Table Of ContentMarkus Berndt
Global Differences in Corporate Governance Systems
GABLER EDITION WISSENSCHAFT
Okonomische Analyse des Rechts
Herausgegeben von
Professor Dr. Peter Behrens
Professor Dr. Manfred Holler
Professor Dr. Claus Ott
Professor Dr. Hans-Bernd Schafer (schriftftihrend)
Professor Dr. Rainer Walz
Universitat Hamburg, Fachbereich Rechtswissenschaft II
Die okonomische Analyse des Rechts untersucht Rechtsnormen auf
ihre gesellschaftlichen Foigewirkungen und bedient sich dabei des
methodischen Instrumentariums der Wirtschaftswissenschaften, ins
besondere der Mikrookonomie, der Neuen Institutionen- und Konsti
tutionenokonomie. Sie ist ein interdisziplini:ires Forschungsgebiet, in
dem sowohl Rechtswissenschaftler als auch Wirtschaftswissen
schaftler ti:itig sind und das zu wesentlichen neuen Erkenntnissen
tiber Funktion und Wirkungen von Rechtsnormen gefilhrt hat.
Die Schriftenreihe enthi:ilt Monographien zu verschiedenen Rechts
gebieten und Rechtsentwicklungen. Sie behandelt Fragestellungen
aus den Bereichen Wirtschaftsrecht, Vertragsrecht, Haftungsrecht,
Sachenrecht und verwaltungsrechtliche Regulierung.
Markus Berndt
Global Differences in
Corporate Governance
Systems
Theory and Implications for Reforms
With a Foreword by Prof. Reinier H. Kraakman
Deutscher Universitats-Verlag
Die Deutsche Bibliothek - CIP-Einheitsaufnahme
Ein Titeldatensatz fUr diese Publikation ist bei
Der Deutschen Bibliothek erhiiltlich
Dissertation Universitiit Hamburg, 2002
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ISBN-13: 978-3-8244-7694-7 e-ISBN-13:978-3-322-81431-9
001: 10.1007/978-3-322-81431-9
Foreword
This book is a wide-ranging contribution to international scholarship on corporate governance
systems. Dr. Markus Berndt draws on the empirical and theoretical literature on corporate
governance, game theory, corporate finance, and legal scholarship to offer a comprehensive
account of the origins and possible evolution of the differing systems of corporate governance
that characterize the U.K and U.S. on the one hand ("outsider systems" with widely-held
companies) and much of Continental Europe on the other ("insider systems" dominated by
controlling shareholders).
After summarizing the empirical literature on differences in corporate ownership
structure, capital markets, and legal regulation between the outsider and insider systems of
corporate governance, Dr. Berndt offers a novel account of how these systems arise in the first
instance. Much recent U.S. literature in finance and corporate law assumes the efficiency of
widely-held companies capitalized by liquid equity markets, and explains the survival of
insider systems as an artifact of poor legal protection for minority shareholders. On this view,
insider systems persist because corporate insiders would otherwise extract prohibitive rents.
By contrast, Dr. Berndt builds on models of reputation to offer an efficiency-based account of
the rise insider systems. Without deciding a priori which is the more efficient system, then,
Dr. Berndt traces the network effects of both of these systems on corporate law, securities
law, and the capital markets. In these chapters of the Book, legal scholars can find, inter alia,
a novel theory of how certain features of Continental European company law, such as
mandatory preemption rights and restrictions on share repurchases, are adapted to a system
insider governance, while flexible company law and strong mandatory disclosure rules are
adapted to outsider governance.
Dr. Berndt next offers an account of how governance systems evolve as the liquidity
of capital markets increases. Here, again, the formal model is rooted in game theory, while
the implications of the analysis are of direct relevance to the comparative analysis of
corporate governance. In particular, Dr. Berndt argues that more liquidity in the capital
market increases the efficiency of outsider governance systems in a straightforward fashion,
while more efficiency has both positive and negative effects on the relative efficiency of
insider governance systems.
