The Impact of EU Membership on the Financial Performance of Business Firms in Central and Eastern Europe

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Abstract

7KLV SDSHU H[DPLQHV KRZ (XURSHDQ 8QLRQ (8 PHPEHUVKLS LPSDFWV WKH ¿QDQFLDO SHUIRUPDQFHRIEXVLQHVV¿UPVLQWKHHPHUJLQJHFRQRPLHVRI&HQWUDODQG(DVWHUQ(XURSH,Q 2004, the European Union welcomed ten additional members: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. This was the largest enlargement in the history of the European Union. This study examines whether business ¿UPVIURPWKRVHWHQFRXQWULHVLPSURYHGWKHLU¿QDQFLDOSHUIRUPDQFHVLQFHMRLQLQJWKH(8,W LQWHQGVWRHPSLULFDOO\GHPRQVWUDWHWKDWWKHSUR¿WDELOLW\RIWKHEXVLQHVV¿UPVLQFUHDVHGVLQFH the ten countries joined the EU. Quarterly data on assets, short and long term liabilities, and common equity were collected. Data was collected for the period 2001- 2009. Econometric PHWKRGVZHUHXVHGWRGHWHUPLQHWKHHI¿FLHQF\DQGSUR¿WDELOLW\RIWKHVHFRPSDQLHV7KHUHVXOWV RIWKLVVWXG\LQGLFDWHWKDWWKHFRPSDQLHVEHQH¿WHGIURPMRLQLQJWKH(XURSHDQ8QLRQ

Keywords: )LQDQFLDO 3HUIRUPDQFH )LQDQFLDO 5DWLRV (I¿FLHQF\ 3UR¿WDELOLW\ (XURSHDQ Union

1. Introduction

,QWKH¿IWKDQGODUJHVW(XURSHDQ8QLRQHQODUJHPHQWWHQQHZFRXQWULHVMRLQHGWKH(XURSHDQ 8QLRQ(8LQ(LJKWRIWKHWHQFRXQWULHV&]HFK5HSXEOLF(VWRQLD+XQJDU\/DWYLD /LWKXDQLD3RODQG6ORYDNLDDQG6ORYHQLDZHUHIRUPHUFRPPXQLVW&HQWUDODQG(DVW(XURSHDQ &((FRXQWULHVZKLOHWKHRWKHUWZR&\SUXVDQG0DOWDZHUHQRW$IWHUMRLQLQJWKH(8WKH ¿UPVRIWKHVHWHQFRXQWULHVIDFHGLQFUHDVHGFRPSHWLWLRQ7KHUHLVOLWWOHUHVHDUFKRQWKHLPSDFW RI(8PHPEHUVKLSRQWKH¿QDQFLDOSHUIRUPDQFHRIEXVLQHVV¿UPVRIWKHVHWHQFRXQWULHVVLQFH MRLQLQJWKH(87KLVSDSHUH[DPLQHVWKH¿QDQFLDOSHUIRUPDQFHRIWKHVRPHRIWKH¿UPVOLVWHG in the stock exchanges of these ten countries to see whether their performances improved after WKH\MRLQHGWKH(88VLQJWKH¿QDQFLDOGDWDRIWKHVH¿UPVWKHSDSHUDWWHPSWVWRVKRZLIWKH

THE IMPACT OF EU MEMBERSHIP

ON THE FINANCIAL

PERFORMANCE OF BUSINESS

FIRMS IN CENTRAL AND EASTERN

EUROPE

G. ROD ERFANI, TONMOY ISLAM

Transylvania University, USA

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7KHTXDUWHUO\GDWDRQDVVHWVVKRUWDQGORQJWHUPOLDELOLWLHVFRPPRQHTXLW\DQGSUR¿WV of the companies located in those ten countries were collected from the Compustat database IRUWKHSHULRGRI&RPSXVWDWLVDGDWDEDVHFRPSLOHGE\6WDQGDUG 3RRU¶VZKLFK FROOHFWV GDWD RQ ¿QDQFLDO LQGLFDWRUV RI FRPSDQLHV OLVWHG LQ WKH VWRFN H[FKDQJH RI GLIIHUHQW nations.

