This book analyses the widely-held view of the merits of the 'bank-based' German system of finance for investment, and shows that this view is not supported by evidence from the post-war period. The institutional features of the German system are such that universal banks have control of voting rights at shareholders' meetings due to proxy votes, and they also have representation on companies' supervisory boards. These features are claimed to have two main benefits. One is that the German system reduces asymmetric information problems, enabling banks to supply more external finance to firms at a lower cost, and thus increasing investment. The other is that German banks are able to mould and control managements of firms on behalf of shareholders, and thus ensure that firms are run efficiently. This book assesses whether empirical evidence backs up these claims, and shows that the merits of the German system are largely myths.
he qermn system of orporte governne is often thought to e effetive t ddressing prolems rising in lrge firmsF sn ddition to the usul emphsis on the role of qermn nksD it is inresingly reognized tht the qermn system lso involves high onentrtion of the ownership of lrge firmsF e nlyse the reltive signifine of these two fetures of the qermn system nd onlude tht high ownership onentrtion is more importntF elthough nks my influene orporte governne vi their ontrol of proxy votesD positions on supervisory ordsD nd provision of lon finneD in prtie they do not ply role in the governne of lrge qermn firms whih is distint from tht of other types of lrge shreholdersF eny se for the superiority of qermn orporte governne of lrge firms must therefore e sed on high ownership onentrtion rther thn speil role of nksD nd must onsider the osts of ownership onentrtion s well s the enefitsF teremy idwrds nd wrus xiler C o r p o r a t e g o v e r n a n c e B a n k s v e r s u s o w n e r s h i p c o n c e n t r a t i o n i n G e r m a n y ionomi oliy ytoer PHHH rinted in qret fritin # giD giD wrD PHHHF
Concentrated ownership of large listed companies is widespread throughout the world, and Germany is typical in this respect. This paper proposes a method of distinguishing empirically between the beneficial and harmful effects of ownership concentration, and applies it to German data. The results show that, for most types of largest shareholder, the beneficial effects on minority shareholders of increased ownership (greater monitoring of management, and reduced incentives to exploit minority shareholders due to greater cash-flow rights) are at least as large as, and sometimes significantly larger than, the harmful effect (greater private benefits of control due to greater control rights).JEL classification: G32.
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