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Shareholder Protection and the Cost of Capital Empirical Evidence from German and Italian Firms

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Abstract

We investigate implications for the cost of capital in a model with agency conflicts between inside and outside shareholders, where the severity of agency costs depends on a parameter representing investor protection. Using firm-level data for Italy and Germany we find significant differences in shareholder protection and its implications for the firm’s ownership structure and the cost of capital. Results indicate that concentrated inside ownership increases the cost of capital for Italian firms while having no significant impact on the cost of capital for German firms. Evidence also suggests bank influence in Germany may serve to reduce investor risk for outside shareholders. In contrast, the magnitude of capital stock distortions is found to be quite important in Italy. Overall, slow growth in continental Europe may be more closely linked to institutional differences in shareholder protection between countries rather than inside ownership of firms.

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Paper provided by Institute for Economic Research on Firms and Growth - Moncalieri (TO) in its series CERIS Working Paper with number 200608.

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Length: 27 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:csc:cerisp:200608

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Keywords: Shareholder protection; ownership structure; cost of capital; agency costs; underinvestment;

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References

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  1. Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," Harvard Institute of Economic Research Working Papers 1906, Harvard - Institute of Economic Research.
  2. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  3. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
  4. Müller, Elisabeth, 2005. "How Does Owners' Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies?," ZEW Discussion Papers 05-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
  6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
  7. Simon Gilchrist & Charles Himmelberg, 1999. "Investment: Fundamentals and Finance," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274 National Bureau of Economic Research, Inc.
  8. Robert Carpenter & Laura Rondi, 2006. "Going Public to Grow? Evidence from a Panel of Italian Firms," Small Business Economics, Springer, vol. 27(4), pages 387-407, December.
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  11. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
  12. Chirinko, R-S & Elston, J-A, 1997. "Finance, Control, and Profitability : An Evaluation of German Bank Influence," Papers 28, American Institute for Contemporary German Studies-.
  13. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  14. Himmelberg, Charles P. & Hubbard, R. Glenn & Love, Inessa, 2002. "Investor protection, ownership, and the cost of capital," Policy Research Working Paper Series 2834, The World Bank.
  15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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Cited by:
  1. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 84-111.
  2. Francesco Devicienti & Cristian Bartolucci, 2013. "Better Workers Move to Better Firms: A Simple Test to Identify Sorting," 2013 Meeting Papers 249, Society for Economic Dynamics.
  3. Elston, Julie Ann & Yang, J. Jimmy, 2010. "Venture capital, ownership structure, accounting standards and IPO underpricing: Evidence from Germany," Journal of Economics and Business, Elsevier, vol. 62(6), pages 517-536, November.

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