7KLVSDSHUH[DPLQHVZKHWKHUWKHRSHUDWLQJHI¿FLHQF\RIWKHOLVWHG¿UPVIURPWKRVHWHQ FRXQWULHVLPSURYHGVLQFHWKH\MRLQHGWKH(8LQ0D\7KH:LOFR[RQVLJQHGUDQNHGWHVW ZDVXWLOL]HGWRWHVWZKHWKHUWKHVH¿UPVLPSURYHGWKHLU¿QDQFLDOSHUIRUPDQFHDIWHUWKH\EHFDPH EU members. Furthermore, a panel data regression model was developed and tested to examine whether the accession to the EU affects WKH¿QDQFLDOSHUIRUPDQFHRIEXVLQHVV¿UPV (the effect of joining the EU on each of the above ratios). The analysis shows that companies in those WHQ(XURSHDQFRXQWULHVZHUHLPSURYLQJWKHLU¿QDQFLDOSHUIRUPDQFHSULRUWRMRLQLQJWKH(8 +RZHYHUVRPHRIWKHLPSURYHPHQWLQ¿QDQFLDOSHUIRUPDQFHFDQEHDWWULEXWHGWRMRLQLQJWKH (87KHSDSHULVGLYLGHGDVIROORZV7KH¿UVWVHFWLRQSURYLGHVDUHYLHZRIOLWHUDWXUHIROORZHG by a description of our data and methodology. The results and interpretation section describes WKHHPSLULFDOUHVXOWVIURPWKHDQDO\VLV7KH¿QDOVHFWLRQRIWKHSDSHURIIHUVDVXPPDU\DQG conclusions.

2. Review of Literature

,Q WKH (XURSHDQ 8QLRQ ZHOFRPHG WHQ QHZ PHPEHUV WR WKH XQLRQ +RZHYHU WKH SURFHVVRIJHWWLQJWKHFRXQWULHVUHDG\WRMRLQWKH(8WRRNDORQJWLPH%\WKH\HDUWKH(8 began to have closer ties with the Central and Eastern European countries. Import quotas were removed to assist these countries in their preparations for admission to the European Union. ,Q WKH 3RODQG DQG +XQJDU\$VVLVWDQFH IRU 5HVWUXFWXULQJ WKHLU (FRQRPLHV 3+$5( program was instituted to help these countries transition to market economies. It provided economic and technical assistance as well as support for infrastructure investment to recipient countries. Bilateral treaties between Central and Eastern European countries and the EU were IRUPHGDQGDVDUHVXOWWUDGHEHWZHHQWKHVHIRUPHUFRPPXQLVWFRXQWULHVDQGWKH(8ÀRXULVKHG 6XEVHTXHQWO\LQWKH(XURSHDQ&RXQFLOGHFLGHGWKDWWKHVHFRXQWULHVFRXOGEHFRPHDSDUW RIWKH(8LIWKH\ZHUHZLOOLQJWRXQGHUWDNHVRPHUHIRUPV,QWKHFRXQWULHVRI%XOJDULD /DWYLD/LWKXDQLD5RPDQLDDQG6ORYDNLDZHUHDOVRDOORZHGWRMRLQWKH(8LIWKH\IXO¿OOHG VRPHUHIRUPV,QWHQFRXQWULHVEHFDPHPHPEHUVRIWKH(87RPIRUW 3ULRUWRHQWHULQJIRUHLJQGLUHFWLQYHVWPHQW)',LQÀRZVWRWKRVHWHQFRXQWULHVLQFUHDVHG E\ D ODUJH H[WHQW %HYDQ HW DO 7KHUHIRUH DQWLFLSDWLQJ WKH FKDQJH ORFDO ¿UPV PD\ have had adjusted their business practices to remain competitive once they join the EU. 7KHUHIRUH DQDO\VLV RI ¿QDQFLDO SHUIRUPDQFH SUH DQG SRVW(8 DFFHVVLRQ PD\ KDYH VRPH problems if companies keep on improving performance way before joining the EU. Also, as QRWHGE\7RPIRUW&HQWUDODQG(DVWHUQ(XURSHDQFRXQWULHVZHUHDEOHWRKDYHDKLJKHU OHYHORI¿QDQFLDOLQWHJUDWLRQWKDQ6RXWK(DVWHUQ(XURSHDQFRXQWULHV7KLVFDQDOVRKDYHDQ HIIHFWRQWKH¿QDQFLDOSHUIRUPDQFHRIWKHLQVWLWXWLRQVOLVWHGLQWKHVWRFNH[FKDQJH+RZHYHU this paper counterbalances this problem by considering a long period of data starting from WKXVWKHDFWXDOLPSURYHPHQWVRI¿UPVFDQEHH[DPLQHGSULRUWRDQGSRVW(8DFFHVVLRQ 6RPHUHVHDUFKHUVVWXG\WKH¿QDQFLDOSHUIRUPDQFHRURSHUDWLQJHI¿FLHQF\RI¿UPVDIWHUWKH\ XQGHUJR GUDVWLF FKDQJHV VXFK DV SULYDWL]DWLRQ %RXEDNUL DQG &RVVHW '¶6RX]D DQG