A variety of implications for corporate governance follow. For example, a relatively
high quality of corporate law is a prerequisite for open governance; without it, open
governance is extremely inefficient. By contrast, however, more integrated capital markets
enhance the attractiveness of outsider governance as long as there are no serious obstacles to
the operation of the market for corporate control.
A final chapter of the Book offers a general analysis of integration of competing
standards in accounting methodologies and corporate governance rules between jurisdictions.
While this analysis, which is also developed with a game theoretic model, differs from Dr.
v
Berndt's exploration of insider and outsider governance systems, it is nonetheless closely
related to his earlier discussion and carries important legal implications. Within Dr. Brendt's
relatively simple analytical framework, there are predictable circumstances in which
convergence of standards will not occur despite a convergence of capital markets, and there
are even circumstances in which convergence may occur on the less efficient of two
competing sets standards.
This Book will be of great interest to legal scholars of comparative corporate
governance and corporate and securities law, as well as to economists who investigate
network effects, the evolution of capital markets, and the important linkages between
corporate governance institutions and the capital markets.
Reinier Kraakman
Ezra Ripley Thayer Professor ofL aw
Harvard Law School
VI
Preface
This publication adds to the theoretical understanding of the economic analysis of the law of
corporations. The governance of corporations, resulting from both private contractual
arrangements and the law, varies significantly between different jurisdictions. Dissatisfaction
with the existing theories to explain these differences motivated this research. The dissertation
is an attempt to come up with a coherent theoretical framework that is able to explain the
observed differences in corporate governance. It pulls together existing theories and provides
new theoretical foundations whenever there is a perceived gap in the current theoretical
understanding of corporate governance.
I would like to make use of this preface to thank the people and institutions that made
this research possible. I would like to thank Hans-Bernd Schafer for his tremendous
dedication to setting up and shaping the Hamburg Ph.D. program in Law and Economics that
is unique in Europe. I thank Manfred Holler and Klaus Hopt for their valuable advice, thought
provoking discussions, and their thorough supervision of this dissertation.
I thank John Coates, Oliver Hart, Florencio Lopez-de-Silanes, Reinier Kraakman,
Katharina Pistor, Marc Roe, Andrei Shleifer, and Volker Simmering for helpful comments,
stimulating discussions, and encouragement. I gratefully acknowledge support by the German
National Research Foundation (DFG), the German Academic Exchange Service (DAAD), and
the John M. Olin Center for Law, Economics, and Business at Harvard Law School.
Last but not least, I thank Natascha Berndt for her patience, encouragement, and support.
Markus Berndt
VII
Table of Contents
Foreword V
Preface VII
List of Tables XIII
List of Figures XV
List of Variables XVII
1. Introduction 1
2. Differences in Corporate Governance Systems 4
2.1 Components of a Corporate Governance System - Scope of the Analysis 4
2.2 Empirical Evidence 5
2.2.1 Concentration of Control 5
2.2.2 Ownership 9
2.2.3 Capital Markets 10
2.2.4 Legislation 11
2.2.5 Summary - Stylized Facts 13
2.2.6 Recent Developments 13
2.3 Explanations for the Evolution of Different Systems 14
