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Abstract:
This paper provides a comprehensive overview of the European takeover market. We characterize the main features of the domestic and cross-border corporate takeovers involving European companies in the period 1993-2001. We provide detailed and comparable information on the size and dynamics of takeover activity in 28 Continental European countries, the UK and Ireland. The data is supplemented with the characteristics of takeover transactions, including the type of takeovers (negotiated acquisition or tender offer), bid attitude (friendly or hostile), payment method (all-cash, all-equity, or mixed deals), legal status of the target firm (public or private), takeover strategy (focus or diversifi cation), amongst other factors. In addition, we investigate the shortterm wealth effects of 2,419 European mergers and acquisitions. We find announcement effects of 9% for target fi rms compared to a statistically signifi cant announcement effect of only 0.5% for the bidders. Including the price run-up, the share price reaction amounts to 21% for the targets and 0.9% for the bidders. We show that the estimated shareholder wealth effect strongly depends on the different attributes of the takeovers. The type of takeover bid has a large impact on the short-term wealth effects for the target firm shareholders with hostile takeovers triggering substantially larger price reactions than friendly transactions. When a UK target is involved, the abnormal returns are higher than those of bids involving a Continental European target. There is strong evidence that the means of payment has a large impact on the share prices of both bidder and target.

takeovers, mergers and acquisitions, diversification, takeover waves, means of payment

Abstract:
This paper contributes to the research on corporate governance by predicting the effects of European takeover regulation. In particular, we investigate whether the recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations. With the help of 150 corporate governance lawyers, we collected the main changes in takeover regulation for 30 European countries. We assess whether a process of convergence towards the Anglo-(American) corporate governance system has been started. We conclude that this is the case. We make predictions as to the consequences of the reforms for ownership and control. We find that, while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the blockholder-based system.

takeover regulation, mergers and acquisitions, corporate governance

Abstract:
This paper reviews the vast academic literature on the market for corporate control. Our main focus is the cyclical wave pattern that this market exhibits. We address the following questions: Why do we observe recurring surges and downfalls in M&A activity? Why do managers herd in their takeover decisions? Is takeover activity fuelled by capital market developments? Does a transfer of control generate shareholder gains and do such gains differ across takeover waves? What caused the formation of conglomerate firms in the wave of the 1960s and their de-conglomeration in the 1980s and 1990s? And, why do we observe time- and country-clustering of hostile takeover activity? We find that the patterns of takeover activity and their profitability vary significantly across takeover waves. Despite such diversity, all waves still have some common factors: they are preceded by technological or industrial shocks, and occur in a positive economic and political environment, amidst rapid credit expansion and stock market booms. Takeovers towards the end of each wave are usually driven by non-rational, frequently self-interested managerial decision-making.

takeovers, mergers and acquisitions, diversifications, takeover waves

Abstract:
This paper shows that a vibrant and economically important public-to-private market has reemerged in the US, UK and Continental Europe, since the second half of the 1990s. The paper shows recent trends and investigates the motives for public-to-private and LBO transactions. The reasons for the potential sources of shareholder wealth effects during the transaction period are examined: a distinction is made between tax benefits, incentive realignment, transaction costs savings, stakeholder expropriation, takeover defenses and corporate undervaluation. The paper also attempts to relate these value drivers to the post-transaction value and to the duration of the private status. Finally, the paper draws some conclusions about whether or not public-to-private transactions are useful devices for corporate restructuring.

Public-to-private transactions, Going-private deals, Management buyouts, Leveraged buyouts, Management buyins

Abstract:
This study investigates the impact of corporate governance and product market competition on total factor productivity growth in Germany and the UK. For Germany, the prototype of a bank-based governance system, productivity grows faster in firms controlled by financial institutions (in particular, banks and insurance companies) and intense competition reinforces this beneficial impact. Furthermore, the importance of the German creditors (mostly banks) for productivity growth is particularly significant in firms which experience financial difficulties or are in financial distress. For the UK, a market-based governance system, we do not find any evidence that creditors play a disciplinary role. Still, there is strong evidence that shareholder control (by insiders, private outsiders and financial institutions) leads to substantial increases in productivity in poorly performing firms. We also find evidence that product market competition is a substitute for blockholder control in the UK.

corporate governance, productivity growth, ownership and control, product market competition, financial distress

Abstract:
This paper provides an overview of the German corporate governance system. We review the governance role of large shareholders, creditors, the product market and the supervisory board. We also discuss the importance of mergers and acquisitions, the market in block trades, and the lack of a hostile takeover market. Given that Germany is often referred to as a bank-based economy, we pay particular attention to the role of the universal banks (Hausbanken). We show that the German system is characterised by a market for partial corporate control, large shareholders and bank/creditor monitoring, a two-tier (management and supervisory) board with co-determination between shareholders and employees on the supervisory board, a disciplinary product-market, and corporate governance regulation largely based on EU directives but with deep roots in the German codes and legal doctrine. Another important feature of the German system is its corporate governance efficiency criterion which is focused on the maximisation of stakeholder value rather than shareholder value. However, the German corporate governance system has experienced many important changes over the last decade. First, the relationship between ownership or control concentration and profitability has changed over time. Second, the pay-for-performance relation is influenced by large shareholder control: in firms with controlling blockholders and when a universal bank is simultaneously an equity- and debtholder, the pay-for-performance relation is lower than in widely-held firms or blockholder-controlled firms. Third, since 1995 several major regulatory initiatives (including voluntary codes) have increased transparency and accountability.

Corporate governance, ownership structure, co-determination, mergers and acquisitions, boards of directors

Abstract:
In this paper, we analyse the short-term wealth effects of large (intra)European takeover bids. We find large announcement effects of 9% for target firms and a cumulative abnormal return that includes the price run-up over the two-month period prior to the announcement date of 23%. However, the share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the status of a takeover bid has a large impact on the short-term wealth effects of target's and bidder's shareholders, with hostile acquisitions triggering substantially larger price reactions than friendly mergers and acquisitions. We also find strong evidence that cash offers trigger much larger share price reactions than all-equity offers or combined bids consisting of cash, equity and loan notes. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. Also, our results suggest that bidding firms should not diversify by acquiring target firms that do not match their core business. Surprisingly, domestic bids create larger short-term wealth effects than cross-border mergers and acquisitions. The country dummies we use proxy for institutional differences, such as different corporate governance regimes (ownership concentration, takeover regulation, protection of shareholder rights, and informational transparency). In addition, we investigate whether the predominant reason for mergers and acquisitions is synergies, agency problems or managerial hubris and find that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.

mergers and acquisitions, domestic and cross-border takeover bids, hostile takeovers, the market for corporate control, short term wealth effects

Abstract:
We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK. We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions. Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover. However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance. None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers. The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance. This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions. Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline.

takeovers, mergers and acquisitions, long-term operating performance, diversification, hostile takeovers, means of payment, cross-border acquisitions, private target

Abstract:
This paper reopens the debate on why firms pay lower dividends in the stakeholder-oriented governance regimes of Continental Europe than in the market-oriented Anglo-American world. Previous studies observe the concentrated ownership structures of Continental European firms, and infer that in the presence of a large controlling shareholder, dividends need not function as an agency control device. We examine the typical stakeholder-oriented regime of the Netherlands, and find that (i) the payouts of Dutch firms are low due to their habitual use of powerful anti-shareholder provisions, and that (ii) dividends and shareholder control are complementary rather than substitute mechanisms in mitigating agency concerns. We find no evidence that controlling shareholders would allow firms to relax their dividend behavior. On the contrary, they demand higher rather than lower dividends to counterbalance the negative impact of anti-shareholder provisions and ensure greater focus on shareholder value. Moreover, the highest dividends are actually paid by firms controlled by corporate insiders, along with institutional investors with superior monitoring skills and incentives. These findings are unlikely to be specific to the Netherlands and could possibly be extended to other stakeholder-oriented regimes.

