Jens F. Koke

An Applied Econometricians' View of Empirical Corporate Governance Studies

Abstract The economic analysis of corporate governance is in vogue. In addition to a host of theoretical papers, an increasing number of empirical studies analyze how ownership structure, capital structure, board structure, and the market for corporate control influence firm performance. This is not an easy task, and indeed, for reasons explained in this survey, empirical studies on corporate governance have more than the usual share of econometric problems. This paper is a critical survey of the recent empirical literature on corporate governance - to show which methodological lessons can be learned for future empirical research in the field of corporate governance, paying particular attention to German institutions and data availability.

The market for corporate control in a bank-based economy: a governance device?

Abstract This study examines whether changes in ultimate firm ownership (control) play a disciplinary role in a bank-based economy. We focus on Germany as the prototype of a bank-based system. We find that poor performance makes a change in control more likely; this suggests a disciplinary role. Tight shareholder control acts as a substitute for control changes, strong creditor control as a complement. Following a change in control, management turnover increases, but not as a consequence of poor performance, and performance does not improve significantly. These findings are inconsistent with a disciplinary role of the market for corporate control in bank-based Germany.

Determinants of acquisition and failure: evidence from corporate Germany

Abstract This study examines the determinants of acquisition and failure for a large sample of German corporations, separately for public and private corporations. Both types of firms are more likely to be acquired or to fail when performance is poor, leverage is high, and firm size is small. For public corporations, also ownership concentration and the type of the ultimate owner are strongly related to the probability of acquisition, and restructuring activity is significantly related to the probability of failure. Generally, these results do not depend on the length of the forward-looking time horizon.

Institutional Investment in Central and Eastern Europe: Investment Criteria of Western Portfolio Managers

This study provides detailed evidence on the recent transitionstate of Central and Eastern European (CEE) countries. It draws on data froma survey conducted among portfolio managers ofWestern investment funds thereby making use of the knowledge of experts in CEE markets. The approach of the study is two-fold: First, criteria for portfolio investment and current barriers to higherinvestment in CEE countries are identified. Second, the CEE portfolio structure is explained making use of detailed grading data fromthe survey. The results suggest that a reduction in general andmacroeconomic risk tends to increase investment and that the potential of high returns and low risk from the setting of financialmarkets contributes to significantly higher investment in some countries.

Control transfers in corporate Germany: their frequency, causes and consequences

This study examines changes in block ownership for a large sample of listed and non-listed German firms. The frequency of block trading is similar to other countries, and the vast majority of block trades leads to changes in ultimate ownership (control transfers). Such changes are more likely for firms with high leverage, while they are less likely for larger firms and firms with high ownership concentration. Only for listed firms poor performance is related to more frequent control transfers. Control transfers are followed by increased management turnover, and for listed firms also by asset divestitures and employee layouts.

Corporate Governance, Market Discipline, and Productivity Growth

Using a large panel of German manufacturing firms over the years 1986-1996, this study examines the impact of corporate governance and market discipline on productivity growth. We find that firms under concentrated ownership tend to show significantly higher productivity growth. Financial pressure from creditors influences productivity growth positively, particularly for firms in financial distress. Regarding market discipline, productivity grows faster when competition on product markets is intense, but only when owner concentration is high. We do not find evidence that the type of the owner, ownership complexity, or the size of the supervisory board is significantly related to productivity growth.

Determinants of Acquisition and Failure

This chapter is an extended and adapted version of Koke (2001b). It examines the determinants of acquisition and failure of German corporations. Both issues have recently attracted the increased attention of researchers and policy makers alike. In Germany, but also in other continental European countries the number of insolvencies continued to rise or stagnated at high levels. At the same time, in the past decade we have seen an upsurge in merger and acquisitions activity, both within and across the borders. In Germany and in other continental European countries, hostile takeovers are rare (Franks and Mayer, 1998). But as shown in Chapter 4, similarly to the US block trades occur more frequently than tender offers. Especially German policy makers often argue that acquisitions occur to the disadvantage of shareholders and other stakeholders. A recent example is the takeover of Mannesmann by the British telecom company Vodafone that provoked intense discussions on the merits of acquisitions.

Frequency, Causes, and Consequences of Control Transfers

This chapter is a revised and adapted version of Koke (2000). It examines the market for large share blocks in Germany. Shleifer and Vishny (1997) argue that such a market for corporate control is an important element of corporate governance. Particularly active markets have been described for the US (e.g., Jensen and Ruback, 1983; Jarrell et al., 1988) and the UK (Franks and Mayer, 1990). To a large extent these markets are based on hostile takeovers. Focusing solely on hostile takeovers, there is no market for corporate control in the bank-based economies of continental Europe (OECD, 1998), in particular not in Germany (Franks and Mayer, 1998). For Germany, this lack is typically attributed to bank voting power, complex ownership structures, and political resistance. This chapter shows that control transfers in Germany occur more frequently than often assumed, and that there are some indications characterizing these control transfers as disciplinary.

Literature Review and Methodological Concerns

This chapter is a revised and adapted version of Borsch-Supan and Koke (2002). It critically reviews previous empirical work on corporate governance to point out important methodological problems constraining these studies. It also suggests solutions to these problems, paying particular attention to the institutional setting in Germany. The ultimate aim is to indicate which data should be collected for corporate governance analyses and which methodological drawbacks can be avoided when using those data. The construction of the German Corporations Database discussed in Chapter 3 as well as the empirical analyses presented in Chapters 4–6 are direct applications of the lessons suggested in this chapter.

The German Corporations Database (GCD)

The key lesson from the literature review in Chapter 2 is that a solid database is essential. Only with data on hand that fulfill specific requirements, most methodological drawbacks plaguing previous empirical studies on corporate governance can be addressed.