Kathy Fogel

Big business stability and economic growth: Is what's good for General Motors good for America? ☆

What is good for big business need not generally advance a country%u2019s overall economy. Big business turnover correlates with rising income, productivity, and (in high income countries) faster capital accumulation; consistent with Schumpeter%u2019s (1912) creative destruction and recent formalizations like Aghion and Howitt (1992). Turnover appears to %u201Ccause%u201D growth; and disappearing behemoths, more than rising stars, drive our results. Stronger findings suggest more intense creative destruction in countries with higher incomes, as well as those with smaller governments, Common Law courts, smaller banking systems, stronger shareholder rights, and more open economies. Only the last matters more in lower income countries.

Powerful Independent Directors

Shareholder valuations are economically and statistically positively correlated with independent directors’ power, gauged by social network power centrality. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not. More powerful independent directors Granger cause higher valuations; the converse is not true. Further tests associate more powerful independent directors with less value-destroying M&A, less free cash flow retention, more CEO accountability, and less earnings management. We posit that more powerful independent directors better detect and counter CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.

Foreign Direct Investors as Change Agents : The Swedish Firm Experience

Manuscript Type. Empirical. Research Question. Prior studies examine corporate governance either at the firm level, with limited attention paid to societal culture and norms, or at the nation‐state level, with limited attention paid to the management practices of firms. In this study we examine the impact on the corporate governance of Swedish firms brought about by foreign investors. We argue that in countries like Sweden with strong culturally embedded norms and control exercised by dominant domestic shareholders, control‐seeking foreign investors can act as agents of change to improve firm performance through more efficient capital utilization and labor productivity. Research Findings. We find that the entry of foreign equity investors over the years 1992–2008 surrounding Swedens formal admission to the European Union in 1995 enhanced the financial performance of large publicly traded, domestic owner‐controlled firms in Sweden. The heightened performance of Swedish firms was not simply a result of cross‐border portfolio investments by institutions as the literature on shareholder activism implies. Rather, significant advancements in firm performance occurred only when an increase in voting participation by foreign direct investors was coincident with a decrease in the excess voting power of the largest domestic shareholder, which gave foreign equity investors a critical “voice” in the management of the firm. Theoretical Implications. Informal institutions influence corporate governance by aligning corporate goals with socially acceptable outcomes. Corporate governance practices, if culturally embedded, cannot be easily displaced even when the gains in economic efficiency are large. Corporate owners stand to benefit from the maintenance of the status quo and may not welcome radical changes that can lead to a “creative destruction” of their market power and political dominance. Foreign portfolio investors who focus solely on cash flow rights of the firm cannot effectively change decision making in the boardroom. Foreign direct investors, who actively seek voting shares and control rights, will have the utmost potential to effect change in corporate governance by advocating for new corporate priorities and objectives at board meetings.

Impact of Shareholder Proposals on the Functioning of the Market for Corporate Control

Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.

Foreign Direct Investors as Change Agents

Institutional theory suggests that informal institutions effectively constrain human behavior. Culturally embedded norms and values align corporate governance with socially acceptable outcomes. We argue that foreign direct investors can act as agents of change in corporate governance. Investigating changes in ownership and control of Swedish firms, we find that foreign direct investors’ participation in conjunction with a reduction of control by the largest domestic shareholder improves firm performance through more efficient capital utilization and labor productivity as firms move away from a Swedish stakeholder orientation toward an Anglo-American shareholder wealth maximization focus.