Dividend policy, corporate governance, anti-shareholder provisions, ownership and control

Abstract:
In view of the record levels of capital raised by European private equity funds in recent years - which, until 2005, exceeded the amounts invested in any given year - we can expect more growth in private equity investment in the near future. In continental Europe, the prospects for buyouts remain especially strong, given both the pressure from investors to restructure larger corporations and the possibilities for adding value in family-owned firms. But, as the authors note, today's private equity firms face a number of challenges in earning adequate returns for their investors. One is increased competition. In addition to the increased activity of U.S. private equity firms, local private equity investors are also facing competition from hedge funds and new entrants such as government-sponsored operators, family offices, and wealthy entrepreneurs. Another major challenge is finding value-preserving exit vehicles. Although an IPO is an option for the largest buyouts with growth prospects, most buyout investments are harvested either through sales to other companies or, increasingly, other private equity firms. The latter transactions, known as secondary buyouts, now account for a significant share of new funds invested by private equity firms across Europe. The markets for management buyouts in the U.K. and continental Europe have experienced dramatic growth in the past ten years. In the U.K., buyouts accounted for half of the total M&A activity (measured by value) in 2005. And as in the U.S. during the 80s, the greatest number of U.K. buyouts in recent years have been management- and investor-led acquisitions of divisions of large corporations. In continental Europe, by contrast, the largest fraction of deals has involved the purchase of family-owned private businesses. But in recent years, increased pressure for shareholder value in countries like France, Netherlands, and even Germany has led to a growing number of buyouts of divisions of listed companies. Like the U.K., continental Europe has also seen a small but growing number of purchases of entire public companies (known as private-to-public transactions, or PTPs), including the largest ever buyout in Europe, the 13 billion purchase this year of the Danish corporation TDC.

Abstract:
Management buy-outs have become a global phenomenon. This paper examines the key market trends in the UK and Continental Europe and identifies challenges for the future development of the market. Key recent trends include: buy-out funds raised have exceeded funds invested; evidence from Continental Europe indicates an intention by institutional investors to increase their commitment; private equity firms from the United States have become more prominent investors in European buy-outs; increased competition has come from hedge funds and new entrants such as government-sponsored operators, family offices and wealthy entrepreneurs; major changes in deals have been the growth of secondary buy-outs and public-to-private buy-outs; recent lower interest rates have been associated with a rise in debt; size of deal syndicates is increasing in very large deals; average share price reaction to the PTP announcement in the UK during 1997-2003 was 30%; secondary buy-outs have become an important exit route, and there is an increasing number of tertiary or quaternary buy-outs. Future challenges include: realizing the scope for attractive deals from restructuring larger corporations in Continental Europe; encouraging succession planning that will result in buy-outs involving family-owned firms; further differentiation between private equity firms in order to generate upside gains; addressing the competitive challenge to existing financiers from hedge funds; reconciling concerns about the medium term economic performance of European economies and the degree of leverage in buy-out deals; and secondary buy-outs raise major challenges relating to whether managers are buyers or sellers, and the attitudes of limited partners.

Public-to-private, going-private, LBO, MBO, IBO, Management buy-ins

Abstract:
We analyse why the control of listed German and UK companies is so different. As shareholders in Germany are less protected and control is less expensive, German investors prefer controlling stakes. We also focus on economic factors such as profitability, risk and growth to predict the probability of occurrence of different states of control six years after the flotation.

Large UK companies become widely held whereas in large German firms new shareholders control significantly larger stakes. Wealth constraints become binding for UK shareholders whereas German shareholders can avoid this by using pyramids. We find substantial differences between a takeover by a concentrated shareholder and one by a widely-held company. For the UK, the probability of the former increases when the company is risky, small and poorly performing. Conversely, the latter is more likely when the target is large, fast growing and profitable. Poor performance and high risk require control and monitoring by a concentrated shareholder. Conversely, high growth and profitability attract widely-held companies. Founders are less inclined to dilute their stake to retain private benefits of control. When German firms are profitable and risky, control is likely to go to a concentrated shareholder, but growth and low profitability increase the probability of a control acquisition by a widely-held firm.

Initial Public Offerings, Corporate Governance, Corporate Ownership and Control, Ownership Structures, Share Pyramids, Shareholder Minority Protection, Stock Exchange Regulation, Takeovers, Dual Class Shares

Abstract:
This paper investigates the market's reaction to UK insider transactions and analyzes whether the reaction depends on the firm's ownership. There are three major findings. First, differences in regulation between the UK and US, in particular the speedier reporting of trades in the UK, may explain the observed larger abnormal returns in the UK. Second, ownership by directors and outside shareholders has an impact on the abnormal returns. Third, it is important to adjust for news released before directors' trades. In particular, trades preceded by news on mergers & acquisitions and CEO replacements contain significantly less information.

Insider trading, directors' share dealings, corporate governance, ownership and control

Abstract:
We simultaneously analyze two mechanisms of the managerial labor market: CEO turnover and monetary remuneration schemes. Sample selection models and hazard analyses applied to a random sample of 250 firms listed on the London Stock Exchange show that managerial remuneration and the termination of labor contracts play an important role in mitigating agency problems between managers and shareholders. We find that both the CEOs' industry-adjusted monetary compensation and their replacement are strongly performance-sensitive. We also investigate whether specific corporate governance mechanisms have an impact on managerial disciplining or on the pay-for-performance contracts. There is little evidence of outside shareholder monitoring whereas entrenched CEOs with strong voting power successfully resist replacement irrespective of corporate performance. CEO remuneration is more sensitive to stock price performance in firms with strong outside shareholders whereas remuneration in insider-dominated firms is more sensitive to measures of accounting returns. When stock prices decrease, CEOs seem to compensate disappointing stock performance by augmenting the cashbased compensation package. Finally, the presence of a remuneration committee has no significant impact on remuneration.

corporate governance, agency costs, CEO remuneration, disciplinary CEO turnover, ownership and control entrenchment, sample selection model

Abstract:
This paper provides an overview of existing research on how corporate restructuring affects bondholder wealth. Restructuring is defined as any transaction which affects the firm's riskiness by changing its underlying capital structure. Thus, it reaches well beyond asset restructuring and includes transactions such as leveraged buyouts, security issues and exchanges, and the issuance of stock options. We identify significant gaps in the literature, emphasize the potential differences in bond performance between market- and stakeholder-oriented corporate governance systems, and provide valuable insights into methodological advances. We find that many issues remain as the empirical evidence is often inconclusive and focuses almost exclusively on the US. Research on other countries remains constrained by the lesser development of their bond markets, but is equally imperative because the position and bargaining power of creditors vis-à-vis the firm differ substantially across countries and governance regimes.

Abstract:
This paper provides an overview of existing research on how corporate restructuring affects the wealth of creditors. Restructuring is defined as any transaction that affects the firm's underlying capital structure. Thus, it reaches well beyond asset restructuring and includes transactions such as leveraged buyouts, security issues and exchanges, and the issuance of stock options. The analysis identifies significant gaps in the literature, emphasizes the potential differences between creditor wealth changes in market- and network-oriented governance systems, and provides valuable insights into methodological advances. Many issues obviously remain, as empirical evidence is still incomplete and focuses exclusively on the US. In network-oriented regimes, the potential for research remains constrained by the lesser development of bond markets that disclose information on creditor wealth shocks. Still, on-going debt securitization should now allow for the investigation of at least some critical issues. This is imperative, as the position of creditors in the firm differs substantially across governance systems despite the gradual convergence of these regimes across the world.

Bondholder wealth, corporate restructuring, mergers and acquisitions, event studies, bond returns

Abstract:
In cross-border acquisitions, the differences between the bidder and target corporate governance have an important impact on the takeover returns. We measure the difference in the bidder and target corporate governance (in terms of shareholder, minority shareholder, and creditor orientation) with newly constructed indices. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for this bootstrapping effect.

takeovers, mergers and acquisitions, cross-border, takeover synergies, corporate governance regulation, contractual convergence, shareholder protection, creditor protection, minority shareholder protection, takeover regulation

Abstract:
Dividends of German firms are often perceived to be more flexible than those of Anglo-American firms. We analyse the decision to change the dividend for 221 German firms over 1984-93. Consistent with Lintner (1956), net earnings are key determinants of dividend changes. However, our findings also refine those of Lintner (1956) and Miller and Modigliani (1961). First, the occurrence of a loss is a key determinant of dividends in addition to the traditional key determinant, the level of net earnings. Second, the majority of dividend cuts or omissions are temporary. This stands in marked contrast with DeAngelo et al. (1992) who report that US firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis. Finally, we find that firms with a bank as their major shareholder are more willing to omit their dividend than firms controlled by other shareholders.

