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


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


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


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


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


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’


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

the coming of shareholder value to europe: longitudinal firm level evidence

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