Corporate Governance in Spain (with an Application of the Power Indices Approach)

This paper describes the governance system of Spanish listed firms in the early 1990's. Although the institutional setting of the Spanish Stock Exchanges differs little from other European national markets, we found important differences in several aspects of corporate governance. In particular, some of the standard mechanisms of control (e.g. boards and institutional shareholders) do not play an active role, whereas ownership is relatively concentrated. Moreover, power indices suggest that controlling blocs of large shareholders are very likely to form. We thus conclude that the ownership of shares is a pivotal mechanism in the governance of Spanish corporations.     

Corporate Financial Performance and the Use of Takeover Defenses

This paper tests the hypothesis that the threat of a contested takeover improves corporate performance. This is done by a cross-sectional analysis of listed Danish firms with and without effective takeover defenses. Takeover defenses adopted by Danish firms mainly consist of dual class voting rights often in combination with foundation ownership. Using simultaneous equation estimation to deal with the problem of causation, the results show that unprotected firms do not outperform protected firms. This suggests that management in unprotected firms are disciplined by other corporate governance mechanisms than the market for corporate control, including the legal protection of shareholders.     

Why are the French so different from the Germans? Underpricing of IPOs on the Euro New Markets

We study the underpricing of firms listed on the two largest EuroNM stock exchanges, the Neuer Markt of Germany and the Nouveau Marché of France. We find that the high underpricing in these two markets – contrary to the evidence on the US – is not driven by insiders’ selling behaviour. However, the large underpricing is caused by the high degree of riskiness of the issuing firms and by the partial adjustment phenomenon of offer prices to compensate institutional investors for the truthful revelation of their demand for the shares. For France, lock-up agreements act as substitutes to underpricing, but not so for Germany. We also explore the reasons for the large difference in underpricing between the German and the French IPOs: German firms are more underpriced because they are riskier, have larger price revisions, have less stringent VC lock-up contracts, and go public mostly during the hot issue period when the general level of underpricing in all IPO markets is substantially higher.     

Excessive Prices: Using Economics to Define Administrable Legal Rules

European competition laws condemn as ‘exploitative abuses’the pricing policies of dominant firms that may result in adirect loss of consumer welfare. Article 82(a) of the EC Treaty,for example, expressly states that imposing ‘unfair’prices on consumers by dominant suppliers constitutes an abuse.Several firms have been found to abuse their dominant positionsby charging excessive prices in cases brought by the EuropeanCommission and the competition authorities of several MemberStates. Those cases show that the assessment of excessive pricingis subject to substantial conceptual and practical difficulties,and that any policy that seeks to detect and prohibit excessiveprices is likely to yield incorrect predictions in numerousinstances. In this paper, we evaluate the pros and cons of alternativelegal standards towards excessive pricing by explicitly consideringthe likelihood of false convictions/acquittals and the costsassociated with those errors. We find that the legal standardthat maximizes long-term consumer welfare, given the informationtypically available to regulators, would involve no ex postintervention on the pricing decisions of dominant firms. A possibleexception to this general rule is discussed.     

European national news

The regular article tracking developments at the national level in key European countries in the area of IT and communications – co-ordinated by Herbert Smith LLP and contributed to by firms across Europe. This column provides a concise alerting service of important national developments in key European countries. Part of its purpose is to compliment the Journal's feature articles and Briefing Notes by keeping readers abreast of what is currently happening “on the ground” at a national level in implementing EU level legislation and international conventions and treaties. Where an item of European National News is of particular significance, CLSR may also cover it in more detail in the current or a subsequent edition.     

European national news

The regular article tracking developments at the national level in key European countries in the area of IT and communications – co-ordinated by Herbert Smith LLP and contributed to by firms across Europe. This column provides a concise alerting service of important national developments in key European countries. Part of its purpose is to compliment the Journal's feature articles and Briefing Notes by keeping readers abreast of what is currently happening “on the ground” at a national level in implementing EU level legislation and international conventions and treaties. Where an item of European National News is of particular significance, CLSR may also cover it in more detail in the current or a subsequent edition.     

