Greece’s investor protection leaves something to be desired

According to recent theories of financial management, the international diversification of a portfolio is expected to reduce the investment risk. It is also true to say that the lowering of transaction costs and the development of technology facilitate cross-border investment. Nevertheless, investors shy away from placing their capital in foreign stocks when the protection of their rights is weak. This appears, in some degree, to be the case with foreign investors considering Greek stocks when diversifying their portfolios. According to prominent academics in the universities of Harvard and Chicago, Greece is among the laggards in investor protection. In 1998, a team under Professor La Porta looked into company and commercial law in 49 countries with a view to determining the degree to which national legal systems protected minority shareholder rights from managers or main shareholders (including, for instance, the right to vote by mail and not just by attending a general assembly). On a scale from 0 to 6, Greece was graded with a 2, while Pakistan and South Africa received 5. Beyond the existence of specific protective mechanisms in legal systems, the survey also examined the degree to which laws are actually applied (this is obviously related to the level of corruption among public servants). On a scale from 0 to 10 (where the lower the grade, the higher the incidence of corruption), Greece received 6.8. Although not extremely low, this grade is the lowest in Europe. Based on the above survey, more recent studies showed that investor protection has considerable and important implications for businesses and a country’s economy. For instance, a study conducted by a team of academics from the US universities of Wharton, Duke and MIT last year showed that the «dressing-up» of accounting profits is higher in countries with a low level of protection for investors and weak application of laws. Greece was ranked in top position among 31 nations in the use of techniques for the manipulation of accounting profits and, therefore, last in terms of the «quality» of firms’ financial reporting standards. It goes without saying that there is no such thing as a «perfect» study; weaknesses are bound to be always present. But the fact remains that the results of the above studies were highly unsatisfactory for Greece. Admittedly, significant efforts have been made in recent years to plan and adopt mechanisms of corporate governance and, consequently, to protect the rights of investors. However, the international competitiveness of the Athens Stock Exchange will not receive any substantial boost if the responsible public authorities do not become more attuned to the interests of the «periphery,» such as institutional and retail investors, and less to those of managers and majority shareholders. (1) Peter F. Pope is professor of accounting at the University of Lancaster and Annita Florou is lecturer of accounting at the University of Macedonia at Thessaloniki.

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