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0HJJLQVRQDQG0HJJLQVRQHWDOVWXG\WKHSHUIRUPDQFHRI¿UPVEHIRUH DQGDIWHUWKH\ZHUHSULYDWL]HGWRVHHZKHWKHUWKHLU¿QDQFLDOSHUIRUPDQFHKDVLPSURYHG The authors use the Wilcoxon signed-ranked test to measure whether, on average, the ¿QDQFLDOSHUIRUPDQFHRIWKHVH¿UPVKDGLPSURYHGDIWHUWKH\ZHUHSULYDWL]HG,QDQRWKHUVWXG\ 0HJJLQVRQUHYLHZVUHVHDUFKRQKRZSULYDWL]DWLRQSURJUDPVKDYHDOWHUHGWKHVL]HDQG HI¿FLHQF\RILQWHUQDWLRQDO¿QDQFLDOPDUNHWVLQWKHSDVWWKUHHGHFDGHV (XURSHDQ8QLRQ(8PHPEHUVKLSEULQJVPDQ\HFRQRPLFEHQH¿WVWRFRPSDQLHVLQFOXGLQJ HFRQRPLHVRIVFDOHODUJHUPDUNHWVDFFHVVWR¿QDQFLDOLQVWLWXWLRQVZLWKLQWKH(XURSHDQ8QLRQ DQGPRUHIRUHLJQGLUHFWLQYHVWPHQW)',ÀRZV,QWKHSDVWWZRGHFDGHVLQWKH(XURSHDQ8QLRQ SULYDWL]DWLRQSURJUDPVKDYHPDGHFRQVLGHUDEOHSURJUHVV7KHSULYDWL]DWLRQEHQH¿WVLQFOXGHDQ LQFUHDVHLQHI¿FLHQF\SURGXFWLYLW\DQGOLTXLGLW\LQWKH¿QDQFLDOPDUNHWV5HJDUGLQJWKHHIIHFWV RISULYDWL]DWLRQRQWKHSHUIRUPDQFHRIFRPSDQLHV'MDQNRYDQG0XUUHOOFRQGXFWHGDQ extensive survey on enterprise restructuring in transition. They found that privatization tends WRLPSURYH¿UPSHUIRUPDQFH

6RPHRWKHUUHVHDUFKHUVVXFKDV9DVLJKDQG+DULULDQDWWHPSWHGWRFRPSDUHHI¿FLHQF\ RISULYDWL]HGDQGJRYHUQPHQWRZQHGDLUSRUWV7KHLU¿QDQFLDOGDWDRQ%ULWLVKDQG$PHULFDQ DLUSRUWVERWKSXEOLFO\DQGSULYDWHO\RZQHGLQFOXGHGRSHUDWLQJFRVWVSUR¿WVDQGUHYHQXHV 7KH\IRXQGWKDWSULYDWL]HGDLUSRUWVKDYHKLJKHU¿QDQFLDOHI¿FLHQFLHVUHYHQXHSHUSDVVHQJHU and revenue per landing) than publicly-owned airports. In another study by Vasigh and Haririan WKH\ LQYHVWLJDWHG WKH ¿QDQFLDO DQG RSHUDWLRQDO HI¿FLHQF\ RI SULYDWH YHUVXV SXEOLF DLUSRUWV7KH\PHDVXUHGDLUSRUWSHUIRUPDQFHE\FRPSDULQJWKHHI¿FLHQF\RISULYDWL]HGDQG JRYHUQPHQWRZQHGDLUSRUWVWKURXJKUDWLRDQGUHJUHVVLRQWHFKQLTXHV9RJHOLQKLVVWXG\ IRFXVHGRQWKHUHODWLRQVEHWZHHQDLUSRUWSULYDWL]DWLRQDQG¿QDQFLDOSHUIRUPDQFH+HDVVHVVHG WKHLPSDFWRIWKHGHJUHHRISULYDWL]DWLRQRQWKH¿QDQFLDOSHUIRUPDQFHRI(XURSHDQDLUSRUWV By comparing privately to publicly owned airports, he found privatized airports were more FRVWHI¿FLHQW,QDVWXG\E\9DVLJKDQG*RUMLGRR]SURGXFWLYLW\ZDVWHVWHGLQSXEOLF and private airports using American and British airports. Their concluded that productivity DQG HI¿FLHQF\ RI DLUSRUWV GHSHQG DPRQJ RWKHU IDFWRUV RQ WKH OHYHO RI FRPSHWLWLRQ LQ WKH environment that they operate.