Dividend policy, ownership, control, bank monitoring, corporate governance

Abstract:
This paper analyses the decision to change the dividend for a panel of German firms from 1984 to 1994. The period captures an economic boom which followed by a recession. This study comes up with two findings which refine the results by Lintner (1956) and Miller and Modigliani (1961). First, the occurrence of a loss is a key determinant of the dividend decision in addition to the level of net earnings. Second, dividend cuts or omissions tend to be temporary and the majority of German firms revert within two years to their initial dividend level. This stands in marked contrast with the US where firms are more likely to reduce their dividend when earnings deteriorate on a permanent basis. Furthermore, the fact that German firms frequently omit and cut their dividend and quickly return to their initial dividend suggests that dividends in Germany have less of a signalling role than dividends in the US or UK. Our findings also contradict Bhattacharya's (1979) argument that the costs of dividend changes are asymmetric with dividend reductions being more costly to the firm than dividend increases. Finally, we find that firms with banks as major shareholder are more willing toomit the dividend than firms controlled by other types of shareholder.

dividend policy, ownership, control, banking, corporate governance

Abstract:
This paper surveys the literature on socially responsible investments (SRI). Over the past decade, SRI has experienced an explosive growth around the world. Particular to the SRI funds is that both financial goals and social objectives are pursued. While corporate social responsibility (CSR) - defined as good corporate governance, sound environmental standards, and good management towards stakeholder relations - may create value for shareholders, participating in other social and ethical issues is likely to destroy shareholder value. Furthermore, the risk-adjusted returns of SRI funds in the US and UK are not significantly different from those of conventional funds, whereas SRI funds in Continental Europe and Asia-Pacific strongly underperform benchmark portfolios. Finally, the volatility of money-flows is lower in SRI funds than of conventional funds, and SRI investors' decisions to invest in an SRI fund are less affected by management fees than the decisions by conventional fund investors.

socially responsible investments, ethical investing, corporate social responsibility, mutual funds, performance evaluation, money-flows, investment screens, mutual funds

Abstract:
This paper shows an in-depth analysis of the performance of large, medium-sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistical significant abnormal returns of 9.13% for the targets and of 0.53% for bidding firms. The characteristics of the targets and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the targets' but decreases bidders' returns; (ii) the private status of the target is associated with higher bidder returns; and (iii) an equity payment leads to a decrease in both bidders' and targets' returns. The takeover wealth effect is not limited to the announcement day but is visible prior and subsequent to the bid. In particular, hostile takeovers trigger larger abnormal returns at announcement but this value is incorporated to some extent in the bidder's and target's share price already prior to the bid announcement. In addition, a bidder benefits from accumulating a toehold stake in the target and these benefits are reflected in bidder's returns subsequent to the takeover announcement. A comparison of the UK and Continental European M&A markets reveals that: (i) The abnormal returns of UK targets substantially exceed those of Continental European firm. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the targets' incumbent shareholders.

takeovers, mergers and acquisitions, diversification, hostile takeovers, means of payment, cross-border acquisitions, private target, partial acquisitions, blockholder, toehold, investor protection, UK, Continental Europe

Abstract:
German firms pay out a lower proportion of their cash flows than UK and US firms. However, on a published profits basis, the pattern is reversed. Company law provisions and accounting policies account for these conflicting results. A partial adjustment model is used to estimate the implicit target payout ratio and the speed of adjustment of dividends towards a long run target payout ratio. We find that German firms do not base their dividend decisions on published earnings, but on cash flows. The reasons for the use of a cash flow-based payout policy are: (i) published earnings figures do not correctly reflect corporate performance as German firms tend to retain a significant part of their earnings to build up legal reserves, (ii) the conservative nature of German accounting policies, (iii) published earnings are subject to a higher degree of smoothing than cash flows. Regarding the speed of adjustment of dividends towards the long term target payout ratio, UK and US companies only slowly adjust their dividend policy whereas German are more willing to cut the dividend in the wake of a temporary decrease in profitability. This causes a higher degree of discreteness in the dividends-per-share time series as opposed to the smoothness (i.e., frequent annual small adjustments in the dividend per share) observed in the US and the UK.

Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance

Abstract:
We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this suboptimal investment policy the result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that the observed cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non-monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.

investment-cash flow sensitivity, ownership and control, asymmetric information, liquidity constraints, agency costs of free cash flow, large shareholder monitoring, Shapley values

Abstract:
How is a takeover bid financed and what is its impact on the expected value creation of the takeover? An analysis of the sources of transaction financing has been largely ignored in the takeover literature. Using a unique dataset, we show that external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are in fact quite distinct. Acquisitions financed with internally generated funds significantly underperform those financed with debt. The takeover financing decision is influenced by the bidder's pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. The choice of equity versus internal cash or debt financing depends on the bidder's strategic preferences with respect to the means of payment.

mergers and acquisitions, takeovers, means of payment, financing decision, cost of capital, sources of financing, agency problem, pecking order, corporate governance regulation, nested logit

Abstract:
This paper investigates whether voting coalitions are formed by shareholders in order to discipline incumbent management. Shapley values capturing the relative power of shareholder coalitions by category of owner, outperform models with percentage ownership stakes and models measuring the relative voting power of individual owners.

There is evidence of successful executive director resistance to board restructuring if these executive directors can combine their ownership stakes to a substantial block of voting power. Non-executive directors seem to support incumbent management, but poor performance is penalised by industrial and commercial companies with large relative voting power. The voting power of insurance companies is positively related to executive director turnover, but this voting power is used to remove management for reasons other than performance, which may be of strategic nature. Investment/pension funds and funds managed by banks do not play a role in the management substitution process. A large number of share blocks change hands, and new shareholders - industrial companies, individuals and families - are related to increased executive director turnover.

Still, these changes in share stakes do not constitute a market in (partial) control since there is no systematic evidence that these changes are triggered by poor performance with the notable exception of industrial companies. There is little evidence that adjusting the board composition to allow for more independence for non-executive directors leads to higher managerial removal. In contrast, high gearing facilitates substitution of executive directors, especially if the company needs to be refinanced.

Corporate Finance, Corporate Control, Ownership structures, Government Regulation

Abstract:
This paper investigates the relationship between ownership and corporate social responsibility. There are at least two reasons why ownership may have an impact on corporate social responsibility. First, major shareholders are visible to outsiders and may therefore become the target of activists if they do not prevent their firm's management from making socially irresponsible decisions. Second, high levels of corporate social responsibility may improve financial performance. Corporate social responsibility would then be one of the factors of good management that a major shareholder would enforce in her monitoring effort.

Similar to recent studies on the link between financial profitability and corporate social performance, we distinguish between two components of social responsibility: stakeholder management and social issue participation. Hillman and Keim (2001) find that the former has a positive impact on firm value whereas the latter has a negative impact. Using detailed ownership data and data on corporate social responsibility for the S&P500 firms, we analyse whether the existence of a major shareholder increases the level of stakeholder management or social issue participation. Although, we find similar signs and levels of significance to previous studies on the control variables in our regression, none of our ownership variables has an effect on social performance.

Corporate social responsibility, corporate governance, ownership, and financial performance

Abstract:
This paper examines the magnitude and the sources of the expected shareholder gains in UK public to private transactions (PTPs) in the second wave from 1997-2003. Pre-transaction shareholders on average receive a premium of 40% and the share price reaction to the PTP announcement is about 30%. We test the sources of the anticipated value creation of the delisting and distinguish between: tax benefits, incentive realignment, control reasons, free cash flow reduction, transactions cost reduction, takeover defences, undervaluation and wealth transfers, The main sources of the shareholder wealth gains are undervaluation of the pre-transaction target firm, increased interest tax shields and incentive realignment. An expected reduction of free cash flows does not determine the premiums nor are PTPs a defensive reaction against a takeover.

Public to private, going-private, LBO, MBO, IBO, Management buyins, Management buyouts, Leveraged buyouts

Abstract:
To the opposite of most Continental European countries, the UK has had stringent rules on ownership disclosure for more than 50 years. However, despite this, we show that the corporate governance system in the UK still needs be improved. The way ownership of listed companies is concentrated in the hands of corporate directors and of passive institutional investors creates its own type of agency problems, i.e. high managerial discretion. Furthermore, there is mounting evidence that hostile takeovers do not necessarily discipline badly performing managers.

Abstract:
This paper investigates whether shareholder lockup agreements in France and Germany mitigate problems of agency and asymmetric information. Despite minimum requirements in terms of the length and percentage of shares locked up, lockup agreements are not only highly diverse across firms but also across the different shareholders of a single firm as most firms have different agreements in place for executives, non-executives and venture capitalists. The diversity across firms and types of shareholders can be explained by firm characteristics - such as the level of uncertainty - as well as the type and importance of each shareholder within the firm.

