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Insider Ownership, Shareholder Structures and Corporate Governance

Moldenhauer, Benjamin

Entrepreneurial and Financial Studies, Vol. 9

(2007)

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Abstract

The question whether a relationship between insider ownership – i. e. direct shareholdings of managers in their firms – and corporate performance exists increasingly attracts attention in academia as well as in investment practice. The work on hand is an important contribution to this strand of corporate governance research especially as most of the relevant studies refer to Anglo-Saxon capital markets. This study investigates the relationship between insider ownership and corporate performance on the basis of a new and unique data set of German corporations. The results of this study are very interesting from both an academic and practical perspective. They provide evidence that the development of investment strategies should not disregard companies’ ownership structures and shed new light on the role of insider ownership as a corporate governance mechanism. Finally, this work constitutes the first comprehensive overview on the development of shareholder structures of German listed stock corporations.

Table of Contents

Section Title Page Action Price
Preface V
Acknowledgements VII
Table of Contents IX
List of Figures XV
List of Tables XVII
List of Abbreviations XXI
1 Corporate Governance and the Role of Insider Ownership 1
1.1 Why Do Corporate Governance and Insider Ownership Matter? 1
1.2 Aims of the Study 6
1.3 Structure of the Analysis 8
2 Fundamentals of Corporate Governance 11
2.1 Definition and Understanding of Corporate Governance 11
2.2 Corporate Governance Mechanisms 14
2.2.1 Business Objective and Shareholder Value 14
2.2.2 Conflicts between Shareholders and Management 16
2.2.3 Mechanisms to Control Management 17
2.3 Basic Types of Corporate Governance Systems 22
2.3.1 The Capital Market Oriented System 23
2.3.2 The Corporate Law Oriented System 25
2.3.3 Which Corporate Governance System is Best? 26
2.4 The German System of Corporate Governance 28
2.4.1 Historical Development 28
2.4.2 Status Quo 33
2.4.3 Characteristics and Idiosyncrasies 36
2.4.4 Trends and Outlook 38
3 Causes and Consequences of Shareholder Structures in Theory and Practice of Corporate Governance 43
3.1 The Separation of Ownership and Control 43
3.2 Constitution of the German Stock Corporation 47
3.2.1 Management Board 48
3.2.2 Supervisory Board 49
3.2.3 Shareholders’ Meeting 51
3.3 Shareholders’ Objectives and Control Incentives 53
3.3.1 Systematization of Shareholders’ Interests 53
3.3.2 Shareholder Identity as Differentiating Factor 55
3.3.2.1 Insider Individuals (MGMT) 56
3.3.2.1.1 Members of the Management Board (MB) 56
3.3.2.1.2 Members of the Supervisory Board (SB) 58
3.3.2.1.3 Former Members of the Boards (FBM) 60
3.3.2.2 Non-financial Companies (CORP) 61
3.3.2.2.1 Business Groups (BGR) 61
3.3.2.2.2 Corporations (COR) 62
3.3.2.3 Financial Institutions (FINC) 63
3.3.2.3.1 Banks (BANK) 63
3.3.2.3.2 Insurance Companies (INSR) 65
3.3.2.3.3 Investment Companies (INVC) 66
3.3.2.3.4 Domestic Institutional Investors (INST) 66
3.3.2.3.5 Foreign Institutional Investors (INST-F) 69
3.3.2.4 Federal, State and Municipal Government (GOV) 70
3.3.2.5 Miscellaneous (MISC) 70
3.3.2.5.1 Outsider Individuals (INVD) 70
3.3.2.5.2 Employees (EMP) 71
3.3.2.5.3 Others (OTH) and Treasury Shares (TRE) 72
3.3.3 Shareholder Concentration as Differentiating Factor 73
3.3.3.1 Minority Shareholders 74
3.3.3.1.1 Smallholders 74
3.3.3.1.2 Simple Blockholders 76
3.3.3.1.3 Dominating Blockholders 78
3.3.3.2 Majority Shareholders 79
3.3.3.2.1 Simple Majority Blockholders 79
3.3.3.2.2 Super Majority Blockholders 80
