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The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence

The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence. 28 February 2014 Gerhard Schnyder, King’s College London gerhard.schnyder@kcl.ac.uk. Spread of shareholder-orientated CG around the world since 1980s

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The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence

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  1. The Coming of Shareholder Value to Europe: Longitudinal Firm Level Evidence 28 February 2014 Gerhard Schnyder, King’s College London gerhard.schnyder@kcl.ac.uk

  2. 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

  3. Rasheed & Yoshikawa. 2012. ‘The Convergence of Corporate Governance: Promises and Prospects’ The Convergence Debate

  4. 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

  5. Rasheed & Yoshikawa 2012 review: Two streams of convergence research: • Country-level institutional comparisons • 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 levels Findings: Much change in CG, but mainly hybridisation rather than outright convergence The Convergence Debate

  6. 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

  7. LLSV: QCL = strong minority shareholder protections • High level of MSP • low risk of expropriation • low levels of ownership concentration • high levels of capital market development • (high levels of economic growth) The Law & Finance School 2

  8. 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. Deakinet al. 2011 Counter arguments/ criticisms

  9. 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

  10. Cuomo et al. 2013: Findings: • # CEMs: significant decline of CEMs • Ownership-control ratio: realignment of ownership and control after Draghi law was adopted Cuomo et al. 2013 findings 1

  11. 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

  12. 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. ( DeminorRatings 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

  13. 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

  14. 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

  15. Outright prohibition/prescription of practices • Signalling? • Reverse causality: Demand for law? How does law matter? 1

  16. Legal shareholder protection in the UK

  17. 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

  18. Cadbury Report 1992: director dismissal easier + majority of NED must be independent Legal shareholder protection in the UK

  19. Code of Best Practice 1995: Director notice period < or = 1 year Legal shareholder protection in the UK

  20. Combined Code 2003: at least 50% of BoD members must be independent Legal shareholder protection in the UK

  21. CA 2006: derivative suits possible (shareholders can sue on behalf of company) + directors dismissals easier Legal shareholder protection in the UK

  22. AGM involvement for asset sales of 25% or more not required anymore if company lists on ‘standard segment’ (rather than premium) Legal shareholder protection in the UK

  23. 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?

  24. 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’

  25. Combined Code 2003: at least 50% of BoD members must be independent Legal shareholder protection in the UK

  26. 2002: 44.70%

  27. 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

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