Initial public offerings, lockup agreements, underpricing, asymmetric informa-tion, agency costs, valuation

Abstract:
In this paper, we analyse the short-term wealth effects of large (intra) European takeover bids. We find large announcement effects of 9% for target firms, but the cumulative abnormal return that includes the price run-up over the two-week period prior to the event rises to 20%. The share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the type of takeover bid has a large impact on the short term-wealth effects of target and bidder shareholders with hostile takeovers triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns outperform those of Continental European bids. We also find strong evidence that the means of payment in an offer has a large impact on the share price reactions. High market-to-book ratio of the target lead to a higher bid premium combined but trigger a negative price reaction for the bidding firm. Bidding firms should not further diversify by acquiring target firms that do not match the bidder's core business. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. We find a significant positive correlation between target shareholder gains and total gains for the merged entity as well as between target gains and bidder gains. This suggests that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.

Mergers and Acquisitions, wealth effects, event study

Abstract:
We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts. Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice. We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives ("contract substitution" effect). If managerial compensation has priority over the debt claims, higher leverage produces lower power-incentive schemes (lower bonuses) and a higher base salary. With junior compensation, we expect more emphasis on pay-for-performance incentives. The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms.

seniority of claims, remuneration contracts, financial distress, insolvency, leverage

Abstract:
This paper addresses the question of how corporate control is exerted in poorly performing listed companies in Belgium. We examine the efficiency of new regulations proposed in Belgium and the neighboring countries by studying whether the board's composition and structure is instrumental for adequate monitoring proxied by enforced management turnover. We find that in poorly performing companies with a high non- executive board representation, management is more frequently disciplined. The fact that the level of total concentrated cumulative ownership is positively related to board turnover when performance is poor supports the hypothesis that major shareholders will monitor the company if the free rider costs of control are low. Monitoring activity is related to the type of owner. The institutional shareholders are not actively involved with disciplining management whereas board turnover is positively correlated to the presence of substantial share stakes held by industrial companies, families and holding companies. We also examine the extent to which sales of stakes and changes in concentration of ownership are associated with poor performance. This market for share stakes might be an important complement to the 100% changes in ownership (the external market for corporate control). We identified high quality monitors as those shareholders who increase their ownership when performance is poor. Such shareholding increases are followed by management restructuring in order to allow management to improve performance.

Abstract:
This paper addresses the question of how corporate control is exerted in poorly performing listed companies in Belgium. We examine the efficiency of new regulations proposed in Belgium and the neighboring countries by studying whether the board's composition and structure is instrumental for adequate monitoring proxied by enforced management turnover. We find that in poorly performing companies with a high non- executive board representation, management is more frequently disciplined. The fact that the level of total concentrated cumulative ownership is positively related to board turnover when performance is poor supports the hypothesis that major shareholders will monitor the company if the free rider costs of control are low. Monitoring activity is related to the type of owner. The institutional shareholders are not actively involved with disciplining management whereas board turnover is positively correlated to the presence of substantial share stakes held by industrial companies, families and holding companies. We also examine the extent to which sales of stakes and changes in concentration of ownership are associated with poor performance. This market for share stakes might be an important complement to the 100% changes in ownership (the external market for corporate control). We identified high quality monitors as those shareholders who increase their ownership when performance is poor. Such shareholding increases are followed by management restructuring in order to allow management to improve performance.

Abstract:
This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds' riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.

ethics, mutual funds, socially responsible investing, investment screens, smart money, risk loadings

Abstract:
This study has analysed the share price reactions to changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. Subsequently, a more detailed classification of the change of top management was made based on the background of the successor (an internal versus external candidate), on the size of the corporation and the degree of corporate diversification. Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance. In companies with good past performance and with internal succession, there is a price decline, but this is not statistically significant. The paper also analysed which corporate governance mechanisms are responsible for forced CEO turnover. A logit regression which accounted for time and industry specific fixed effects did not reveal a relation between performance and turnover. Furthermore, institutional investors, banks and the government do not seem to provoke CEO departures even if they own large blocks of equity. We did not find evidence that the government exerts control in the companies in which it holds majority shareholdings. In contrast, when industrial companies are major owners, there is evidence that forced turnover is facilitated. It also seems that it is easier to remove management in smaller companies than in larger ones. On the part of holding companies, there is only some evidence that they take a monitoring role in the case of other listed holding companies. No correlation was discovered between the degree of leverage and forced CEOs departures, although CEO turnover is facilitated if creditors have their own representatives on the board. Likewise, a high proportion of shareholder representatives on the board leads to a higher probability of forced CEO resignations. However, this probability decreases when the founding family is represented by one or more (executive) directors.

Corporate governance, managerial disciplining, ownership structure, CEO succession, event study

Abstract:
This study has analysed the share price reactions to changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. Subsequently, a more detailed classification of the change of top management was made based on the background of the successor (an internal versus external candidate), on the size of the corporation and the degree of corporate diversification. Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance. In companies with good past performance and with internal succession, there is a price decline, but this is not statistically significant. The paper also analysed which corporate governance mechanisms are responsible for forced CEO turnover. A logit regression which accounted for time and industry specific fixed effects did not reveal a relation between performance and turnover. Furthermore, institutional investors, banks and the government do not seem to provoke CEO departures even if they own large blocks of equity. We did not find evidence that the government exerts control in the companies in which it holds majority shareholdings. In contrast, when industrial companies are major owners, there is evidence that forced turnover is facilitated. It also seems that it is easier to remove management in smaller companies than in larger ones. On the part of holding companies, there is only some evidence that they take a monitoring role in the case of other listed holding companies. No correlation was discovered between the degree of leverage and forced CEOs departures, although CEO turnover is facilitated if creditors have their own representatives on the board. Likewise, a high proportion of shareholder representatives on the board leads to a higher probability of forced CEO resignations. However, this probability decreases when the founding family is represented by one or more (executive) directors.

Corporate governance, managerial disciplining, ownership structure, CEO succession, event study

Abstract:
This paper examines the magnitude and the sources of the expected shareholder gains in UK public to private transactions (PTPs) in the second wave from 1997-2003. Pre-transaction shareholders on average receive a premium of 40% and the share price reaction to the PTP announcement is about 30%. The main sources of the shareholder wealth gains are undervaluation of the pre-transaction target firm, increased interest tax shields and incentive realignment. An expected reduction of free cash flows does not determine the premiums nor are PTPs a defensive reaction against a takeover.

Public to private, going-private, LBO, MBO, IBO, Management buyins, Management buyouts,Leveraged buyouts

Abstract:
This paper examines the payout policies of UK firms listed on the London Stock Exchange during the 1990s. It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases). In a dynamic panel data regression setting, we relate target payout ratios to control structure variables. Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics. While the impact of the voting power of shareholders' coalitions on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions). The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs. Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy.

Payout policy, dividend payout, share repurchases, partial adjustment, ownership

Abstract:
This paper shows that bond performance around M&A announcements is extremely sensitive to cross-country differences in governance and legal standards, using deals involving European bidders with outstanding Eurobonds. Firstly, stakeholder-oriented corporate governance ensures that Continental European bonds fare better in and respond less to the risk effects of M&As. Secondly, bonds fare worse in cross-border M&As ceteris paribus, but perform better when they become exposed to a stakeholder-oriented governance regime or a more creditor-friendly jurisdiction. The creditor protection spillovers we identify are much greater in scope than has been previously assumed, and are intensified by the ability of creditors to arbitrage across legal systems.