3. Data and Methodology

In order to perform our statistical analyses, data on assets, long-term and short-term OLDELOLWLHVFRPPRQHTXLW\DQGSUR¿WVZHUHFROOHFWHG7KHTXDUWHUO\¿QDQFLDOGDWDZHUHUHWULHYHG IURPWKH6WDQGDUGDQG3RRU¶V&RPSXVWDW'DWDEDVH)LOHIRUWKHWLPHSHULRGRI-DQXDU\± -XQHZZZFRPSXVWDWFRP7KHUHDUHDWRWDORIREVHUYDWLRQVEHWZHHQWKH\HDUV QXPEHURI¿UPVLQHDFKFRXQWU\&\SUXV&]HFK5HSXEOLF(VWRQLD+XQJDU\ /LWKXDQLD/DWYLD0DOWD3RODQG6ORYDNLDDQG6ORYHQLD ,QPHDVXULQJWKH¿QDQFLDOSHUIRUPDQFHRI¿UPVWKHIROORZLQJ¿QDQFLDOUDWLRVZHUHXVHG I. Liquidity Ratios /LTXLGLW\UDWLRVSURYLGHLQIRUPDWLRQRQWKHDELOLW\RID¿UPWRPHHWLWVVKRUWWHUP¿QDQFLDO obligations. Liquidity can be measured by several ratios; we used the Current Liability-to-Asset (CL-to-A) Ratio. This ratio is calculated by dividing total liabilities by total assets. The UDWLRVKRZVWKHSHUFHQWDJHRID¿UP¶VDVVHWVWKDWDUH¿QDQFHGE\GHEWZLWKWKHUHPDLQLQJEHLQJ ¿QDQFHGE\HTXLW\,WUHSUHVHQWVWKH¿UP¶VERUURZLQJFDSDFLW\LQWKHFDSLWDOPDUNHW

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3UR¿WDELOLW\UDWLRVSURYLGHLQIRUPDWLRQDERXWWKH¿UP¶VRYHUDOOHI¿FLHQF\DQGSHUIRUPDQFH These ratios are used to evaluate the ability of a company to manage its expenditures. In our DQDO\VLVZHXVHGWKHIROORZLQJUDWLRVReturn on Assets (ROA). The return on assets ratio LOOXVWUDWHVWKHSUR¿WDELOLW\RID¿UPUHODWLYHWRLWVWRWDODVVHWVSUR¿WVPDGHRQLQYHVWPHQWRI ¿UP¶VDVVHW7KH52$UDWLRLVFDOFXODWHGE\FRPSDULQJWKH¿UP¶VQHWLQFRPHWRLWVWRWDODVVHWV 7KHKLJKHUWKH52$UDWLRWKHPRUHHI¿FLHQWLVWKH¿UPReturn on Equity (ROE). The return RQHTXLW\52(PHDVXUHVWKHSUR¿WHDUQHGIRUHDFKXQLWRIFXUUHQF\LQYHVWHGLQWKH¿UP¶V VWRFN7KHUDWLRLVFDOFXODWHGE\GLYLGLQJWKH¿UP¶VQHWLQFRPHDIWHUSUHIHUUHGVWRFNGLYLGHQGV but before common stock dividends) by total shareholders’ equity (excluding preferred shares). 7KHKLJKHUWKH52(UDWLRWKHPRUHHI¿FLHQWLVWKH¿UPReturn on Common Equity (ROCE). This ratio measures the rate of return earned on the owners’ investment, excluding SUHIHUUHGVWRFNKROGHUVQHWSUR¿WDELOLW\RIFRPPRQVWRFNKROGHUV¶LQYHVWPHQWDIWHUSUHIHUUHG GLYLGHQGV7KH52&(LVFDOFXODWHGE\GLYLGLQJWKH¿UP¶VQHWLQFRPHDYDLODEOHIRUGLVWULEXWLRQ to shareholders (net income reduced by preferred dividends) by common equity. A high ROCE FDQLQGLFDWHWKDWDODUJHUSRUWLRQRISUR¿WVDUHUHLQYHVWHGEDFNLQWRWKHFRPSDQ\7KHKLJKHUWKH UDWLRWKHPRUHHI¿FLHQWWKHFRPSDQ\LVLQJHQHUDWLQJSUR¿WVIURPLWVLQYHVWPHQW

