Corporate governance structures, control and performance in European markets: a tale of two systems

Yves Crama (), Luc Leruth (), Luc Renneboog and Jean-Pierre Urbain
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Yves Crama: School of Business Administration University of Liège Boulevard du Rectorat 7, B31, 4000 Liège, Belgium
Luc Leruth: School of Business Administration University of Liège Boulevard du Rectorat 7, B31, 4000 Liège, Belgium, CORE, and International Monetary Fund

No 1999042, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

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.

Keywords: corporate governance; voting rights; shareholder coalitions; corporate performance (search for similar items in EconPapers)
JEL-codes: G10 G32 G34 (search for similar items in EconPapers)
Date: 1999-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Corporate Governance Structures, Control and Performance in European Markets: A Tale of Two Systems (1999)
Working Paper: Corporate Governance Structures, Control and Performance in European Markets: A Tale of Two Systems (1999)
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