Why are the Levels of Control (so) Different in German and UK Companies? Evidence from Initial Public Offerings

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.

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

JEL Classification: G3, G32, G34