III. Financial Leverage Ratios (Debt Ratios)

)LQDQFLDOOHYHUDJHUDWLRVSURYLGHLQIRUPDWLRQRQWKHDELOLW\RID¿UPWRPHHWLWV¿QDQFLDO REOLJDWLRQVPHDVXULQJLWV¿QDQFLDOULVN7KHVHUDWLRVPHDVXUHWKHH[WHQWWRZKLFKDEXVLQHVV ¿UPLVXWLOL]LQJLWVORQJWHUPGHEW7KH\LQGLFDWHWKHORQJWHUPVROYHQF\RUOHYHUDJHRIWKH FRPSDQ\:HXVHGWKHIROORZLQJWZRPHDVXUHVRIOHYHUDJHUDWLRVDebt-to-Asset (D-to-A) Ratio7KLVUDWLRLVFDOFXODWHGE\GLYLGLQJD¿UP¶VWRWDOOLDELOLWLHVE\WRWDODVVHWV,WLQGLFDWHV WKHSHUFHQWDJHRID¿UP¶VDVVHWVWKDWDUH¿QDQFHGE\GHEW7KHKLJKHUWKLVUDWLRWKHJUHDWHULV WKHULVNDVVRFLDWHGZLWKWKH¿UP¶VSHUIRUPDQFH,WPD\DOVRLQGLFDWHORZERUURZLQJDELOLW\RI WKH¿UPDebt-Equity (D-to-E) Ratio. The debt-to-equity ratio indicates the proportion of GHEWDQGHTXLW\WKDWWKHFRPSDQ\XVHVWR¿QDQFHLWVDVVHWVWKHSURSRUWLRQRID¿UP¶VDVVHWVWKDW DUH¿QDQFHGE\GHEWYHUVXVHTXLW\,WLVFDOFXODWHGE\GLYLGLQJWRWDOOLDELOLWLHVRID¿UPE\LWV VWRFNKROGHUV¶HTXLW\7KHUDWLRFDQEHXVHGWRGHWHUPLQHWKHDELOLW\RID¿UPWRJHQHUDWHQHZ FDSLWDO7KDWLV¿UPVZLWKKLJKHUGHEWWRHTXLW\UDWLRVPD\¿QGLWGLI¿FXOWWRUDLVHDGGLWLRQDO IXQGVLQWKHFDSLWDOPDUNHW/RQJWHUP'HEWWR$VVHW5DWLR/W'WR$7KLVUDWLRPHDVXUHV WKHSHUFHQWDJHRIWKH¿UP¶VDVVHWVWKDWDUH¿QDQFHGE\ORQJWHUPGHEW $VLPSOHVFDWWHUSORWSURYLGHVVRPHLGHDRIWKH¿QDQFLDOSHUIRUPDQFHRI¿UPVDURXQGWKH WLPHRI(8DFFHVVLRQ)LJXUHVDQGVKRZWKHVFDWWHUSORWVRIWKHTXDUWHUO\UHWXUQRQDVVHW UHWXUQRQFRPPRQHTXLW\DQGWKHUHWXUQRQHTXLW\UHVSHFWLYHO\RIWKH¿UPVORFDWHGLQWKRVH WHQFRXQWULHVIRUWKH\HDUVWKURXJK$SDUWIURPDIHZRXWOLHUVZKLFKDUHH[FOXGHG to keep the range within normal limits), most of the data points are positive, showing that most RIWKH¿UPVHQMR\HGSUR¿WVGXULQJWKLVWLPHSHULRG7KLVLQGLFDWHVWKDW¿UPVFRQWLQXHGWRHQMR\ SUR¿WVEHIRUHDQGDIWHUWKHDFWXDOGDWHRIMRLQLQJWKH(8

%\XWLOL]LQJWKH¿QDQFLDOUDWLRVRIWKHEXVLQHVV¿UPVLQWKRVHWHQFRXQWULHVWKH:LOFR[RQ VLJQHGUDQNWHVWZLOOEHSHUIRUPHGWRVKRZZKHWKHUDOOWKHVH¿QDQFLDOUDWLRVKDYHLQFUHDVHGLQ value between different years. Furthermore, a panel data regression model will be tested with these values to determine the effect of joining the EU on each of these ratios.

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Figure 1 - Return on Assets

ͲϬ͕ϱ ͲϬ͕ϯ ͲϬ͕ϭ Ϭ͕ϭ Ϭ͕ϯ Ϭ͕ϱ Ϭ͕ϳ Ϭ͕ϵ Ϭ ϮϬϬϬ ϰϬϬϬ ϲϬϬϬ ϴϬϬϬ

Figure 2 - Return on Common Equity

ͲϬ͕ϱ ͲϬ͕ϯ ͲϬ͕ϭ Ϭ͕ϭ Ϭ͕ϯ Ϭ͕ϱ Ϭ͕ϳ Ϭ͕ϵ Ϭ ϮϬϬϬ ϰϬϬϬ ϲϬϬϬ ϴϬϬϬ ͲϬ͕ϱ ͲϬ͕ϯ ͲϬ͕ϭ Ϭ͕ϭ Ϭ͕ϯ Ϭ͕ϱ Ϭ͕ϳ Ϭ͕ϵ Ϭ ϮϬϬϬ ϰϬϬϬ ϲϬϬϬ ϴϬϬϬ ͲϬ͕ϱ ͲϬ͕ϯ ͲϬ͕ϭ Ϭ͕ϭ Ϭ͕ϯ Ϭ͕ϱ Ϭ͕ϳ Ϭ͕ϵ Ϭ ϮϬϬϬ ϰϬϬϬ ϲϬϬϬ ϴϬϬϬ

