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We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Other political variables also affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection.

This paper analyzes executive turnover and firm valuation in Italy, a country that features all the characteristics of the most common governance structure around the world, as described by La Porta, et al. (1999): low legal protection for investors, firms with large controlling shareholders and pyramidal groups. The main findings are that turnover is significantly lower and unaffected by performance when the controlling shareholder of the firm is also a top executive in the firm, while it is more sensitive to performance when control is, to some extent, contestable and when the controlling shareholder owns a larger fraction of the firm's cash-flow rights. The results on valuation are the mirror image of those on turnover: the firm's Q is lower for companies with the controlling shareholder as a top executive, larger when a voting syndicate controls the firm, and increases with the fraction of cash-flow rights owned by the controlling shareholder.

If management has high private benefits and a small equity stake, managers and workers are natural allies against takeover threats. Two forces are at play. First, managers can transform employees into a "shark repellent" through long-term labor contracts and thereby reduce the firm's attractiveness to raiders. Second, employees can act as "white squires" for the incumbent managers. To protect their high wages, they resist hostile takeovers by refusing to sell their shares to the raider or by lobbying against the takeover. The model predicts that wages are inversely correlated with the managerial equity stake, and decline after takeovers.LABOR ECONOMISTS VIEW INDUSTRIAL RELATIONS as being shaped by the conf lict between workers and management. Financial economists view corporate governance as the outcome of the diverging interests of shareholders and management. Actually, these two conf licts are present simultaneously and interact. We show that the conf lict in corporate governance, when particularly acute, can soften the clash in industrial relations. Managers who place a great value on control and own only a small equity stake have an incentive to pay high wages and not to monitor workers too strictly. Noncontrolling shareholders are those who bear most of the costs of such an employment policy.

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This is the unspecified version of the paper.This version of the publication may differ from the final published version. We study whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders. (JEL G01, G14, G32) * We study whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders. (JEL G01, G14, G32) 3 Whether family control is beneficial for all shareholders or serves the family's best interest at the expense of outside shareholders is still unclear, despite much research on this issue. Permanent repository link:1 In this paper, we shed new light on this topic by studying, around the world, whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis.We argue that the unexpected liquidity shock from the financial crisis moves firms out of equilibrium in a way that magnifies both the benefits and costs of family control. With liquidity scarce, a family could add value by providing greater access to finance via other firms under its control. However, a family's private benefits of control also can be affected by the crisis. A controlling family tends to be undiversified with its wealth tied up in the firm(s) it controls, and a liquidity shock can threaten the survival of the family empire. Relative to firms controlled by more diversified shareholders, family-controlled firms may be biased toward survival-oriented actions that help preserve the family's control benefits at the expense of outside shareholders.We use a sample of more than 8,500 nonfinancial firms from thirty-five countries to test whether outside shareholders update their expectations regarding the benefit or cost of family control during a financial shock. Our results show that across countries family-controlled firms underperform relative to other firms during the 2008-2009 global fin...

The fundamental problem of corporate governance in the United States is to alleviate the conflict of interest between dispersed small shareowners and powerful controlling managers. The fundamental corporate governance in continental Europe and in most of the rest of the world is different. There, few listed companies are widely held. Instead, the typical firm in stock exchanges around the world has a dominant shareholder, usually an individual or a family, who controls the majority of the votes. In this essay, we begin by describing the differences in the ownership structure of companies in the three main economies of continental Europe -- Germany, France, and Italy -- with comparisons to the United States and the United Kingdom. We next summarize the corporate governance issues that arise in firms with a dominant shareholder. We take a look at a major European corporate scandal, Parmalat, as an extreme example of investor expropriation in a family-controlled corporation. We outline the legal tools that can be used to tackle abuses by controlling shareholders. Finally, we describe the corporate governance reforms enacted by France, Germany, and Italy between 1991 and 2005 and assess the way in which investor protection in the three countries has changed.

This paper examines the effect of labor protection on firm financial structure. We exploit inter-temporal variations in employment protection laws across 21 OECD countries and find that labor friendly reforms are associated with a reduction in firm leverage. We also find that the negative effect of labor protection on leverage is more pronounced in firms that rely more on labor, are subject to more frequent hiring and firing, and have lower liquidation value. These results are consistent with the view that employment protection increases operating leverage and thus crowds out financial leverage. Furthermore, we find that increases in employment protection impact negatively firm investment and growth in sectors that are more dependent on external capital. These results indicate that firms' reduced ability to raise external capital, due to stronger labor protection, has negative real effects.