2.3.1 Potential Influences on Corporate Governance 14
2.3.2 Technology 15
2.3.3 Financial Institutions 15
2.3.4 Legal Tradition 16
2.3.5 Labor Relations 18
2.3.6 Property Rights and Interventionism 18
2.4 Explanations for the Persistence of Different Systems 19
2.4.1 Remaining Questions 19
2.4.2 Political Economy 19
2.4.3 Network Effects 20
3. Analytical Framework 22
3.1 Purpose of Corporate Governance 22
3.1.1 Shared Purpose 22
3.1.2 Main Agency Problems of the Different Corporate Governance
Strategies 24
3.2 The Role of Institutions and Law 28
3.2.1 Market Response 28
3.2.2 Potential Market Failures 29
3.2.3 Legislative Intervention 30
4. Dispersed Control - the Outsider System 32
4.1 Takeover Market and the Agency Costs of Dispersed Control 32
4.2 Institutional Innovation 34
IX
4.3 A Case for Mandatory Disclosure 36
4.3.1 Benefits and Costs of Disclosure 36
4.3.2 Model 39
4.3.3 Implications 41
5. Concentrated Control-the Insider System 44
5.1 Differences with Dispersed Control 44
5.2 Modeling the Reputation Mechanism of Concentrated Control 44
5.2.1 Setup 44
5.2.2 Sequential Equilibrium 48
5.2.3 Sketch of Proof 49
5.2.4 Properties of the Sequential Equilibrium 58
5.3 Implications 58
5.3.1 Corporate Governance without Control 58
5.3.2 Consequences for the Institutional Design 60
5.4 Legislative Intervention 62
5.4.1 Need for Legislative Intervention? 62
5.4.2 Preemptive Rights and Shareholder Approval to Authorized Capital
Increases 63
6. Network Effects via Capital Markets 68
6.1 Influence of Corporate Governance on Capital Market Liquidity 68
6.2 The Influence of Capital Market Liquidity on Corporate Governance 69
6.2.1 The Effects on the Costs of Capital of Dispersed Control 69
6.2.2 The Effects on the Costs of Capital of Concentrated Control 69
6.3 Resulting Network Effects 72
7. Evolutionary Model 76
7.1 Intention and Structure 76
7.2 Setup 76
7.2.1 Players 76
7.2.2 Strategies of Corporate Control 76
7.2.3 Capital Markets 77
7.2.4 Legislative Strategies 77
7.2.5 Structure of the Model 78
7.3 Control Strategy 79
7.3.1 Firms' Payoffs 79
7.3.2 Decision Process 80
7.3.3 Cost of Capital 81
7.3.4 Strategy Choice 82
7.3.5 Equilibria 84
7.4 Legislation and Financial System 86
7.4.1 The Legislator's Payoffs 86
7.4.2 Strategy Choice 86
7.4.3 Financial System 89
x
8. Implications for Corporate Governance Reforms 93
8.1 Sequencing of Reforms 93
8.1.1 Influence of the Overall Quality of Law on the Autonomous Costs of
Capital 93
8.1.2 Influence of the Overall Quality of Law on the Corporate Governance
System 93
8.1.3 Introduction of Mandatory One-Share-One-Vote Provisions 94
8.1.4 Proposed Sequencing of Reforms 95
8.2 Hysteresis ofInefficient Systems 96
8.2.1 Social Welfare 96
8.2.2 Inherent Coordination Problems 97
8.3 Effect of Capital Market Integration 98
8.3.1 Scope of the Analysis 98
8.3.2 Modeling Capital Market Integration 99
8.3.3 Implications 100
8.4 An Outlook on Privatization Strategies 103
8.4.1 Basic Idea 103
8.4.2 Auction to One Investor 104
8.4.3 Mass Privatization 104
8.4.4 Detrimental Minority Control Privatization 105
9. The Influence of Coordination Benefits on Corporate Governance and
Accounting Standards 106
9.1 Objective of this Chapter 106
9.1.1 Intention of the Chapter 106
9.1.2 Remaining Puzzles 106
9.1.3 Why a new Model? 108
9.2 Setup 109
9.2.1 One Country 109
9.2.2 Two Countries 111
9.3 Equilibria 116
9.4 Social Welfare 119
9.5 Implications of the Coordination Model 122
9.5.1 Sticky Variety 122
9.5.2 Standardization with the Wrong Standard 123
10. Conclusion 127
Appendix: Difference between Entry-Inducement and Entry-Deterrence
A Theoretical Note 131
References 137
XI
