presents an answer to the question to what extent is the judiciary independent from political influences of members of government, citizens, or firms? Shows higher scores for countries with greater judicial independence, on a converted scale of 1–10. | Fraser Institute |
| Impartial courts | Presents an answer to the question how efficient is the legal framework for private businesses to settle disputes and challenge the legality of government actions and/or regulations? Shows greater scores for countries where the legal framework is efficient and follows a clear, neutral process, on a scale of 1–7. | Fraser Institute |
| Rule-of-law estimate | Captures perceptions of the extent to which agents have confidence in and abide by the rules of society, in particular, the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Ranges from approximately -2.5 to +2.5, with higher scores showing “better” environments. | Worldwide Governance Indicators of the World Bank Group |
| Rule-of-law index | Presents an answer to the question to what extent is the law transparently, independently, predictably, impartially, and equally enforced, and to what extent do the actions of government officials comply with the law? Ranges from “0” to “1”, with higher scores showing higher rule-of-law quality. | V-Dem Institute |
| Market value | Natural logarithm of the market value of equity at the end of the fiscal year. | EquityRT |
| Leverage | The total liabilities to shareholders equity ratio at the end of the fiscal year. | EquityRT, Orbis |
| Return on assets | The ratio of net income to total assets at the end of the fiscal year. | EquityRT, Orbis |
| P/BV | Market value of shares divided by their book value | EquityRT |
| EPS | The ratio of net income to total shares at the end of the fiscal year. | EquityRT |
| Index return | One-year return of the main stock market index in each analyzed country, i.e., WIG Index (Poland), OMX Vilnius Index (Lithuania), OMX Riga Index (Latvia), OMX Tallinn Index (Estonia). | EquityRT |
| Unemployment | Unemployment rate refers to the share of the labor force that is without work but available for and seeking employment. | World Development Indicators World Bank Group |
| GDP growth | Real growth rate of GDP volume. The calculation of the annual growth rate of GDP volume is intended to allow comparisons of the dynamics of economic development both over time and between economies of different sizes. | Eurostat |
Descriptive statistics
| N | Min | Median | Mean | SD | Max | Skewness | |
|---|---|---|---|---|---|---|---|
| Firm market performance | 2,124 | -91.924 | -0.398 | 10.124 | 62.890 | 762.256 | 3.645 |
| Judicial independencet | 2,124 | 4.740 | 6.830 | 6.277 | 1.015 | 7.980 | -0.351 |
| Judicial independencet-1 | 2,124 | 4.740 | 6.990 | 6.458 | 0.930 | 7.980 | -0.665 |
| Impartial courtst | 2,124 | 5.790 | 6.260 | 6.371 | 0.313 | 7.340 | 1.022 |
| Impartial courtst- 1 | 2,124 | 5.790 | 6.400 | 6.397 | 0.303 | 7.340 | 0.899 |
| Rule-of-law estimatet | 2,124 | 4.205 | 7.662 | 7.080 | 2.235 | 13.822 | 0.684 |
