The Greek capital market : caught in between poor corporate governance and market inefficiency

Abstract

The investors’ shift towards shares, in the late 1990s drove stock prices up to unduly high levels in the Athens Stock Exchange (ASE). On the other hand companies listed in the ASE were attracted to equity finance. There was a significant gap of perception between investors and companies regarding the cost of equity. The return on stock investment expected by investors between 1995 and 1999 was around 70%, yet, for companies the visible cost of equity, practically equal to the dividend yield, was about 1%. Such a gap can be explained by the problematic system of corporate governance and the inefficiency of the Greek stock market. The Greek governance system, traditionally based on the monitoring role of financial intermediation, lack the norms to provide adequate protection for minority interests in the context of the new trend favoring fund raising through the stock market. Preference of equity over debt reduced considerably control over the use of funds and the accountability of controlling owners to the providers of capital, allowing for misuse of resources. On the other hand, investors dared to invest in stocks that yielded dividends of about 1% in the late 1990s due to market inefficiency created by some form of irrational investors’ behavior based on "overreaction" and ‘feedback trading". The current slump of the stock market is changing the original perception. Weakness in investor’s protection affects access to finance, cost of capital and ultimately economic growth. Companies pay the price for their excess finance in the past and controlling owners face up to the true cost of equity. The true cost of equity emerges by the responsibilities to shareholders not only in terms of dividends, but also capital gains which investors expect. Corporate governance reform has become the new rhetoric in Greece, but it continues to separate capital contribution from control. However, with such a corporate governance and declining corporate’s profits, companies are unable to placate once again investors.