Takeover Defenses’ Influence on Managerial Incentives

This article examines how takeover defenses influence managerial incentives with respect to long-term investments, excess liquidity and capital structure. The article presents a cross-sectional regression based on a sample of listed Danish firms and deals explicitly with the problem of causation between the variables. Takeover defenses adopted by Danish firms mainly consist of shares with dual class voting rights, which are often combined with foundation ownership. The article finds that protected firms have significantly less debt to equity. However, protected firms are not significantly more oriented towards the long-term and do not have significantly more excess liquidity.     

Legal Environment,Firm-level Corporate Governance and Expropriation of Minority Shareholders in Asia

Claessens et al. (2000, Journal of Financial Economics 58(1–2), 81–112) show that corporate control is substantially enhanced by using pyramid structures and cross-holdings by firms in nine East Asian countries. Claessens et al. (1999, SSRN Working Paper; 2002, Journal of Finance 57(2), 2741–2771) provide empirical evidence regarding expropriation arising from the separation of cash flow from voting rights in Asian firms. Their analysis suggests a high degree of expropriation in Hong Kong, Indonesia, Malaysia, and Thailand. We re-examine the problem of expropriation in Asian firms reported by earlier research. We explore firm-level governance-control structure interactions, and control-legal environment interaction for a set of Asian firms for which we are able to obtain relevant data for all the required variables. The major contribution of this paper is that it jointly examines ownership-control structure, firm-level governance and country-level legal protection available to external suppliers of capital. Using post-crisis data, we find a strong country effect in governance. In general, high control firms in countries with weak legal protection have lower firm-level governance scores in general. On the other hand, high control firms, in countries which have a stronger legal protection environment, signal their intention to not expropriate minority shareholders’ wealth by voluntarily adopting measures to strengthen their discipline and responsibility scores. Contrary to earlier findings, we do not find a relationship between control-ownership wedge and firm value. Furthermore, we do not find any relation between firm-level governance and firm value as measured by Tobin’s Q.     

Public bads and private firms: efficiency and sustainability with different allocations of voting rights

A number of authors have proposed that firms can internalize externalities through their shareholders. This paper investigates this proposition, focusing on public bads. Theoretically it is, indeed, possible that shareholders decide that the firm reduces its public bads at the cost of profits, thereby increasing Pareto-efficiency. One of the factors which help determine the size of the reduction is the number of shareholders with a (very) small stake in the firm. The greater this number, the greater the reduction will tend to be. It is shown that the reduction in public bads can be reversed by takeovers, but under special conditions only while takeover defences may also be used. Unfortunately, there are a number of factors which significantly limit the internalization of external effects in practice. The paper also discusses a change in the legal share-voting system whereby the direct owners of the shares (i.e., the shareholders) no longer possess, in their capacity of direct owners, the legal right to vote at the General Meetings of firm owners. Instead, these rights become the property of the beneficial owners of the shares (i.e., the people who ultimately provided the money to buy the shares), but on the condition that they delegate their voting rights to a proxy voting institution. This institutional innovation may significantly increase the internalization of external effects among other things because many beneficial owners have a tiny stake in the firm.     

A Regulation of Bids for Dual Class Shares. Implication: Two Shares—One Price

This paper examines the consequences of a specific regulatory restriction on bids for dual class shares. Shares of different classes are often argued to have different prices because a premium will be paid to the superior voting shares in the case of a tender offer. This paper assumes a setup where regulations require that a tender offer pays the same relative premium to both classes of shares. In this setup, it is shown that both classes will sell at the same price as long as there is a strictly positive probability that either the current management is sufficiently strong or that a sufficiently strong rival will show up. Furthermore, under this weak condition the regulation is socially optimal in the sense that the management that provides the highest total firm value will be the management of the firm. Finally, the regulation is shown to favor (or protect) the holders of restricted voting shares and this is not necessarily at the expense of the holders of superior voting shares.The practical interest of this paper derives from the fact that some European countries have adopted different regulatory restrictions on bids for dual class shares. This has more or less occurred due to proposed EU Directives. The regulation examined in this paper applies to tender offers in Denmark. Empirical results on the voting premium in Denmark are shown to be consistent with the theoretical results in this paper.     

