Does codetermination reduce shareholder value? Board-level employee representation, firms’ market value, and operational performance

Abstract

We analyze the relationship between board-level codetermination and shareholder value. We use a unique dataset of listed German companies that enables us to identify heterogeneous aspects of codetermination and overcome otherwise common identification issues. We find that codetermination reduces firms’ market value but does not have a corresponding negative effect on firm operating performance. However, we find that employees of codetermined firms are able to positively affect employee wages and employee count while negatively affecting dividends paid to shareholders, thus providing some justification for the observed decrease in perceived market value. These results are mitigated by the presence of strong shareholder monitors. Our findings highlight how heterogeneity of firms’ governance structures can result in tradeoffs in economic outcomes that are a function of the structure’s economic characteristics. This study should be of interest for policy makers concerned about the potential economic consequences of codetermination.

Keywords: Codetermination, Performance, Market Valuation, Diversification

JEL Classification: G30, J53, L25