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4. Empirical Results

The Wilcoxon signed-rank test was performedWRVKRZZKHWKHUWKH¿QDQFLDOUDWLRVUHWXUQ on assets (ROA), return on equity (ROE), and return on common equity (ROCE), increased in value between the two time periods used in this study. Furthermore, a panel data regression model was developed and tested to examine whether the accession to the EU affected the ¿QDQFLDOSHUIRUPDQFHRIEXVLQHVV¿UPV (WKHHIIHFWRIMRLQLQJWKH(8RQHDFKRIWKH¿QDQFLDO ratios). The results of the Wilcoxon signed-rank test show that these companies were able to LPSURYHWKHLU¿QDQFLDOSHUIRUPDQFHDIWHUWKH\MRLQHGWKH(8:HXVHGWZRZD\VWRFRQGXFW WKHVLJQHGUDQNHGWHVW)LUVWZHKROGWKHLQLWLDOGDWHFRQVWDQWDQGWKHQFRPSDUHGWKH¿QDQFLDO SHUIRUPDQFHRI¿UPVVLQFHWKH\MRLQHGWKH(8ZLWKWKDWLQLWLDOGDWH7KHQZHDOWHUHGWKHLQLWLDO GDWHWRFRPSDUHWKHSHUIRUPDQFHRI¿UPVLQGLIIHUHQWWLPHSHULRGV7KHUHVXOWVDUHSUHVHQWHG LQWDEOHVDQG7KHWHVWH[DPLQHVWKHWZRVDPSOHVRIGDWDDWGLIIHUHQWWLPHSHULRGVWR GHWHUPLQHZKHWKHUWKHGDWDZHUHVLJQL¿FDQWO\GLIIHUHQWIURPRQHDQRWKHU7KHWDEOHVOLVWWKH WYDOXHVRIWKHDQDO\VLV$OOVWDWLVWLFDODQDO\VHVLQWKLVSDSHUZHUHSHUIRUPHGXVLQJWKH6WDWD Data Analysis and Statistical Software package (www.stata.com).

Table 1 – Wilcoxon Signed-Rank Test Results Comparing the Financial Ratios at Different Dates

ROA 5.897* 3.337* 3.471* 3.07* 2.883* ROCE 4.951* 2.984* 3.25* 2.574* 2.034* ROE 5.762* 2.747* 3.941* 3.016* 3.025* CL-to-A -2.218* Lt-D-to-A -2.414* D-to-E D-to-A 'DWHVDUHLQ00''<<<<IRUPDW$VWHULVNVLQGLFDWHVLJQL¿FDQFHDWWKHOHYHO

Table 1 compares the results of different Wilcoxon-signed rank tests. For example, the VHFRQG FROXPQ VKRZV WKH WYDOXHV FRPSXWHG XVLQJ WKH ¿QDQFLDO UDWLRV EHWZHHQ WKH GDWHV DQG7KHUHIRUHWKHVHFRQGFROXPQPHDVXUHVWKH¿QDQFLDOSHUIRUPDQFH RI ¿UPV DERXW PRQWKV EHIRUH DQG DIWHU MRLQLQJ WKH (8 WKH WKLUG FROXPQ PHDVXUHV WKH SHUIRUPDQFHDERXWPRQWKVEHIRUHDQGDIWHUMRLQLQJWKH(8DQGVRRQ%DVHGRQWKLVWHVWLW VHHPVWKDWSHUIRUPDQFHRI52$52&(DQG52(LPSURYHGVLJQL¿FDQWO\RUVWD\HGWKHVDPH WKHWYDOXHVQRWEHLQJVLJQL¿FDQWIRUDOOWLPHSHULRGV&XUUHQWOLDELOLWLHVWRDVVHWDQGORQJWHUP debt to asset ratios either stayed statistically the same or decreased. Debt-to-equity and debt-to-DVVHWUDWLRVGLGQRWFKDQJHVLJQL¿FDQWO\)URPWKLVDQDO\VLVLWVHHPVWKDWFRPSDQLHVLPSURYHG WKHLUSUR¿WDELOLW\DIWHUWKHFRXQWULHVMRLQHGWKH(8)LUPVGLGQRWLQFUHDVHWKHLUOHYHUDJHRU in some cases, actually reduced their leverage. This shows that, on average, the companies SHUIRUPHGZHOODIWHUWKH\MRLQHGWKH(87KHVHFRXQWULHVZHUHDEOHWRHDUQKLJKHUSUR¿WVSHU unit currency of asset and equity right after joining the EU.

