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Class struggle inside the firm: a study of German codetermination

  • Gary Gorton
  • Frank Schmid

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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