Mergers and acquisitions, bond performance, creditor rights, legal arbitrage, corporate governance

Abstract:
Little is known about how investors select socially responsible investment (SRI) funds. Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fund performance. This paper studies the money-flows into and out of the SRI funds around the world. We find that ethical money chases past returns. In contrast to conventional funds' investors, SRI investors care less about the funds' riskiness and fees. Funds characterized by shareholder activism and by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family. SRI funds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry. Finally, funds employing a higher number of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds.

money-flows, ethical funds, socially responsible investing, persistence in performance, investment screens, corporate governance screens, SRI

Abstract:
This paper studies the short- and long-run share price performance of firms that have gone public on the Euro New Markets (EuroNMs) since their foundation in 1996/97. The initial and long-run returns are remarkable in four ways. First, underpricing is on average 2-3 times higher than that on the main markets. Second, the proportion of IPOs with negative initial returns is much higher. Third, the long-run buy-and-hold returns and the cumulative abnormal returns are strongly negative and even substantially more negative than longterm returns on the main markets. Fourth, even across EuroNMs, we find large differences in short- and long-run performance. We show that the performance discrepancies can largely be explained by differences in firm and industry characteristics between the various countries involved.

initial public offerings, underpricing, long-term performance, stock exchange regulation, listing rules

Abstract:
This paper provides an overview of the main characteristics of the ownership structures of the Belgian companies quoted on the Brussels stock Exchange. Prior to the changes in corporate law regarding ownership disclosure in 1989 little was know about ownership and control. We show that the Belgian equity market has some similarities with equity markets of its Continental European neighbors: relatively few Belgian companies are listed and there is a high degree of ownership concentration. In addition, control is levered via pyramidal and complex ownership structures. Ultimate owners in such control chains are not only families and industrial companies but predominantly widely held holding companies that with relatively small cash flow rights, exercise substantial control rights.

Abstract:
This paper provides an overview of the main characteristics of the ownership structures of the Belgian companies quoted on the Brussels stock Exchange. Prior to the changes in corporate law regarding ownership disclosure in 1989 little was know about ownership and control. We show that the Belgian equity market has some similarities with equity markets of its Continental European neighbors : relatively few Belgian companies are listed and there is a high degree of ownership concentration. In addition, control is levered via pyramidal and complex ownership structures. Ultimate owners in such control chains are not only families and industrial companies but predominantly widely held holding companies that with relatively small cash flow rights, exercise substantial control rights.

Abstract:
This paper analyses the control of Belgian listed companies. The analysis reveals that control of listed companies in Belgium is highly concentrated. Business groups, holding companies, and voting pacts, play an important role in bringing about this concentration. The main characteristics of the Belgian corporate ownership and equity market can be summarised as follows: (i) few - merely 140 - Belgian companies are listed on the Brussels stock exchange, (ii) there is a high degree of ownership concentration with an average largest direct shareholding of 45%, (iii) holding companies and families, and to a lesser extent industrial companies, are the main investor categories whose share stakes are concentrated into powerful control blocks through business group structures and voting pacts, (iv) control is levered by pyramidal and complex ownership structures and (v) there is a market for share stakes.

corporate ownership; corporate control; corporate governance

Abstract:
Companies have the choice to deviate from their national corporate governance standards by opting into another system. They can do so via contractual devices - such as cross-border mergers and acquisitions, (re)incorporations, and cross-listings - which enable firms to choose their preferred level of investor protection and regulation. This paper reviews these three main contractual governance devices, their effect on value, and whether their adoption by firms induces a race to the bottom or a race to the top. Indeed, firms may opt for less shareholder-orientation or investor protection shareholder-expropriation hypothesis) rather than for more stringent rules that require firms to focus on shareholder value (bonding hypothesis).

Contractual corporate governance, corporate governance regulation, cross-border mergers and acquisitions, cross-listings, reincorporations, shareholder protection, creditor protection, spillover effects

Abstract:
German firms pay out a lower proportion of their cash flows than UK and US firms. However, on a published profits basis, the pattern is reversed.Company law provisions and accounting policies account for these conflicting results. A partial adjustment model is used to estimate the implicit target payout ratio and the speed of adjustment of dividends towards a long run target payout ratio. We find that German firms do not base their dividend decisions on published earnings, but on cash flows. The reasons for the use of a cash flow-based payout policy are: (i) published earnings figures do not correctly reflect corporate performance as German firms tend to retain a significant part of their earnings to build up legal reserves, (ii) the conservative nature of German accounting policies, (iii) published earnings are subject to a higher degree of smoothing than cash flows. Regarding the speed of adjustment of dividends towards the long term target payout ratio, UK and US companies only slowly adjust their dividend policy whereas German are more willing to cut the dividend in the wake of a temporary decrease in profitability. This causes a higher degree of 'discreteness' in the dividends - pershare time series as opposed to the 'smoothness' (i.e., frequent annual small adjustments in the dividend per share) observed in the US and the UK.

Dividend policy, payout policy, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance

Abstract:
This paper examines the choice between two rights-preserving issue methods of seasoned equity offers in the UK as well as the factors determining the offer price and stock market announcement reactions. Firstly, equity issues in the UK are underwritten for different reasons than in other countries. Only severely financially distressed companies choose not to underwrite their share offer. Second, the average announcement reaction to non-underwritten issues is much more negative than to underwritten issues. This contrasts sharply with the results found in other countries, such as the US. Third, underwritten rights issues experience a negative announcement return whereas the share price reaction to underwritten open offers is positive. The choice of issue method and the subsequent announcement reaction are explained by directors' and institutional investors' interests, growth opportunities, stock market uncertainty and liquidity in the market for rights.

seasoned equity, rights issue, open offer, capital structure, financial distress

Abstract:
This paper examines the impact of venture-capital (VC) backing on the characteristics of voluntary lock-in agreements entered into by the existing shareholders of UK IPOs, and on the abnormal returns around the expiry of the directors' lock-in agreements. Overall, we find that venture-capital backing acts as a complement rather than a substitute for lock-in contracts. We also examine the share-price performance of IPOs with and without VC backing around the time of the expiry of the lock-in agreements. We find that the cumulative average abnormal returns for the VC-backed stocks are lower for most of the short windows around the expiry date. We also examine some UK companies in more detail. Different motivations for the lock-in agreements are uncovered such as the founder's commitment not to exit the company (as he did in an earlier venture which subsequently failed) in one case, and the poor pre-IPO earnings performance in another case.

Initial public offerings, lock-in agreements, high-tech firms, venture capital

Abstract:
The paper investigates why corporate control of listed companies is so different in Germany and the UK. For this purpose we use a unique database which allows us to trace the evolution of control in German and UK firms over the six years after their flotation. Not only do the initial shareholders in the average German company own much larger voting stakes than the UK ones, but the German shareholders lose majority control only 6 years after the IPO. In contrast, the initial owners of UK companies lose control already two years after going public. We find that control retention by initial shareholders depends to a large extent on economic characteristics such as profitability, riskiness, and growth. When a UK firm is risky and experiences high growth in assets, old shareholders are likely to abandon control provided they are not part of the founding family and do not have managerial responsibilities. Thus, control retention by initial shareholders in the UK is more likely in older, profitable firms. In contrast, high growth of a young firm and high profitability is seen as an opportunity by the initial shareholders of German companies to reduce their control. The initial shareholders tend to keep tighter control when the equity structure combines both voting and non-voting shares and when they are involved in the management of the company. In the UK, new large shareholders will accumulate stronger control in smaller, riskier and faster growing firms, especially when it is the founder (or founding family) who reduces control. In German firms in contrast, new large shareholders acquire control in older, profitable firms. However, differences in control between the two countries are not only explained by economic factors, but also by legal determinants. The regulatory environment induces a lower relative cost of holding control blocks in German firms. The weaker protection of shareholder rights in Germany and, hence, the potential to benefit from private benefits of control increases the value of holding large blocks. Therefore, the net benefits from holding large blocks are larger in Germany than in the UK.

Abstract:
The paper examines the payout policy of UK firms listed on the London Stock Exchange during the 1990s. We complement the existing payout literature studies by analyzing jointly the trends in dividends and share repurchases. Unlike in the US, we find that, in the UK, firms do not demonstrate a decreasing propensity to distribute funds to shareholders.

The role of share repurchases is increasing, but dividends still constitute a vast proportion of the total payout. Firms repurchasing shares usually pay dividends as well. We also document that there is a strong relationship between the presence of blockholders and the choice of the payout channel: firms with concentrated ownership tend to opt for dividends rather than share repurchases, irrespectively of the identity of the controlling shareholder. We argue that the differential taxation of dividends and capital gains as well as the insider trading regulation affect the relative attractiveness of dividends and share repurchases to large shareholders.

payout policy, dividends, share repurchases, taxes, power indices, Banzhaf index, ownership structure, corporate governance

Abstract:
IPOs on the EuroNMs have shown very high underpricing. The majority of these IPOs possess specific characteristics such as lock-up agreements, venture-capital financing, ownership by the underwriter and over-allotment options. We study how these characteristics influence the underpricing of firms listed on the two largest EuroNM stock exchanges, the Neuer Markt of Germany and the Nouveau Marché of France. We find that the high underpricing in these two markets - contrary to the evidence on the US - is not driven by insiders' selling behaviour. However, the large underpricing is caused by the high degree of riskiness of the issuing firms and by the partial adjustment phenomenon of offer prices to compensate institutional investors for the truthful revelation of their demand for the shares. In contrast, venture-capital involvement does not affect underpricing. For France, lock-up agreements act as substitutes to underpricing, but not so for Germany. We also explore the reasons for the large difference in underpricing between the German and the French IPOs: German firms are more underpriced because they are more risky, have larger price revisions, have less stringent VC lock-up contracts and mostly go public during the hot issue period of 1999-2000 when the general level of underpricing in all IPO markets is substantially higher.

