Corporate Governance Structures, Control and Performance in European Markets

A Tale of Two Systems

Y. Crama, L. Leruth, L.D.R. Renneboog, J-P. Urbain

Research output: Working paperDiscussion paperOther research output

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Abstract

Traditionally share price returns and their variance have been explained by factors linked to the operations of the company such as systematic risk, corporate size and P/E ratios or by factors related to the influence of the macro-economic environment. In these models, the institutional environment in terms of concentration and nature of voting rights, bank debt dependence and corporate and legal mechanisms to change control have rarely been included. In this paper we have a dual objective. We first highlight the large discrepancies among corporate governance environments. We conclude that there is a need for a theoretically well-grounded measure of corporate control applicable to all systems and we define such a measure. Secondly, the impact of ownership structure on the share price performance and corporate risk is empirically nalysed for companies listed on the London Stock Exchange. Within Europe, the UK corporate landscape is particularly interesting because of its widely held nature and the liquidity of the market for controlling rights. We show that financial performance increases with the level of control held by the second largest shareholder. One possible explanation is that when the largest shareholder owns most of the control, she essentially maximizes her own utility function, which may differ from the firm’s profits. When there exists a counterbalancing pole of control in other hands, utility functions are usually different and the best compromise between both poles of control may be to maximize profits. Yet, it was not our purpose to survey the many (sometimes contradictory) theories of corporate governance, nor to test any specific hypothesis. We hope however to have conveyed the message that there exists a link between corporate governance and financial performance and that a sound index, based on game-theoretic arguments, is the appropriate instrument for researchers in the field.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages27
Volume1999-97
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-97

Fingerprint

Corporate governance
Governance structure
Financial performance
Share prices
Utility function
Profit
Factors
Large shareholders
Governance environment
Nature
Economic environment
Macroeconomics
Discrepancy
P/E ratio
Voting rights
Bank debt
Ownership structure
Systematic risk
Liquidity
Corporate control

Keywords

  • corporate governance
  • voting rights
  • shareholder coalitions
  • corporate performance

Cite this

Crama, Y., Leruth, L., Renneboog, L. D. R., & Urbain, J-P. (1999). Corporate Governance Structures, Control and Performance in European Markets: A Tale of Two Systems. (CentER Discussion Paper; Vol. 1999-97). Tilburg: Finance.
Crama, Y. ; Leruth, L. ; Renneboog, L.D.R. ; Urbain, J-P. / Corporate Governance Structures, Control and Performance in European Markets : A Tale of Two Systems. Tilburg : Finance, 1999. (CentER Discussion Paper).
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Crama, Y, Leruth, L, Renneboog, LDR & Urbain, J-P 1999 'Corporate Governance Structures, Control and Performance in European Markets: A Tale of Two Systems' CentER Discussion Paper, vol. 1999-97, Finance, Tilburg.

Corporate Governance Structures, Control and Performance in European Markets : A Tale of Two Systems. / Crama, Y.; Leruth, L.; Renneboog, L.D.R.; Urbain, J-P.

Tilburg : Finance, 1999. (CentER Discussion Paper; Vol. 1999-97).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Corporate Governance Structures, Control and Performance in European Markets

T2 - A Tale of Two Systems

AU - Crama, Y.

AU - Leruth, L.

AU - Renneboog, L.D.R.

AU - Urbain, J-P.

N1 - Pagination: 27

PY - 1999

Y1 - 1999

N2 - Traditionally share price returns and their variance have been explained by factors linked to the operations of the company such as systematic risk, corporate size and P/E ratios or by factors related to the influence of the macro-economic environment. In these models, the institutional environment in terms of concentration and nature of voting rights, bank debt dependence and corporate and legal mechanisms to change control have rarely been included. In this paper we have a dual objective. We first highlight the large discrepancies among corporate governance environments. We conclude that there is a need for a theoretically well-grounded measure of corporate control applicable to all systems and we define such a measure. Secondly, the impact of ownership structure on the share price performance and corporate risk is empirically nalysed for companies listed on the London Stock Exchange. Within Europe, the UK corporate landscape is particularly interesting because of its widely held nature and the liquidity of the market for controlling rights. We show that financial performance increases with the level of control held by the second largest shareholder. One possible explanation is that when the largest shareholder owns most of the control, she essentially maximizes her own utility function, which may differ from the firm’s profits. When there exists a counterbalancing pole of control in other hands, utility functions are usually different and the best compromise between both poles of control may be to maximize profits. Yet, it was not our purpose to survey the many (sometimes contradictory) theories of corporate governance, nor to test any specific hypothesis. We hope however to have conveyed the message that there exists a link between corporate governance and financial performance and that a sound index, based on game-theoretic arguments, is the appropriate instrument for researchers in the field.

AB - Traditionally share price returns and their variance have been explained by factors linked to the operations of the company such as systematic risk, corporate size and P/E ratios or by factors related to the influence of the macro-economic environment. In these models, the institutional environment in terms of concentration and nature of voting rights, bank debt dependence and corporate and legal mechanisms to change control have rarely been included. In this paper we have a dual objective. We first highlight the large discrepancies among corporate governance environments. We conclude that there is a need for a theoretically well-grounded measure of corporate control applicable to all systems and we define such a measure. Secondly, the impact of ownership structure on the share price performance and corporate risk is empirically nalysed for companies listed on the London Stock Exchange. Within Europe, the UK corporate landscape is particularly interesting because of its widely held nature and the liquidity of the market for controlling rights. We show that financial performance increases with the level of control held by the second largest shareholder. One possible explanation is that when the largest shareholder owns most of the control, she essentially maximizes her own utility function, which may differ from the firm’s profits. When there exists a counterbalancing pole of control in other hands, utility functions are usually different and the best compromise between both poles of control may be to maximize profits. Yet, it was not our purpose to survey the many (sometimes contradictory) theories of corporate governance, nor to test any specific hypothesis. We hope however to have conveyed the message that there exists a link between corporate governance and financial performance and that a sound index, based on game-theoretic arguments, is the appropriate instrument for researchers in the field.

KW - corporate governance

KW - voting rights

KW - shareholder coalitions

KW - corporate performance

M3 - Discussion paper

VL - 1999-97

T3 - CentER Discussion Paper

BT - Corporate Governance Structures, Control and Performance in European Markets

PB - Finance

CY - Tilburg

ER -

Crama Y, Leruth L, Renneboog LDR, Urbain J-P. Corporate Governance Structures, Control and Performance in European Markets: A Tale of Two Systems. Tilburg: Finance. 1999. (CentER Discussion Paper).