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 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 firms 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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
97.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, .
"Legal Determinants of External Finance,","
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324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997.
" Legal Determinants of External Finance,"
Journal of Finance,
American Finance Association, vol. 52(3), pages 1131-50, July.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Marc Levy, 2006.
"Control in Pyramidal Structures,"
Working Papers CEB
06-023.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB).
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