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Table 2 – Wilcoxon Signed-Rank Test Results Comparing the Financial ratios with the Initial Date Fixed at March 31, 2004

ROA -5.294* ROCE -5.437* ROE -6.156* CL-to-A Lt-D-to-A D-to-E D-to-A 'DWHVDUHLQ00''<<<<IRUPDW$VWHULVNVLQGLFDWHVLJQL¿FDQFHDWWKHOHYHO 7DEOHUHYHDOVWKDWPRVWRIWKHUHVXOWVRIWKHUDQNWHVWDUHQRWVLJQL¿FDQWH[FHSWIRUWKH 52$52(DQG52&(EHWZHHQWKHGDWHV0DUFKDQG0DUFK7KHIDOOLQ SUR¿WVLQWKLVFDVHFDQEHDWWULEXWHGWRWKHUHFHVVLRQWKDWDQXPEHURIFRXQWULHVKDGH[SHULHQFHG LQGXHWRWKHJOREDOHFRQRPLFVORZGRZQ7KHUHIRUHLWFDQEHDWWULEXWHGIURPWKLVWDEOH WKDWFRPSDQLHVZHUHLPSURYLQJWKHLUHI¿FLHQF\EHIRUHWKH\KDGDFWXDOO\MRLQHGWKH(87KXV WKH¿QDQFLDOUDWLRVMXVWEHIRUHMRLQLQJWKH(8DUHQRWVLJQL¿FDQWO\GLIIHUHQWIURPWKRVHUDWLRV IROORZLQJWKHDFFHVVLRQ7RWHVWZKHWKHU¿UPVUHDOO\LPSURYHGWKHLUSHUIRUPDQFHWKHDERYH WHVWZDVUHSHDWHGH[FHSWWKDWWKHLQLWLDOGDWHZDV¿[HGDW-XQH7KHUHVXOWVDUHVKRZQ LQ7DEOH

Table 3 – Wilcoxon Signed-Rank Test Results Comparing the Financial Ratios with the Initial Date Fixed at June 30, 2001

ROA 2.404* 2.512* 2.883* -3.985* ROCE 2.034* -4.56* ROE 2.722* 2.588* 3.025* -4.088* CL-to-A Lt-D-to-A -1.964* -2.414* D-to-E D-to-A 'DWHVDUHLQ00''<<<<IRUPDW$VWHULVNVLQGLFDWHVLJQL¿FDQFHDWWKHOHYHO 7KHUHVXOWVLQ7DEOHVKRZWKDW52$52&(DQG52(LQFUHDVHGLQYDOXHVLJQL¿FDQWO\ XQWLO,QWKHYDOXHVGHFUHDVHGGXHWRWKHHIIHFWRIDJOREDOHFRQRPLFVORZGRZQ

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88

Long- term-debt-to asset ratio decreased or stayed statistically the same and the rest of the YDOXHVDUHQRWVLJQL¿FDQWO\GLIIHUHQW7KLVWDEOHDOVRUHYHDOVWKDWZKHQFRPSDULQJWKH¿QDQFLDO UDWLRVRIZLWKWKRVHDIWHUMRLQLQJWKH(8FRPSDQLHVJHQHUDOO\GLGPXFKEHWWHU)LUPVKDG VWDUWHGLPSURYLQJWKHLUSHUIRUPDQFHDIWHUDQGFRQWLQXHGWRGRVRXQWLO

7KHQH[WTXHVWLRQLVZKHWKHUWKLVLPSURYHPHQWLQ¿QDQFLDOSHUIRUPDQFHZDVGXHWR joining the EU or to sustained economic growth and other business-friendly factors that these countries experienced during the study period. An auto-regression model was developed and WHVWHGWRHYDOXDWHZKHWKHUWKHDFFHVVLRQWRWKH(8UHDOO\DIIHFWHGWKH¿QDQFLDOSHUIRUPDQFHRI WKHVH¿UPV

7KHIROORZLQJPRGHOLVXVHGWRH[DPLQHWKH¿QDQFLDOSHUIRUPDQFHRIWKHEXVLQHVV¿UPV X_t = ȕ₀ +ȕ₁ X_t-1 + ȕ₂ X_t-2 + B₃ D

where

X

_t is any of the variables ROA, ROCE, ROE, CL-to-A, Lt-D-to-A, D-to-E and D-to-A respectively at time period t.

E

_i DUH WKH FRHI¿FLHQWV where i={0,1,2,3} and D is the dummy variable which is 1 to indicate the WLPHSHULRGDIWHUMRLQLQJWKH(8DQGRWKHUZLVH

7KHDERYHHTXDWLRQFDQEHHVWLPDWHGWRPHDVXUHWKHHIIHFWRISDVWSHUIRUPDQFHRI¿QDQFLDO ratios on present performance, and whether joining the EU, as represented by the dummy, had DQ\HIIHFWRQWKRVH¿QDQFLDOUDWLRV$SDQHOGDWDUHJUHVVLRQZDVWKHQSHUIRUPHGWRHVWLPDWHWKH effects of each of the independent variables on the dependent variable and the empirical results are shown in Table 4.

