Shareholder Composition, Corporate Governance and Their Monitoring Effects on Firm Performance

Abstract

The main goal of the paper is to understand if the shareholder composition must be considered as part of the corporate governance framework or as monitoring factor. A related goal of the paper is to investigate if the shareholder composition must be included in the loop among the corporate governance and the corporate performance of the firms. We analyze a sample made of 10,520 firms over the years 2006-2015, in 8 European Countries having very differentiated governance frameworks, shareholder composition and corporate performance. Three variables related to equity-ownership structure were considered: (i) equity ratio; (ii) the percentage of institutional investors inside the ownership structure, and (iii) a C-3 index as a measure of ownership concentration explaining the actual influence of shareholders over the managerial decision. Seven indicators of the adopted corporate governance were sourced from ORBIS database and investigated as well. We find out that the qualitative indicators of shareholder composition have significant impacts on the corporate governance framework. On one side, they do not generate an economic incentive, since they do not reinforce the relationships among corporate governance and corporate performance, still an opaque topic. On the other side, shareholder composition deploys its monitoring capabilities by reinforcing the relationship between corporate governance and capital structure. We conclude that corporate governance should be considered as an element contributing to the monitoring capabilities of the shareholder composition of equity, not vice-versa!

Keywords: Corporate Governance, Capital Structure, Agency monitoring

JEL Classification: G30, G32, M10