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Class struggle inside the firm: a study of German codetermination

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  • Gary Gorton
  • Frank Schmid

Abstract

Under the German system of "codetermination," employees are legally allocated some control rights over corporate assets, in the form of board seats. We empirically investigate the implications of equal board representation compared with one-third employee representation and find a 26% stock market discount on firms with equal representation. Employees redistribute the firm's surplus towards themselves but may also prefer a different objective function for the firm, maximizing employee utility rather than shareholder value. We investigate the shareholder response to codetermination via higher leverage that commits more cash to leave the firm. We also examine the relationship between codetermination and the performance sensitivity of compensation for board members.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2000-025.

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Date of creation: 2002
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Handle: RePEc:fip:fedlwp:2000-025

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Keywords: Germany ; Corporations - Finance;

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Cited by:
  1. Marc Goergen & Miguel Manjon & Luc Renneboog, 2008. "Is the German system of corporate governance converging towards the Anglo-American model?," Journal of Management and Governance, Springer, Springer, vol. 12(1), pages 37-71, March.
  2. Abe, Naohito & Gaston, Noel & Kubo, Katsuyuki, 2005. "Executive pay in Japan: the role of bank-appointed monitors and the Main Bank relationship," Japan and the World Economy, Elsevier, Elsevier, vol. 17(3), pages 371-394, August.
  3. Thomas Philippon, 2004. "Corporate Governance Over the Business Cycle," 2004 Meeting Papers 114, Society for Economic Dynamics.
  4. Marco Pagano & Paolo Volpin, 2001. "Managers, Workers, and Corporate Control," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 75, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Jan 2004.
  5. William R. Emmons & Frank A. Schmid, 2001. "Corporate governance, entrenched labor, and economic growth," Working Papers, Federal Reserve Bank of St. Louis 2001-023, Federal Reserve Bank of St. Louis.
  6. Chilosi, Alberto & Damiani, Mirella, 2007. "Stakeholders vs. shareholders in corporate governance," MPRA Paper 2334, University Library of Munich, Germany.
  7. Goergen, M. & Manjon, M.C. & Renneboog, L.D.R., 2004. "Recent Developments in German Corporate Governance," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2004-014, Tilburg University, Tilburg Law and Economic Center.
  8. FitzRoy, Felix & Kraft, Kornelius, 2004. "Co-Determination, Efficiency, and Productivity," IZA Discussion Papers 1442, Institute for the Study of Labor (IZA).
  9. Frank A. Schmid & Mark Wahrenburg, 2002. "Mergers and acquisitions in Germany," Working Papers, Federal Reserve Bank of St. Louis 2002-027, Federal Reserve Bank of St. Louis.
  10. Rossini, Gianpaolo, 2005. "Outsourcing with labor management," Economic Systems, Elsevier, vol. 29(4), pages 455-466, December.
  11. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 1-33.

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