IPOs, underpricing, venture capital, high technology, European New Markets, lock-up agreements

Abstract:
This paper simultaneously analyses two mechanisms of managerial labour market in the UK - CEO disciplinary turnover and executive compensation schemes. It relates them to the characteristics of corporate ownership structure. Executive cash compensation and turnover proves strongly performance-sensitive. However, the impact of the CEO replacement on subsequent firm performance appears to be weak. Both market - and accounting-based performance indicators play an important role in evaluating executive's productivity. The ownership concentration per se and substantial changes of block holdings do not prove a major determinant of the CEO turnover and compensation. Still, monitoring by some types of owners strengthens governance role of the managerial labour market, while large equity stakes controlled by CEOs result in entrenchment.

corporate governance, CEO compensation, disciplinary managerial turnover, financial performance, ownership structure

Abstract:
This paper is the first to investigate the corporate governance role of shareholderinitiated proxy proposals in European firms. While proposals in the US are nonbinding even if they pass the shareholder vote, they are legally binding in the UK and most of Continental Europe. Nonetheless, submissions remain relatively infrequent in Continental Europe in particular, with major variations across countries in ownership structures, monitoring incentives, and the laws and regulations governing shareholder access to the proxy. We use sample selection models to analyze target selection and proposal success in terms of the voting outcomes and the stock price effects, and make several contributions to the literature. First, proposal submissions remain infrequent compared to the US in Continental Europe in particular. In the UK proposals typically relate to a proxy contest seeking board changes, while in Continental Europe they are more focused on specific governance issues. Second, there is some evidence that the proposal sponsors are valuable monitors, because the target firms tend to underperform and have low leverage. The sponsors also observe the identity of the voting shareholders, because proposal probability increases in the target’s ownership concentration and the equity stake of institutional investors. Third, while proposals enjoy limited voting success across Europe, they are relatively more successful in the UK. The outcomes are strongest for proposals targeting the board but are also affected by the target characteristics including the CEO’s pay-performance sensitivity. Finally, proposals are met with strong negative stock price effects when they are voted upon at general meetings. This suggests that rather than attribute them control benefits, the market often interprets proposals and their failure to pass the vote as a negative signal of governance concerns. Indeed, the market responds better to proposals submitted against large firms with low leverage, which is consistent with agency considerations. However, the stock price effects are most negative for poorly performing firms with low market-to-book ratios, which implies that the proposal outcomes only intensify the market’s concerns over firms that have previously underperformed.

Shareholder activism, shareholder proposals, corporate governance, sample selection

Abstract:
This study examines managerial disciplining in poorly performing firms using large panels for Belgian, French, German and UK firms. We consider the monitoring role of large blockholders, the market for share blocks, creditors, and non-executive directors. Board restructuring is correlated to poor performance, but not for France. Neither existing blockholders nor creditors play an active role in disciplining. Block purchases have a monitoring role in Belgium and Germany, but not in France and the UK. Large boards facilitate disciplining, but the role of non-executives is ambiguous.

corporate governance, managerial disciplining, ownership structure, CEO succession

Abstract:
German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.

Dividend policy, payout policy, target payout ratio, Lintner dividend model, dividend smoothing, partial adjustment model, corporate governance

Abstract:
This paper investigates whether voting coalitions are formed by shareholders in order to discipline incumbent management. Shapley values capturing the relative power of shareholder coalitions by category of owner, outperform models with percentage ownership stakes and models measuring the relative voting power of individual owners. There is evidence of successful executive director resistance to board restructuring if these executive directors can combine their ownership stakes to a substantial block of voting power. Non-executive directors seem to support incumbent management, but poor performance is penalised by industrial and commercial companies with large relative voting power. The voting power of insurance companies is positively related to executive director turnover, but this voting power is used for remove management for reasons of other than performance, which may be of strategic nature. Investment/pension funds and funds managed by banks do not play a role in the management substitution process. A large number of share blocks change hands, and new shareholders - industrial companies, individuals and families - are related to increased executive director turnover. Still, these changes in share stakes do not constitute a market in (partial) control since there is no systematic evidence that these changes are triggered by poor performance with the notable exception of industrial companies. There is little evidence that adjusting the board composition to allow for more independence for non-executive directors leads to higher managerial removal. In contrast, high gearing facilitates substitution of executive directors, especially if the company needs to be refinanced.

Corporate Finance, Corporate Control, Ownership structures, Government Regulation

Abstract:
This paper unveils the diversity in lock-in agreements of firms listed on the Nouveau Marche stock exchange in France. We give the main economic reasons why shareholders adopt lock-in agreements that are more stringent than legally required. We relate the abnormal returns and the abnormal volume at the expiry dates of the different types of lock-in contracts to the degree of underpricing, venture-capitalist reputation and underwriter reputation. Abnormal returns and trading volume increase at the lock-in expiry; this is especially pronounced at the expiry dates of insider lock-in contracts as insiders are legally required to be locked-in. We do not find significant abnormal returns at the expiries of VC contracts, even though trading volume increases at their lock-in expiry. There is also no evidence of a positive (negative) relation between abnormal returns (abnormal volume) and more stringent lock-in contracts. Lock-in contracts and the degree of underpricing are complementary signaling devices.

Lock-in Agreements, Nouveau Marche, Abnormal Returns and Volumes

Abstract:
This paper unveils the diversity in lock-in agreements of firms listed on the Nouveau Marche stock exchange in France. We give the main economic reasons why shareholders adopt lock-in agreements that are more stringent than legally required. We relate the abnormal returns and the abnormal volume at the expiry dates of the different types of lock-in contracts to the degree of underpricing, venture-capitalist reputation and underwriter reputation. Abnormal returns and trading volume increase at the lock-in expiry; this is especially pronounced at the expiry dates of insider lock-in contracts as insiders are legally required to be locked-in. We do not find significant abnormal returns at the expiries of VC contracts, even though trading volume increases at their lock-in expiry. There is also no evidence of a positive (negative) relation between abnormal returns (abnormal volume) and more stringent lock-in contracts. Lock-in contracts and the degree of underpricing are complementary signalling devices.

shareholders, venture capital, lock-in agreements, lock-up contracts, lock-in expiry, lock-up expiry, signaling, underwriter reputation, underpricing

Abstract:
This paper investigates the evolution of prices and returns in the art market since the middle of the previous century. We first compile a comprehensive list of more than 10,000 artists and then build a dataset that contains information on more than 1.1 million auction sales of paintings, prints, and works on paper. We perform an extensive hedonic regression analysis that includes unique price-determining variables capturing amongst others: the artist’s reputation, the strength of the attribution to an artist, and the subject matter of the work. Based on the resulting price index, we conclude that art has appreciated in value by a moderate 4.03% per year, in real USD terms, between 1951 and 2007. During the art market boom period 2002-2007, prices augmented by 11.60% annually, which explains the increased attention to ‘art as an investment’. Furthermore, our results show that, over the last quarter of a century, prices of oil paintings and of post-war art have risen faster than the overall market. In contrast to earlier studies, we find evidence of a positive masterpiece effect: high-quality art makes a better investment. Our results are robust to alternative model specifications, and do not seem influenced by sample selection or survivorship biases. When comparing the long-term returns on art to those on financial assets, we find that art has underperformed stocks, but outperformed bonds. However, between 1982 and 2007, bonds yielded higher average returns (at a lower risk) than art. Buyers of art should thus expect to reap non-pecuniary benefits rather than high financial returns, especially because the modest art returns are further diminished by substantial transaction costs.

Art investments, Art market, Art returns, Auction prices, Hedonic regressions, Long-term bond returns, Long-term stock returns, Masterpiece effect

Abstract:
As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors' trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm's future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors' trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.

