The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence
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Transcript of The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence
{28 February 2014Gerhard Schnyder, King’s College [email protected]
The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence
Spread of shareholder-orientated CG around the world since 1980s
Research on convergence of corporate governance: State of the art
Does law matter? The theory and a recent empirical study
UK evidence and some thoughts for future research
Topic & Plan
Rasheed & Yoshikawa. 2012. ‘The Convergence of Corporate Governance: Promises and Prospects’
The Convergence Debate
Hansmann & Kraakman 2000: The end of history of corporate law
“The triumph of the shareholder-oriented model of the
corporation over its principal competitors is now assured, even if it was problematic as recently
as twenty-five years ago” (Hansmann & Kraakman 2001)
Hansmann & Kraakman 2012: still the end of history
The Convergence Debate
Rasheed & Yoshikawa 2012 review:Two streams of convergence research: 1. Country-level institutional
comparisons2. Firm level studies, using variety of
approaches and sample sizes Very few long-term studies (even
fewer using longitudinal data) Very few combining the two levelsFindings: Much change in CG, but mainly hybridisation rather than outright convergenceThe Convergence
Debate
Is corporate governance convergence a law-driven process?
La Porta, Lopez-de-Silanes, Shleifer & Vishny. 1997ff
Law matters: Corporate governance changes are driven by law ‘good’ law leads to ‘good’
economic outcomes (quality of company law claim; QCL)
Law in common law countries is better than in civil law countries (legal origin claim)The Law & Finance
School 1
LLSV: QCL = strong minority shareholder protections
High level of MSPlow risk of expropriationlow levels of ownership
concentrationhigh levels of capital market
development(high levels of economic growth)The Law & Finance
School 2
Too strong legal determinism? One-side view of law? (protective
function only) (Milhaupt & Pistor 2008)
Direction of causality: Does “good” company law precede or follow dispersed ownership?
Endogeneity/co-evolution of law and economy
Historical studies: first MS, then MSP! (Coffee 2001, Cheffins 2001) For more criticisms cf. e.g. Deakin et
al. 2011Counter arguments/ criticisms
Cuomo et al. 2013. ‘The effects of legal reforms on the ownership structure of listed firms’, Industrial and Corporate Change, 22(2), 427-458.
Italian companies: after Draghi Law of 1998
Changes in…1. …no of control enhancing mechanisms (CEMs)…2. …ownership-control ratio…3. ….and/or ownership concentration?
A recent test of the ‘law matters thesis’ 1
Cuomo et al. 2013:Findings: 1. # CEMs: significant decline of CEMs2. Ownership-control ratio: realignment
of ownership and control after Draghi law was adopted
Cuomo et al. 2013 findings 1
3. Ownership concentration: mixed evidence In some cases, higher levels of
MSP = higher levels of ownership concentration
which is contrary to LLSV’s theory But compatible with Schnyder
2012 on NL, S, CH ownership = substitute for legal control mechanisms
Cuomo et al. 2013 findings 2
How to measure CG? why these 3 CEMs (pyramids, dual class stock,
and shareholder agreements) why ownership-control ratio? Cuomo et al justification (p.431): ‘the most
common mechanisms’ in Europe used to separate control rights from cash flow rights. ( Deminor Ratings 2005)
Yet: i) Why should they be the most relevant instruments used in the Italian context? ii) how are these instruments related to each other and linked to the ultimate outcome of interest (firm performance)
Shortcomings 1
Methodological and Data shortcomings
Study cannot provide evidence for causal link
Only four dates worth of company data: 1985, 1995, 2000 and 2005 (no longitudinal data)
Changing sample Measure of legal data: - cross-sectional for the most part (ADRI,
ASDI…but CBR SPI since 1990)- Not directly measure of Draghi law (also
probably quite well captured by ADRI)
Shortcomings 2
What links law to corporate outcomes? Link MSP and ownership
theoretically clear in LLSV’s work: reduced fear from expropriation diffusion
…but what about the two others? (ownership – control ratios and no of CEMs)
lack of theorisation of link between legal rules and corporate practices
Shortcomings 3
Outright prohibition/prescription of practices
Signalling? Reverse causality: Demand for
law?
How does law matter? 1
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%% of firms with dual class stock
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
5
10
15
20
25
30
35
40
Number of firms with dual class stockNumber of firms with multiple voting stockNo firms with Pref/Prio stockNo firms with voting capsNo firms with restricted transferabilityNo firms with golden shares
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8Average no of deviations from 1s1v
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0%10%20%30%40%50%60%70%80%90%
% firms 1s1v
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Average % of blockholders (cumulated stakes >3%)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
2
4
6
8
10
12
Number of firms with controlling shareholder
Legal MSP increased steadily since 1990
Corporate practices changed as well What caused what? First step: decomposition of legal
index…did 1s-1v rules change in the UK?
Direction of causality
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8Cadbury Report 1992: director dismissal easier + majority of NED must be independent
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8Code of Best Practice 1995: Director notice period < or = 1 year
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8
Combined Code 2003: at least 50% of BoD members must be independent
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8
CA 2006: derivative suits possible (shareholders can sue on behalf of company)+ directors dismissals easier
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8AGM involvement for asset sales of 25% or more not required anymore if company lists on ‘standard segment’ (rather than premium)
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
00.10.20.30.40.50.60.70.80.9
1
Prohibition of multiple voting rights (Var 4)
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0%10%20%30%40%50%60%70%80%90%
% firms 1s1v
Note…none of the changes have anything to do with 1S1V….
So, what does that tell us about the role of law in CG change?
Co-evolution? How? Common, non-observed variable driving
both trends? Reversed causality? Why? legal change
difficult without support of business elite (Schnyder 2010)
How does law matter?
Yearly data for both legal change and corporate change
Relatively long time period (1990-2010) Alternative statistical methods (e.g.
Granger causality tests) Definition of CG and how to measure it
(e.g. including variables that are contained in legal indices)
Designing better tests for ‘law matters thesis’
Legal shareholder protection in the UK
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
66.26.46.66.8
77.27.47.67.8
8
Combined Code 2003: at least 50% of BoD members must be independent
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0%
10%
20%
30%
40%
50%
60%
70%Average % ID2003:
55.96%
2004: 57.92%
2002: 44.70%
How did shareholder value-orientated corporate governance come to Europe?
“Establishing the effect of legal reforms on firms’ ownership structure is a particularly challenging task” (Cuomo et al. 2013: 438)
New datasets and innovative use of methods needed
New insights into the relationship between law and economics and the evolution of modern capitalism
Conclusion