Regulation and the Anatomy of Ownership Structures in European Listed Firms

Abstract:     
This paper explores an extensive novel panel-data set covering more than 4,000 listed firms in 16 European countries to study the effects of shareholder protection on ownership structure and firm performance. Recent research criticizes the existing law and finance literature using (i) small-sample country averages and (ii) legal indices of the first generation and casts serious doubts on the seemingly well-established negative correlation between shareholder protection and ownership concentration. Examining overall ownership concentration we provide supportive evidence for a negative effect of shareholder rights, even when we examine a large sample of firms, account for a broad set of firm level characteristics and use second generation legal indices measuring shareholder protection. However, when we differentiate between shareholder types, we find that this effect is mainly driven by strategic investors (including families) and institutional ownership is actually positively correlated to the level of shareholder protection. The latter effect, in turn is mainly driven by independent institutional investors. Examining the effect on firm valuation, we find that while independent institutional investors fuel firm valuation, strategic investors jeopardize firm valuation. Thus, our findings support the view that blockholdings of strategic investors emerge (or survive) in case of limited minority protection at the expense of minority blockholders. Altogether our results contribute to a better understanding of the mechanisms between legal protection, ownership structures and firm valuation.

Number of Pages in PDF File: 55

Keywords: Corporate governance, ownership structure, shareholder protection, institutional ownership, minority shareholders, agency conflicts, Europe

JEL Classification: G20, G32, G38

working papers series