Insider trading, institutional investor monitoring, shareholder activism, corporate

Abstract:
As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors' trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm's future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors' trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction, which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.

institutional investors, institutional shareholders, listed UK firms, monitoring, directors' trades, firm's future value, stock price reaction

Abstract:
This paper provides evidence on the corporate governance role of shareholder-initiated proxy proposals. Previous studies debate over whether activists use proxy proposals to discipline firms or to simply advance their self-serving agendas, and whether proxy proposals are effective at all in addressing governance concerns. Using the largest sample yet examined as well as extensive controls for governance quality, we find that activists use the proxy process as a disciplinary mechanism, and as such are valuable monitoring agents. Moreover, proposal announcements in the proxy statements have positive stock price effects, and both the market and the voting shareholders respond as much to the target firm’s governance quality as to the proposal’s objective and sponsoring shareholder. We address the endogeneity of target selection and proposal success using sample selection models. We conclude that shareholder proposals have nontrivial control benefits, countering arguments that they should be restricted by the SEC.

shareholder activism, shareholder proposals, corporate governance, sample selection

Abstract:
Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.

Abstract:
Economic theory points to five parties active in disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in take-overs, non-executive directors, and investors during periods of financial distress. This Paper reports the first comparative evaluation of the role of these different parties in the discipline of management. We find that, in the UK, most parties, including holders of substantial share blocks, exert little discipline and that some (for example, inside holders of share blocks and boards dominated by non-executive directors), actually impede it. Bidders replace a high proportion of management of companies acquired in take-overs but do not target poorly performing management. In contrast, during periods of financial constraints, which prompt distressed rights issues and capital restructuring, investors focus control on poorly performing companies. These results stand in contrast to the US, where there is little evidence of a role for new equity issues but non-executive directors and acquirers of share blocks perform a disciplinary function. The different governance outcomes are attributed to differences in minority investor protection in two countries with supposedly similar common law systems.

Board turnover, control, corporate governance, regulation, restructuring

Abstract:
Who disciplines management of poorly performing firms? Four parties are considered: existing holders of large blocks of shares, investors acquiring new shareholdings, creditors and non-executive directors. This paper reports a comparative evaluation of the role of all four parties using a large sample of UK companies. Like the US, we find that there is a high level of executive board turnover in poorly performing companies but, contrary to US evidence, outside directors perform a weak disciplinary function and most outside owners of large share blocks exert little influence. Financial factors are important in the disciplining of management: high board turnover is closely linked to high levels of debt and to new equity finance in the form of distressed rights issues.

Abstract:
Although the relationship between religion and economic development on the macro-level has been investigated, it is less clear how religious background influences economic attitudes and financial decision-making on the level of the individual or household, the micro-level. We use panel data from the extensive DNB Household Survey, covering the period from 1995 to 2008, to investigate whether - and through which channel - religious denomination affects household finance in the Netherlands. We find evidence that, in general, religious households care more about saving, are more risk-averse, consider themselves more trusting, have a more external locus of control, and have a stronger request motive. Furthermore, Catholics and Protestants have longer planning horizons, and Protestants and Evangelicals seem to have a greater sense of individual financial responsibility. Most of these factors matter for household financial decision-making, albeit to differing degrees. Using our religion variables as instruments for economic attitudes (and controlling for demographic and background risk characteristics), we demonstrate that the above-mentioned differences in economic beliefs and preferences explain the higher propensity to save by religious households in general and the lower investments in risky assets by Catholic households.

Economic Attitudes, Culture, Religion, Household finance, Portfolio choice, Trust

Abstract:
Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. We find evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. There is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The discrepancy between the strong market reaction to game results and the lack of reaction to betting odds may not only be the result from overreaction to game results but also from the lack of informational content or information salience of the betting information. Therefore, we also examine whether betting information can be used to predict short-run stock returns subsequent to the games. We reach mixed results: we conclude that investors ignore some non-salient public information such as betting odds, and betting information predicts a stock price overreaction to game results which is influenced by investors' mood (especially when the teams are strongly expected to win).

information salience, investor sentiment, investor attention, sports betting, soccer, football, economics of sports, market efficiency

Abstract:
Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. Stock markets react strongly to news about game results, generating significant abnormal returns and trading volumes. Due to the absence of a market reaction to betting odds and the fact that these odds are excellent predictors of game outcomes, these odds contain unpriced information and can be used to predict short-run stock returns. A naïve trading rule based on the probability to win yields abnormal returns of more than 245 basis points over a three-month period. The findings reinforce theories suggesting that under-reaction to news is due to investors' limited processing ability which generates limited attention. In particular, some non-salient public information is totally ignored by investors.

soccer clubs, stock price reaction, betting odds, game results

Abstract:
When-issued trading concerns transactions in securities that have not yet been issued. This type of trade often takes place in a so-called 'grey market', in which all contracts are conditional on the issuance of the security. In this paper, we investigate the Dutch grey market for when-issued shares prior to stock splits and IPOs, using a unique, handcollected dataset. Stock splits are more likely to be preceded by when-issued trading when the underlying firm is larger, the relative trading volume of the stock is higher, and the stock return is less volatile. This implies that market makers are more likely to set up a when-issued market after a stock split announcement when the number of expected transactions is large and the expected costs are low. On the basis of when-issued and regular share closing prices, we calculate premiums of 0.50% to 1.50% on nearly all of the 50 trading days leading up to the stock split. When corrected for the time value of money, these when-issued securities trade at a small but economically significant premium of on average about 0.60% over the regular shares during a limited period before the effective date of the stock split. However, this when-issued premium disappears in the last days prior to the stock split. In the case of when-issued trading in the run-up to an IPO, we find that the prices paid in the grey market are in line with the first day closing prices. This confirms the findings of Loffler, Panther and Theissen (2005) that pre-IPO prices are highly informative.

when-issued trading, stock splits, initial public offerings, market inefficiency

Abstract:
This paper investigates the impact of equity markets and top incomes on art prices. Using a long-term art market index that incorporates information on repeated sales since the eighteenth century, we demonstrate that both same-year and lagged equity market returns have a significant impact on the price level in the art market. Over a shorter time frame, we also find empirical evidence that an increase in income inequality may lead to higher prices for art, in line with the results of a numerical simulation analysis. Finally, the results of Johansen cointegration tests strongly suggest the existence of a long-term relation between top incomes and art prices.

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Abstract:
This paper investigates the impact of equity markets and top incomes on art prices. Using a long-term art market index that incorporates information on repeated sales since the eighteenth century, we demonstrate that both same-year and lagged equity market returns have a significant impact on the price level in the art market. Over a shorter time frame, we also find empirical evidence that an increase in income inequality may lead to higher prices for art, in line with the results of a numerical simulation analysis. Finally, the results of Johansen cointegration tests strongly suggest the existence of a long-term relation between top incomes and art prices.

Art investments, Cointegration, Comovement, Equities, Income inequality, Long-term returns

Abstract:
We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this sensitivity a result of agency problems when managers with high discretion over-invest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that investment-cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non-monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.

Abstract:
This paper investigates the prices and returns in the market for modern Russian art, one of the most important emerging art markets. Applying a hedonic regression model on an extensive dataset containing information on 52,154 art transactions, we find a geometric average return of 4.07%, in real USD terms, between 1967 and 2007. Our Russian art index shows an annualized return of 12.40% since 1997, which is roughly double the average yearly appreciation of a global art market index over the same period. Especially art from the nineteenth century has performed well. Based on correlations and Granger causality tests, we demonstrate that the prices of Russian art are affected by both Russian and global stock market movements. Our results illustrate how the new wealth created in fast-developing economies has its impact on the demand for art from these countries.

Alternative investments, Art, Emerging markets, Hedonic regressions, Wealth

Abstract:
We analyze why the control of listed German and U.K. companies is so different. As shareholders in Germany are less protected and control is less expensive, German investors prefer controlling stakes. We also focus on economic factors such as profitability, risk, and growth to predict the probability of occurrence of different states of control six years after the flotation. Large U.K. companies become widely held, whereas in large German firms new shareholders control significantly larger stakes. Wealth constraints become binding for U.K. shareholders, whereas German shareholders can avoid this by using pyramids. We find substantial differences between a takeover by a concentrated shareholder and one by a widely held company. For the United Kingdom, the probability of the former increases when the company is risky, small, and poorly performing. Conversely, the latter is more likely when the target is large, fast growing, and profitable. Poor performance and high risk require control and monitoring by a concentrated shareholder. Conversely, high growth and profitability attract widely held companies. Founders are less inclined to dilute their stake to retain private benefits of control. When German firms are profitable and risky, control is likely to go to a concentrated shareholder, but growth and low profitability increase the probability of a control acquisition by a widely held firm.

