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Corporate governance structures, control and performance in European markets: a tale of two systems

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Author Info

  • CRAMA, Yves

    ()
    (School of Business Administration University of Liège Boulevard du Rectorat 7, B31, 4000 Liège, Belgium)

  • LERUTH, Luc

    ()
    (School of Business Administration University of Liège Boulevard du Rectorat 7, B31, 4000 Liège, Belgium, CORE, and International Monetary Fund)

  • RENNEBOOG, Luc

    ()
    (Department of Finance Tilburg University Warandelaan 2, 5000 LE Tilburg, The Netherlands)

  • URBAIN, Jean-Pierre

    ()
    (Department of Quantitative Economics University of Maastricht P.O. Box 616, 6200 MD Maastricht, The Netherlands)

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 macroeconomic 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 analysed 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.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1999042.

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Date of creation: 01 Jul 1999
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Handle: RePEc:cor:louvco:1999042

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Related research

Keywords: corporate governance; voting rights; shareholder coalitions; corporate performance;

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References

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  1. Marc Goergen & Luc Renneboog, 1999. "Strong Managers and Passive Institutional Investors in the UK," Working Papers 1999.21, Fondazione Eni Enrico Mattei.
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  18. Ariane Chapelle & Marco Becht & Luc Renneboog, 2001. "Shareholding cascades: the separation of ownership and control in Belgium," ULB Institutional Repository 2013/9947, ULB -- Universite Libre de Bruxelles.
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Citations

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Cited by:
  1. Lippert, Inge, 2008. "Perspektivenverschiebungen in der Corporate Governance: Neuere Ansätze und Studien der Corporate-Governance-Forschung," Discussion Papers, Research Unit: Knowledge, Production Systems and Work SP III 2008-302, Social Science Research Center Berlin (WZB).
  2. Pasadilla, Gloria O., 2008. "Financial Services Integration in East Asia: Lessons from the European Union," Discussion Papers DP 2008-31, Philippine Institute for Development Studies.
  3. Pietro Tommasino, 2006. "The Political Economy of Investor Protection," Temi di discussione (Economic working papers) 604, Bank of Italy, Economic Research and International Relations Area.
  4. Marc Lévy, 2009. "Control in pyramidal structures," ULB Institutional Repository 2013/14291, ULB -- Universite Libre de Bruxelles.
  5. Lucas, Rainer & Matys, Thomas, 2003. "Erlebnis Nachhaltigkeit? Möglichkeiten und Grenzen des Eventmarketing bei der Vermittlung gesellschaftlicher Werte," Wuppertal Papers 136, Wuppertal Institute for Climate, Environment and Energy.
  6. Luc E. Leruth & Yougesh Khatri & J. Piesse, 2002. "Corporate Performance and Governance in Malaysia," IMF Working Papers 02/152, International Monetary Fund.
  7. Malika HAMADI, 2002. "Ownership Strucure ad the Performance of Belgian Listed Firms," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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