| Rule-of-law estimatet-1 | 2,124 | 4.205 | 7.662 | 7.143 | 2.129 | 13.728 | 0.573 |
| Rule-of-law indext | 2,124 | 8.030 | 9.390 | 9.075 | 0.618 | 9.840 | -0.686 |
| Rule-of-law indext-1 | 2,124 | 8.100 | 9.460 | 9.197 | 0.545 | 9.840 | -1.067 |
| Market value | 2,124 | 6.205 | 10.846 | 10.971 | 1.986 | 16.498 | 0.288 |
| Leverage | 2,124 | 0.001 | 0.835 | 1.432 | 2.657 | 55.458 | 8.990 |
| Return on assets | 2,124 | -739.854 | 3.308 | -0.340 | 37.291 | 195.327 | -8.482 |
| EPS | 2,124 | -80.170 | 0.110 | 0.541 | 4.447 | 63.991 | 0.802 |
| P/BV | 2,124 | 0.004 | 1.012 | 1.855 | 4.088 | 73.751 | 9.508 |
| Index return | 2,124 | -35.457 | -0.364 | 4.567 | 22.900 | 60.679 | 0.514 |
| Unemployment | 2,124 | 3.160 | 7.500 | 7.330 | 3.076 | 17.810 | 0.453 |
| GDP growth | 2,124 | -3.800 | 3.700 | 3.127 | 2.168 | 7.300 | -1.266 |
Subsample regression: moderating effects of yearly change in institutional environment on the relationship between rule of law and stock returns
| Subsample | Dependent variable: Firm market performance | |||||||
|---|---|---|---|---|---|---|---|---|
| Year-on-year change | ||||||||
| Fraser Institute | Worldwide Governance Indicator | V-Dem Institute | ||||||
| Decline | Increase | Decline | Increase | Decline | Increase | Decline | Increase | |
| Model No. | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Judicial independence | -2.604 (2.204) | -13.84*** (3.032) | ||||||
| Impartial courts | -15.83*** (4.751) | -18.40*** (7.055) | ||||||
| Rule-of-law estimate | -0.230 (0.915) | -4.040*** (0.775) | ||||||
| Rule-of-law index | -18.04*** (6.227) | -76.74*** (17.04) | ||||||
| Market value | 2.443*** (0.728) | 1.627* (0.932) | 2.250*** (0.869) | 2.204*** (0.566) | 3.166*** (0.894) | 2.434** (0.978) | 1.867** (0.773) | 2.942*** (0.855) |
| Leverage | -2.355*** (0.567) | 0.106 (0.853) | -1.920** (0.921) | -0.439 (0.645) | -0.352 (0.723) | -1.165 (0.785) | -1.013 (0.742) | -0.366 (1.089) |
| Return on assets | 0.0240 (0.113) | 0.218*** (0.0722) | 0.121 (0.151) | 0.0748 (0.0591) | 0.110 (0.0854) | 0.0583 (0.124) | 0.0725 (0.108) | 0.216*** (0.0697) |
| P/BV | 3.236*** (1.132) | 1.320 (0.936) | 2.744** (1.322) | 1.156 (0.739) | 1.003 (0.851) | 2.488* (1.327) | 2.390** (1.397) | 1.799* (1.035) |
| EPS | 0.752** (0.323) | 0.786 (0.685) | 1.088*** (0.383) | 0.318 (0.414) | -0.00541 (0.229) | 1.147*** (0.371) | 0.375 (0.389) | 0.931*** (0.320) |
| Index return | 0.512*** (O.O5O3) | 1.283*** (0.181) | 0.256*** (0.0699) | 1.282*** (0.164) | 0.582*** (0.0641) | 0.839*** (0.0875) | 0.773*** (0.0695) | 0.923*** (0.0950) |
| Unemployment | -0.255 (0.812) | 4.039*** (1.113) | 0.602 (0.759) | 1.752*** (0.669) | 3.126*** (0.822) | 0.871 (0.714) | 3.518** (1.672) | 2.164** (1.062) |
| GDP growth | -6.636*** (0.991) | -3.142** (1.485) | -4.850*** (0.930) | -1.321 (2.451) | -4.113*** (1.386) | -5.803*** (1.048) | -7.144*** (0.988) | 0.0345 (1.394) |
| Constant | 13.65 (14.66) | 55.26*** (21.35) | 98.27*** (32.59) | 87.71 (54.17) | -34.82*** (11.07) | 17.63 (14.01) | 142.4*** (49.06) | 681.3*** (166.0) |
| Country-fixed effects | No | No | No | No | No | No | No | No |
