The Relationship Between Corporate Governance and Company Performance in Concentrated Ownership Systems: the Case of Germany
This article presents the results of empirical research of the impact of corporate governance system elements (ownership structures and board characteristics) and company performance in the economies with concentrated ownership. Major goals of this study were to develop the empirical methodology allowing for causal relationship between ownership structure elements and corporate performance and to test the methodology using the high-quality data from the developed market with concentrated ownership. The panel data sample of 270 German companies for the period of 2000-2006, originally collected in Sautner & Villalonga (2009) study and supplemented with additional data by the authors of this article, was used for empirical testing 9 of the hypotheses. Using instrumental variables and simultaneous equations methods to identify causality in the relationship between corporate governance and corporate performance, we found negative impact of insider ownership on performance and positive effect for institutional investors ownership. At the same time, causality in the relationship between board characteristics and company performance cannot be established in the absence of so-called natural experiment, i.e. forced change in board composition due to government policy measures (Black & Kim 2008), due to the lack of instrumental variables for board characteristics. Two main policy implications of the analysis follow. Firstly, limitations on cross-listing of the companies in foreign stock markets result in lower institutional investors ownership and thus translate in worse companies’ performance. Secondly, the equilibrium view of companies’ ownership structures, argued for in Demsetz & Lehn (1985) study, is not supported for concentrated ownership systems with high transaction costs of ownership structures reshuffling (e.g. in case of high capital gains taxes), so governments should adopt any measures, which result in high ownership stakes transferring costs, with caution. The empirical methodology developed in this article may be further used in the research on emerging market data; the study of relationship between corporate governance and company performance under the impact of financial crisis is another promising area of study.