3.4 Shareholders, Management and Conflicts of Interest 81
3.4.1 Introductory Remarks 81
3.4.2 Systematical Analysis of Potential Conflicts of Interest 82
3.4.2.1 Between Shareholders and Management 82
3.4.2.2 Among Shareholders 86
3.4.3 Ways and Means for Overcoming Conflicts of Interest 87
4 Insider Ownership and its Effects on Corporate Performance 91
4.1 Insider Ownership According to Different Theoretical Views 91
4.1.1 The Neoclassical View 91
4.1.2 The Institutional View 93
4.1.2.1 Introductory Remarks 93
4.1.2.2 Transaction Cost Theory 95
4.1.2.3 Property Rights Theory 96
4.1.2.4 Principal Agent Theory 98
4.2 Empirical Evidence on Insider Ownership and Performance 102
4.2.1 Determinants and Effects of Insider Ownership 102
4.2.2 Overview of Empirical Studies on Insider Ownership 104
4.2.2.1 Descriptive Studies on the German Market 106
4.2.2.2 Studies on Insider Ownership and Performance 110
4.2.3 Selected Studies on Insider Ownership and Performance 120
4.2.3.1 Results from Capital Market Oriented Systems 120
4.2.3.2 Results from Corporate Law Oriented Systems 123
4.2.3.2.1 Germany 123
4.2.3.2.2 Other Nations 125
4.2.4 Shortcomings of German Research 127
5 Hypotheses on Causes and Effects of Insider Ownership 129
5.1 Determinants of Insider Ownership 129
5.2 Insider Ownership and Corporate Control 131
5.3 Insider Ownership and Corporate Performance 137
6 Empirical Analysis of Insider Ownership in German Public Stock Corporations 143
6.1 Study Design 143
6.2 Sample and Data 146
6.2.1 Sample Selection 146
6.2.2 Data and Sources 150
6.3 Definition of Variables 156
6.3.1 Shareholder Structure Variables 156
6.3.1.1 Introductory Remarks 156
6.3.1.2 Shareholder Identity 157
6.3.1.3 Shareholder Concentration 161
6.3.2 Performance Variables 162
6.3.3 Control and Other Variables 166
6.4 Descriptive Results 170
6.4.1 Shareholder Structures Variables 170
6.4.1.1 Shareholder Identity 170
6.4.1.1.1 Control Rights 170
6.4.1.1.2 Cash Flow Rights 181
6.4.1.1.3 Control and Cash Flow Rights 182
6.4.1.1.4 Ultimate and Direct Ownership 185
6.4.1.2 Shareholder Concentration 187
6.4.1.2.1 Largest Shareholder 188
6.4.1.2.2 Blockholders 191
6.4.1.2.3 Number of Blockholders 195
6.4.2 Performance Variables 198
6.4.3 Control and other Variables 200
6.5 Overview of Hypotheses 204
6.6 Methodology 206
6.7 Results I: Determinants of Insider Ownership 208
6.7.1 Simple Regression Analysis 208
6.7.2 Difference in Means 209
6.7.3 Multiple Regression Analysis 212
6.7.4 Discussion of Results 213
6.8 Results II: Insider Ownership and Corporate Control 215
6.8.1 Simple Regression Analysis 215
6.8.2 Correlation Analysis 217
6.8.3 Difference in Means 219
6.8.4 Discussion of Results 222
6.9 Results III: Insider Ownership and Corporate Performance 224
6.9.1 Correlation Analysis 224
6.9.2 Difference in Means 227
6.9.3 Multiple Regression Analysis 229
6.9.3.1 Base Case (Cross Section 2003) 229
6.9.3.2 Base Case Extended (Cross Section 2003) 234
6.9.3.3 Base Case (Cross Section 1998) 238
6.9.3.4 Base Case (Cross Section 1993) 240
6.9.3.5 Base Case (Pooled Sample) 242
6.9.3.6 Models of Dynamic Ownership 244
6.9.4 Robustness Tests 246
6.9.4.1 Alternative Performance Measures 246
6.9.4.2 Endogeneity 251
6.9.4.3 Multi-Collinearity 255
6.9.5 Discussion of Results 256
6.10 Limitations of the Empirical Study 261
7 Conclusion and Implications 265
7.1 Conclusion 265
7.2 Implications 266
7.2.1 For Research and Theory 266
7.2.2 For Practice 270
Appendix 275
A Exemplary Shareholder Structure Classification 277
B Results I: Determinants of Insider Ownership 279
C Results II: Insider Ownership and Corporate Control 283
D Results III: Insider Ownership and Corporate Performance 289
E Results III: Insider Ownership and Corporate Performance - Robustness 309
F Exemplary Ownership Filings in the U.S. and Germany 315
References 317