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
\nup to unduly high levels in the Athens Stock Exchange (ASE). On the
\nother hand companies listed in the ASE were attracted to equity finance.
\nThere was a significant gap of perception between investors and companies
\nregarding the cost of equity. The return on stock investment expected by investors
\nbetween 1995 and 1999 was around 70%, yet, for companies the visible
\ncost of equity, practically equal to the dividend yield, was about 1%.
\nSuch a gap can be explained by the problematic system of corporate governance
\nand the inefficiency of the Greek stock market. The Greek governance
\nsystem, traditionally based on the monitoring role of financial intermediation,
\nlack the norms to provide adequate protection for minority interests
\nin the context of the new trend favoring fund raising through the stock market.
\nPreference of equity over debt reduced considerably control over the use
\nof funds and the accountability of controlling owners to the providers of
\ncapital, allowing for misuse of resources. On the other hand, investors dared
\nto invest in stocks that yielded dividends of about 1% in the late 1990s due to
\nmarket inefficiency created by some form of irrational investors’ behavior
\nbased on "overreaction" and ‘feedback trading". The current slump of the
\nstock market is changing the original perception. Weakness in investor’s
\nprotection 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
\nequity emerges by the responsibilities to shareholders not only in terms of
\ndividends, but also capital gains which investors expect. Corporate governance
\nreform has become the new rhetoric in Greece, but it continues to
\nseparate capital contribution from control. However, with such a corporate
\ngovernance and declining corporate’s profits, companies are unable
\nto placate once again investors.