Abstract:
This paper analyses the short-term wealth effects of large intra-European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short-term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.

Mergers and acquisitions, domestic, cross-border takeover bids

Abstract:
This paper contributes to the research on corporate governance by predicting the effects of European takeover regulation. In particular, we investigate whether the recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations. With the help of 150 corporate governance lawyers from 30 European countries, we collected the main changes in takeover regulation. We assess whether a process of convergence towards the Anglo-(American) corporate governance system has been started and we find that this is the case. We make predictions as to the consequences of the reforms for ownership and control. However, we find that while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the blockholder-based system.

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 macro-economic 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 firms 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.

voting, corporate control, corporate performance, shareholders, corporate governance

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 macro-economic 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 firms 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.

voting; corporate control; corporate performance; shareholders; corporate governance

Abstract:
The paper investigates why the corporate landscapes of Germany and UK are so different in terms of control by analyzing ownership and control evolution in recent IPOs. We report the control evolution of a sample of size- and industry-matched German and UK companies six years subsequent to the flotation. The initial shareholders in the average German IPO lose majority control six years after going public, whereas the initial owners of UK IPOs decrease their holding to less than the majority two years after going public. Acquisitions are frequent in the UK with 35% of IPOs being taken over versus only one German sample company. Partial take-overs are common in German firms: in one third of the sample a large controlling shareholder acquires control from the existing controlling shareholder. In order to predict the state of ownership and control six years after going public, a multinomial logit model is used. We distinguish four possible states of control: the company is (i) still controlled by the shareholders who controlled the company prior to the flotation, (ii) acquired by a closely held shareholder (i.e. an individual or family), (iii) acquired by a shareholder with diffuse ownership and (iv) widely held. We find that if the founder still owns a stake at the flotation, the probability that the company will be controlled by this founder after six years is large. For risky and poorly performing German and UK companies, the odds of ending up with concentrated ultimate control increase. In the case of German IPOs, the chance of substantial control concentration augments when non-voting shares have been issued at flotation and when the company experiences a high growth rate subsequent to the IPO. Profitable, low-risk, and large companies tend to be widely held six years after being listed.

corporate finance, corporate control, corporate ownership, IPO

Abstract:
The paper investigates why the corporate landscapes of Germany and UK are so different in terms of control by analyzing ownership and control evolution in recent IPOs. We report the control evolution of a sample of size- and industry-matched German and UK companies six years subsequent to the flotation. The initial shareholders in the average German IPO lose majority control six years after going public, whereas the initial owners of UK IPOs decrease their holding to less than the majority two years after going public. Acquisitions are frequent in the UK with 35% of IPOs being taken over versus only one German sample company. Partial take-overs are common in German firms: in one third of the sample a large controlling shareholder acquires control from the existing controlling shareholder. In order to predict the state of ownership and control six years after going public, a multinomial logit model is used. We distinguish four possible states of control: the company is (i) still controlled by the shareholders who controlled the company prior to the flotation, (ii) acquired by a closely held shareholder (i.e. an individual or family), (iii) acquired by a shareholder with diffuse ownership and (iv) widely held. We find that if the founder still owns a stake at the flotation, the probability that the company will be controlled by this founder after six years is large. For risky and poorly performing German and UK companies, the odds of ending up with concentrated ultimate control increase. In the case of German IPOs, the chance of substantial control concentration augments when non-voting shares have been issued at flotation and when the company experiences a high growth rate subsequent to the IPO. Profitable, low-risk, and large companies tend to be widely held six years after being listed.

corporate finance;corporate control;corporate ownership; IPO

Abstract:
In this paper, we analyse the short-term wealth effects of large (intra) European takeover bids. We find large announcement effects of 9% for target firms, but the cumulative abnormal return that includes the price run-up over the two-week period prior to the event rises to 20%. The share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the type of takeover bid has a large impact on the short term-wealth effects of target and bidder shareholders with hostile takeovers triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns outperform those of Continental European bids. We also find strong evidence that the means of payment in an offer has a large impact on the share price reactions. High market-to-book ratio of the target lead to a higher bid premium combined but trigger a negative price reaction for the bidding firm. Bidding firms should not further diversify by acquiring target firms that do not match the bidder's core business. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. We find a significant positive correlation between target shareholder gains and total gains for the merged entity as well as between target gains and bidder gains. This suggests that synergies are the prime motivation for bids and that targets and bidders tend to share the resulting wealth gains.

Mergers and Acquisitions, wealth effects, event study

Abstract:
We analyse why the control of listed German and UK companies is so different. As shareholders in Germany are less protected and control is less expensive, German investors prefer controlling stakes. We also focus on economic factors such as profitability, risk and growth to predict the probability of occurrence of different states of control six years after the flotation.

Large UK companies become widely held whereas in large German firms new shareholders control significantly larger stakes. Wealth constraints become binding for UK shareholders whereas German shareholders can avoid this by using pyramids. We find substantial differences between a takeover by a concentrated shareholder and one by a widely-held company. For the UK, the probability of the former incrases when the company is risky, small and poorly performing. Conversely, the latter is more likely when the target is large, fast growing and profitable. Poor performance and high risk require control and monitoring by a concentrated shareholder. Conversely, high growth and profitability attract widely-held companies. Founders are less inclined to dilute their stake to retain private benefits of control. When German firms are profitable and risky, control is likely to go to a concentrated shareholder, but growth and low profitability increase the probability of a control acquisition by a widely-held firm.

international public offerings, corporate governance, corporate ownership and control, ownership structures, share pyramids, shareholder minority protection, stock exchange regulation, takeovers, dual class shares

Abstract:
This article examines the relation between executive cash compensation and corporate governance in Europe. Most research performed on the pay-for-performance relation has been conducted in the United States and the United Kingdom, because the widely held nature of shareholding makes the potential agency conflict between shareholders and management most prominent. Arguably, a stronger relation between pay and corporate performance might be expected in market-oriented than in control-oriented regimes. This is not, however, the case. Instead, there is recent evidence which shows that CEO cash-based compensation in the United Kingdom (a market-oriented system) hinges more on corporate sales growth. Conversely, executive compensation in some control-oriented systems appears not to depend solely on corporate sales growth, but relies, to a large extent, on share price and accounting performance. In particular, executive directors of Spanish firms controlled by strong investor groups receive increases in cash remuneration if their companies generate increases in shareholder value. In contrast, Spanish executives' cash compensation is linked to accounting performance if the company's equity concentration is diffuse.

corporate governance; executive pay

Abstract:
This paper investigates whether investment spending of firms is sensitive to the availability of internal funds. Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent. The relation between corporate investment and free cash flow is investigated using the Bond and Meghir [Review of Economic Studies, 61 (1994a) 197] Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6-year period. This method allows for a direct test of the first-order condition of an intertemporal maximisation problem. It does not require the use of Tobin's q, which is subject to mis-measurement problems. Apart from past investment levels and generated cash flow, the model also includes a leverage factor which captures potential bankruptcy costs and the tax advantages of debt. More importantly, we investigate whether ownership concentration by class of shareholder creates or mitigates liquidity constraints. When industrial companies control large shareholdings, there is evidence of increased overinvestment. This relation is strong when the relative voting power (measured by the Shapley values) of the combined equity stakes of families and industrial companies and the Herfindahl index of industrial ownership are high. This suggests that a small coalition of industrial companies is able to influence investment spending. In contrast, large institutional holdings reduce the positive link between investment spending and cash flow relation and hence suboptimal investing. Whereas there is no evidence of over- or under-investing at low levels of insider shareholding, a high concentration of control in the hands of executive directors reduces the underinvestment problem.

Investment, liquidity constraints, onwership, control, corporate governance

Abstract:
The paper analyses management turnover in the wake of bad financial performance in listed Belgian firms. It is interesting to study Belgium as it is characterised by tight corporate control and the absence of an active market for corporate control. The findings suggest that management turnover is higher in firms with a large shareholder and in firms with a high proportion of non-executive directors on the board. Furthermore, certain types of shareholder - families, industrial firms and holding companies - are found to be more active monitors than others. Conversely, institutional shareholders are not associated with higher board turnover. We find some evidence that a market for blocks of shares acts as a substitute for the market for corporate control. Good monitors are found to be those who increase their share holdings when performance is poor and subsequently restructure the management board.