Product market competition, corporate governance and firm performance: an empirical analysis for Germany

Abstract

Productivity growth has been slow in many continental European countries over the last few decades, especially in comparison with the United States. It has been argued that lack of product market competition and poor corporate governance are two of the main reasons for this phenomenon. However, predictions from theoretical models are far from unambiguous, and empirical evidence is sparse, in particular at the level of individual firms. In this paper, we aim to close this gap with an econometric analysis of firm performance in Germany. Based on a unique panel data set with detailed information on almost 400 manufacturing firms over the 1986-94 period, we find that firms operating in industries which are characterized by more intensive product market competition experience higher rates of productivity growth. We also find weak evidence for the notion that in Germany's bank-based system of internal control, ownership concentration is harmful for productivity growth. Keywords Non-technical summaryProductivity growth has been slow in many continental European countries over the last few decades, especially in comparison with the United States. European countries such as Germany and France have low capital performance as measured by capital productivity and various rates of return. Improving productivity is important not only for shareholder value, but also from a public policy perspective: In many countries, social security systems move away from pay-as-you-go systems to more capital-funded systems, and therefore the rate of return on capital will be even more important as a determinant of future generations' welfare than in the past.It has been argued that lack of product market competition and poor corporate governance are the two main reasons for slow productivity growth in continental Europe. However, predictions from theoretical models are far from unambiguous, and empirical evidence is sparse, in particular at the level of individual firms. This study tries to close this gap with an econometric analysis of firm performance in Germany. Using a panel of almost 400 German manufacturing firms that covers the period 1986-94, we analyze how product market competition and corporate governance affect the growth of total factor productivity.Our empirical approach improves on existing empirical studies on corporate governance in Germany in two important respects. First, the data set consists of listed and non-listed firms which also differ in their legal forms. Hence, our analysis is not restricted to public companies with limited liability whose shares are listed (börsennotierte Aktiengesellschaften). Second, we recognize that product market competition and corporate governance are potentially endogenous. To avoid biased regression results, we use an instrumental variables technique.We find that firms which operate in more competitive product markets have a higher growth of total factor productivity. This suggests that an increase in the intensity of competition should result in productivity improvements. Fro...

Product Market Competition and Dividend Payouts of Listed Non-Financial Firms in Nigeria

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