Parity Co-determination at the Board Level and Labor Investment Efficiency: Evidence on German Listed Firms

Journal of Business Economics DOI 10.1007/s11573-019-00930-9 (2019, Forthcoming)

Posted: 3 Apr 2019

See all articles by Kerstin Lopatta

Kerstin Lopatta

University of Oldenburg - Accounting and Corporate Governance

Katarina Böttcher

University of Oldenburg

Sumit K. Lodhia

Australian National University (ANU) - Faculty of Economics & Commerce

Sebastian A. Tideman

University of Hamburg; Syracuse University

Date Written: March 08, 2019

Abstract

This study examines whether parity codetermination at German supervisory boards improves labor investment efficiency at firm level. We focus on labor, as it is an important production factor. Labor investment decisions are not easily reversible in the short term, given that hiring and firing costs are usually quite high due to labor regulation in Germany. As labor representatives are legally entitled to 50% voting rights at the supervisory board level (parity codetermination), we expect them to contribute insider knowledge to the supervisory board. As they have access to internal documents, we also expect them to reduce information asymmetry and potential agency conflicts between management on the one hand and outsiders such as investors or capital suppliers on the other. Both smaller information asymmetries and reduced agency conflicts, in turn, ought to increase a firm’s labor investment efficiency. Labor investment proxies for deviations from a firm’s optimal level of investment in labor in the form of over- and underinvestment, defined as hiring fewer employees than required to run profitable projects (underhiring) or retaining employees who are occupied with non-profitable projects (overhiring). We measure labor investment efficiency using such a net hiring optimum for a sample of German listed firms between 1995 and 2015. The results indicate that parity codetermination causes a lower deviation from the net hiring optimum. Our results are interesting for various stakeholders, especially for policymakers, managers, shareholders and employees who may not be aware of the importance of codetermination for firm efficiency, as well as for firms that are considering circumventing German legislation.

Keywords: Labor investment efficiency, Codetermination, Two-tier board system, Underhiring, Overhiring, Employee representation, Supervisory Board

JEL Classification: D22, D25, G30, G39

Suggested Citation

Lopatta, Kerstin and Böttcher, Katarina and Lodhia, Sumit K. and Tideman A., Sebastian, Parity Co-determination at the Board Level and Labor Investment Efficiency: Evidence on German Listed Firms (March 08, 2019). Journal of Business Economics DOI 10.1007/s11573-019-00930-9 (2019, Forthcoming) . Available at SSRN: https://ssrn.com/abstract=3350669

Kerstin Lopatta

University of Oldenburg - Accounting and Corporate Governance ( email )

Ammerländer Heerstraße 114-118
Oldenburg, DE D-26111
Germany

Katarina Böttcher (Contact Author)

University of Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, DE D-26111
Germany

Sumit K. Lodhia

Australian National University (ANU) - Faculty of Economics & Commerce ( email )

School of Business and Information Management Hanna Neumann Building
Canberra ACT 0200
Australia
+61 02 612 58460 (Phone)
+61 02 612 55005 (Fax)

Sebastian Tideman A.

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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