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Corporate Governance Structures, Control and Performance in European Markets : A Tale of Two Systems

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Listed:
  • Crama, Y.
  • Leruth, L.
  • Renneboog, L.D.R.

    (Tilburg University, Center For Economic Research)

  • Urbain, J-P.

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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Suggested Citation

  • Crama, Y. & Leruth, L. & Renneboog, L.D.R. & Urbain, J-P., 1999. "Corporate Governance Structures, Control and Performance in European Markets : A Tale of Two Systems," Discussion Paper 1999-97, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:fa209920-43a1-40ad-bf2e-fd8d8343ce24
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    References listed on IDEAS

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    Cited by:

    1. Roosenboom, P.G.J. & Schramade, W.L.J., 2005. "The Price Of Power: Valuing The Controlling Position Of Owner-Managers In French Ipo Firms," ERIM Report Series Research in Management ERS-2005-011-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Roosenboom, Peter & Schramade, Willem, 2006. "The price of power: Valuing the controlling position of owner-managers in French IPO firms," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 270-295, January.
    3. Malika HAMADI, 2002. "Ownership Strucure ad the Performance of Belgian Listed Firms," LIDAM Discussion Papers IRES 2002015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. Mr. Luc E. Leruth & Mr. Yougesh Khatri & Ms. J. Piesse, 2002. "Corporate Performance and Governance in Malaysia," IMF Working Papers 2002/152, International Monetary Fund.

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    More about this item

    Keywords

    corporate governance; voting rights; shareholder coalitions; corporate performance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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