Table 4 – Regression Results. Auto-Regression of Different Financial Ratios

ROA ROCE ROE CL-to-A Lt-D-to-A D-to-E D-to-A

Constant 0.007* (0.0044) 0.1595* 0.0107 0.0366* (0.0084) (0.0132)0.0858* Lagged one 3HULRG (0.0354)1.0375* (0.0301)0.4026* 0.6709* (0.0416) (0.0315)0.6799* Lagged WZR3HULRGV -0.3180* (0.0466) 0.0610* (0.0099) 0.0599* (0.0102) 0.1678* (0.0305) -0.259 * (0.073) 0.1442* (0.031) EU Dummy 0.0158* (0.0049) (0.0073)-0.032* 6WDQGDUGHUURUVRIWKHUHJUHVVLRQFRHI¿FLHQWVDUHLQSDUHQWKHVHVGLUHFWO\EHORZWKHDVVRFLDWHG FRHI¿FLHQWV$VWHULVNVLQGLFDWHVLJQL¿FDQFHDWWKHOHYHO 7KHDERYHUHJUHVVLRQUHVXOWVVKRZWKDWWKH(8GXPP\LVVLJQL¿FDQWLQWZRRIWKHFDVHV This shows that joining the EU helped to increase the return on assets and decrease current OLDELOLWLHVWRDVVHWUDWLRV$IWHUMRLQLQJWKH(8¿UPVEHFDPHPRUHFRPSHWLWLYHDQGUHGXFHG FXUUHQWOLDELOLWLHVUHODWLYHWRWKHLUDVVHWV,QWKHFDVHRI52&(52(DQG'WR(WKHFRHI¿FLHQW RQ(8GXPP\LVSRVLWLYHEXWQRWVLJQL¿FDQWZKLOHLWLVQHJDWLYHDQGQRWVLJQL¿FDQWLQWKHFDVH of Lt-D-to-A and D-to-A. In most cases, past performance of the companies did affect their

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future performance. However, in some cases such as the two year lagged value of return on assets ratio has a negative effect on present ROA ratio and the two year lagged debt-to-equity ratio has a negative effect on present D-to-E ratio. Generally, most of the past YDOXHVRI¿QDQFLDOUDWLRVDIIHFWHGWKHLUFRUUHVSRQGLQJIXWXUHYDOXHV

5. Conclusions

7KLVSDSHUH[DPLQHVZKHWKHUWKHSHUIRUPDQFHRIEXVLQHVV¿UPVLPSURYHGDIWHUWKHWHQ &HQWUDODQG(DVWHUQ(XURSHDQFRXQWULHVMRLQHGWKH(8LQ0D\4XDUWHUO\GDWDRQDVVHWV ORQJWHUPDQGVKRUWWHUPOLDELOLWLHVFRPPRQHTXLW\DQGSUR¿WVZHUHFROOHFWHGDQGDQDO\]HG 7KH:LOFR[RQVLJQHGUDQNWHVWZDVXWLOL]HGWRVKRZZKHWKHUWKHVH¿QDQFLDOUDWLRVLQFUHDVHGLQ value between the two time periods used in this study. Furthermore, a panel data regression model was developed and tested to examine whether the accession to the EU affected the ¿QDQFLDOSHUIRUPDQFHRIEXVLQHVV¿UPVWKHHIIHFWRIMRLQLQJWKH(8RQHDFKRIWKH¿QDQFLDO ratios). The Wilcoxon signed-rank test reveals that companies were able to improve their return on assets (ROA), return on equity (ROE), and return on common equity (ROCE) after the countries joined the EU. In a cross-country analysis, a panel regression model was developed and estimated. The results of the auto-regression model reveal that the EU dummy variable KDGDVLJQL¿FDQWHIIHFWLQLQFUHDVLQJWKHYDOXHRI52$UDWLRVDVZHOODVUHGXFLQJWKHYDOXHRI current liability to asset (CL-to-A) ratios. Furthermore, this study suggests that companies were anticipating increased competition and access to larger markets before joining the EU and had acted accordingly. Thus, the comparison of ratios (after the countries joined the EU) ZLWKWKDWRI-XQHZHUHVLJQL¿FDQWEXWWKHFRPSDULVRQZLWKWKRVHRI0DUFK ZHUHQRW)URPWRWKHFRPSDQLHVZHUHSUHSDULQJWRMRLQWKH(82QFHWKH\MRLQHG WKH(8WKHSUR¿WDELOLW\RIWKH¿UPVLQFUHDVHG7KHUHIRUHWKHFRPSDQLHVRIWKHVHFRXQWULHV EHQH¿WHGIURPMRLQLQJWKHHFRQRPLFXQLRQ

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