| Observations | 1263 | 861 | 1137 | 987 | 853 | 1271 | 1255 | 869 |
| Firms | 227 | 226 | 224 | 227 | 221 | 228 | 225 | 219 |
| Wald p-value | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| Overall | 0.206 | 0.201 | 0.0997 | 0.291 | 0.170 | 0.182 | 0.161 | 0.249 |
| Between | 0.165 | 0.138 | 0.200 | 0.237 | 0.173 | 0.122 | 0.102 | 0.0544 |
| Within | 0.230 | 0.217 | 0.0995 | 0.290 | 0.171 | 0.207 | 0.181 | 0.293 |
Subsample regression: moderating effects of period on the relationship between rule of law and stock returns
| Dependent variable: firm market performance | ||||||||
|---|---|---|---|---|---|---|---|---|
| Subsample | Fraser Institute | Worldwide Governance Indicator | V-Dem Institute | |||||
| Before 2015 | After 2015 | Before 2015 | After 2015 | Before 2015 | After 2015 | Before 2015 | After 2015 | |
| Model No. | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Judicial independence | -29.09*** (5.583) | -2.899 (2.551) | ||||||
| Impartial courts | -7.791 (10.30) | -12.51** (5.455) | ||||||
| Rule-of-law estimate | -1.455 (lo477) | -0.413 (0.799) | ||||||
| Rule-of-law index | -70.12*** (13.60) | -8.718* (5.180) | ||||||
| Market value | 3.764*** (0.926) | 1.244 (0.869) | 3.603*** (0.870) | 1.294 (0.864) | 3.503*** (0.889) | 1.236 (0.868) | 3.710*** (0.907) | 1.278* (0.867) |
| Leverage | -1.177 (0.793) | -0.780 (0.720) | -1.102 (0.741) | -0.765 (0.723) | -1.132 (0.743) | -0.782 (0.718) | -1.186 (0.753) | -0.782 (0.721) |
| Return on assets | 0.229*** (0.0860) | 0.0255 (0.108) | 0.233*** (0.0836) | 0.0252 (0.108) | 0.233*** (0.0831) | 0.0252 (0.109) | 0.235*** (0.0822) | 0.0256 (0.108) |
| P/BV | 1.633 (1.195) | 3.087*** (1.032) | 1.507 (1.149) | 3.136*** (1.019) | 1.499 (1.143) | 3.072*** (1.039) | 1.521 (1.162) | 3.101*** (1.029) |
| EPS | 0.604* (0.363) | 0.490 (0.389) | 0.654* (0.353) | 0.480 (0.385) | 0.652* (0.353) | 0.507 (0.393) | 0.583* (0.349) | 0.479 (0.386) |
| Index return | 0.712*** (0.0993) | 0.726*** (0.0766) | 0.685*** (0.101) | 0.708*** (0.0755) | 0.675*** (0.103) | 0.714*** (0.0778) | 0.815*** (0.0976) | 0.724*** (0.0763) |
| Unemployment | 4.646*** (1.219) | -0.537 (2.081) | 3.353** (1.627) | -1.514 (1.384) | 3.786*** (1.266) | -1.492 (1.811) | 4.393*** (1.227) | 0.985 (2.427) |
| GDP growth | -4.273** (lo757) | -6.529*** (0.970) | -3.290* (1.703) | -6.398*** (0.946) | -3.680** (1.820) | -6.584*** (0.998) | -2.570 (1.688) | -6.458*** (0.959) |
| Constant | 134.9*** (44.13) | 27.19* (15.82) | -6.177 (80.75) | 92.57** (37.80) | -46.96* (26.43) | 18.51 (14.57) | 596.8*** (131.1) | 78.40** (38.95) |
| Country-fixed effects | No | No | No | No | No | No | No | No |
| Observations | 1091 | 1033 | 1091 | 1033 | 1091 | 1033 | 1091 | 1033 |
| Firms | 216 | 220 | 216 | 220 | 216 | 220 | 216 | 220 |
| Wald p-value | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| Overall | 0.221 | 0.164 | 0.206 | 0.166 | 0.206 | 0.164 | 0.216 | 0.165 |
| Between | 0.0985 | 0.0722 | 0.100 | 0.0771 | 0.102 | 0.0708 | 0.105 | 0.0747 |
| Within | 0.254 | 0.191 | 0.225 | 0.193 | 0.225 | 0.191 | 0.241 | 0.192 |