欧陆上市公司关联交易治理机制比较

上市公司关联交易治理重点因股权结构而异,英美等少数股权分散国家为管理层,包括我国在内的多数股权集中国家则为控制股东。鉴于控制股东所主导的关联交易具有利益冲突与经营效率的双重属性,欧陆国家的法律对其采取兴利除弊的治理策略。通过董事会和监事会审批机制确保决策效率,依靠司法任命特别检查人和派生诉讼机制维护少数股东权益,在公司集团中引入特别规则以提升公司价值,实现了公平与效率的动态平衡,值得我国借鉴。     

Property Rights and the Control of Strategy: Foreign Ownership Rules and Domestic Firm Globalization in Indian Industry

This study examines the influence of foreign ownership levels on domestic firms' exporting behavior in India. Foreign ownership is categorized according to the control exercisable at different levels of ownership by foreign shareholders. The degree of strategic control a foreign shareholder can possess is determined by the institutional structure of the Indian environment that firms operate in. The results show that, after controlling for a variety of firm and environment-specific factors, only when property rights devolve unequivocally to foreign owners do domestic firms display the higher export orientation that is consonant with the process of globalization of their operations.     

Parties and Electoral Performance in the Market for Political Consultants

We investigate whether the hiring relationships of candidates and political consulting firms better resembles the predictions of the “adversarial” or “allied” models of consultant‐party interaction. We find that the highest‐quality consultants are not allocated to the most competitive races, consultant‐candidate relationships persist even as candidates' electoral prospects change, and firms who work for challengers face a higher risk of market exit than firms working for incumbents. The market focuses entirely on win‐loss records and ignores the information on consultant performance available in candidates' vote shares. These findings depict a market driven by individual candidate, rather than aggregate party, goals.     

Do Publicly Traded Firms Price Differently from Private Firms?

This article analyzes whether publicly traded firms price differentlyfrom privately held firms in the product markets. Our empiricalevidence shows that, in the U.S. newspaper industry, firms increasetheir prices when their ownership structure changes from privateto public. The effects are robust and significant. A plausibleexplanation is that private owners enjoy more freedom than publicmanagers to expand circulation and distort content, pursuingthe consumption of nonpecuniary benefits of control. Additionalevidence is consistent with this interpretation. Public newspapersshow lower prices when insiders' ownership participation ishigher. Moreover, private newspapers appear more likely thanpublic newspapers to endorse a candidate during presidentialcampaigns. To my knowledge there are no previous studies comparingpricing by private and public companies.     

论控制股东对公司债权人的诚信义务及法律责任

我国在经济转轨时期,大部分公司股权相对集中,存在着控制股东现象,由于控制股东持有大比例的公司表决权股份,具有控制公司股东大会和操控公司经营管理层的能力.随着股东控制权的滥用,公司控制股东侵害公司和债权人利益以及其他股东利益的现象不断出现,这时我国加强公司治理,建立控制股东制约机制提出了迫切的要求.由于公司形式多样,受控制股东影响的公司利益相关者众多,本文将研究视角局限在我国股份公司中的债权人保护上,提出在股份公司中,控制股东应对公司的债权人承担诚信义务,以免发生侵害公司债权人利益的事情.     

Audit fee pricing and internationally-credible GAAP: a property rights analysis

This paper applies a property rights analysis to examine what optimal audit fee compensation schedule is required by foreign based firms in order to produce internationally-credible generally accepted accounting principles (GAAP) that are acceptable to the Securities and Exchange Commission (SEC). The SEC has property rights to take away from foreign firms their discretion over what form of internationally-credible GAAP they must comply with in order to enter US securities markets. This takings decision is costly for foreign firms because it requires them to incur higher marginal audit fees associated with complying with US GAAP and the Sarbanes–Oxley Act. Utilising an argument developed by the property rights literature, a model is presented which assumes four participants: (a) Congress; (b) the SEC; (c) foreign based firms; and (d) audit firms, who compete for political influence over the determination of internationally credible-GAAP. The optimal audit fee compensation schedule required to be incurred by foreign based firms in order to produce internationally-credible GAAP financial reports is found to depend upon with which of these interest groups the SEC’s preferences coincide. Evidence is provided which supports the proposition implied by the model that European firms overinvested in the audit expenditures required to comply with the US disclosure and legal requirements.     

