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Does Ownership Structure Matter? Governance Structures and the Market for Corporate Control in Germany

This paper investigates the impact of corporate governance on the performance of 361 German firms over the period 1991 to 1996. In contrast to previous studies, we report systematic influences of corporate governance indicators on the profitability of German firms. In particular,ownership concentration affects firm performance in significantly negative fashion. This relationship depends on who commands the control rights over a firm. Firms owned by another industrial firm or controlled by banks have significantly lower rates of return than firms governed by families or foreign owners. Representation of owners on the board of directors tends to improve performance. These findings support the view that tighter governance curbs managerial discretion and expands shareholders' wealth. However, we also find that stock corporations with widely dispersed outside shareholdings outperformed stock corporations in which another industrial firm, banks, or different large shareholders had at least a blocking minority. These results imply that the presence of large shareholders does not necessarily enhance profitability.