ECJ provides further guidance on the ambit of database right

Following on from the European Court of Justice's ruling on database right in the Directmedia case, the Court has looked in more detail at the protection afforded by database right, and provided further clarification of the meaning of ‘extraction’ and ‘substantial’, particularly in relation to modular databases comprised of several sections. The ECJ's ruling is positive for database owners for the most part, bolstering its previous broad interpretation of the acts of ‘extraction’ that can infringe and considering in more detail other points touched on in the Directmedia, British Horseracing Board and Fixtures Marketing cases. This article discusses the outcome and implications of the ruling.     

Foreign ownership and firm scope in India

We examine how foreign ownership influences the extent to which firms engage in outsourcing. We observe a significant and positive relationship between the extent of foreign ownership and the level of internal sourcing for the firms. Second, when foreign owners have at least 51% ownership versus where foreign ownership is less than 51% we observe dramatic differences in outsourcing levels. Also we find that for firms with controlling foreign ownership undertaking in-house activities, the motivation to keep their property rights as inviolate as possible when their capability contributions within the Indian economy are large and significant is intense. For firms considering locating in India a strategy of internalization of activities in India is central towards retaining their competitive advantage.     

The social willingness to comply with the law: The effect of social attitudes on traffic fatalities

This paper investigates the effect of the social willingness to comply with the law on driver behavior and traffic fatalities. We analyze a panel of 15 European Union states for 1996–2002, a period for which consistent attitudinal data are available. Using corruption indices, we find that the social willingness to comply with the law has significant positive effects on traffic fatalities with an elasticity estimated between −0.207 and −0.217. Other significant factors are traffic exposure, economic growth, speed, and alcohol consumption. We also find that, whatever benefits laws produce, differences in national traffic rules do not explain divergences in road safety. This result seems to indicate that willingness to comply matters more than legal specificity.     

Disputes about corporate expression absorption and their legal remedies

Corporate expression is the expression that a company gives to the outside in its capacity as a legal entity. Often referring to resolutions made by shareholder meetings and the board of directors, based on good faith and bound by contractual spirit, a company must be held liable for its expression. Corporate expression absorption refers to the corporate behaviors and situations wherein the majority voting shareholders and directors replace the will of the minority voting shareholders and directors within their own will. Among them, the majority voting shareholders at a shareholders’ meeting (shareholders’ general meeting) are decision-making shareholders, and directors, managers and other senior management staff that decide corporate affairs are called decision-making members. Corporate expression absorption consists of two sorts: absorption by shareholders’ meeting and absorption by the board of directors. Shareholders’ meeting is a company’s authoritative organization; when the voting rights of some shareholders exceed the statutory limit, they will be able to manipulate the expression of shareholders’ meetings and replace the will of other shareholders with that of their own. The expression absorption by the board of directors refers to the practice wherein the majority directors decide on important corporate matters in accordance with the majority rule. Thus, it can be seen that the corporate expression absorption is a double-edged sword, not only capable of uplifting operational efficiency but also likely to help decision-making shareholders achieve personal gains and transfer corporate interests. As for the disputes of corporate expression absorption, the following legal remedies might be adopted: (1) Limit the voting rights of decision-making shareholders. (2) Provide shareholders with veto power over specific events. (3) Ask the chambers of commerce (industry associations) to arbitrate specific events. (4) Preserve the market value of shares held by dissenting directors. (5) Expand cumulative voting; (6) Provide shareholders the right to exit. (7) Legal remedies for corporate deadlock. (8) Shareholders’ derivative lawsuits. __________ Translated from China Law, No. 4, 2005