Do Corporate Control and Product Market Competition Lead to Stronger Productivity Growth? Evidence from Market‐Oriented and Blockholder‐Based Governance Regimes

Abstract

This study investigates the impact of corporate governance and product market competition on total factor productivity growth for two large samples of German and UK firms. In poorly performing UK firms, the presence of strong outside blockholders lead to substantial increases in productivity. Contrarily, for German poorly performing and distressed firms, it is bank debt concentration which stimulates productivity growth. Whereas high bank debt concentration also supports productivity growth in German profitable firms, leverage is unrelated to productivity growth in UK firms. Weak product market competition in the UK has a negative impact on productivity growth of in both widely-held firms and concentrated firms with the exception of firms controlled insiders (directors). These seem able to generate productivity increases in firms subject to little market discipline. For profitable German firms, the relation between strong blockholder control and productivity growth is limited. Only control by banks, insurance firms and the government can somewhat reduce the negative effect of weak product market competition.

Recent developments in German corporate governance

“…They find a non-linear relationship between ROA and control (which is negative at low levels of control but positive at high levels) and a positive impact on ROA from a reduction in strong managerial control (entrenchment). Köke and Renneboog (2003) conclude that the relation between strong ultimate blockholders and productivity growth is very limited. Strong blockholders reduce the negative effect of weak product market competition, but only in profitable large firms controlled by banks, insurance firms and the government.…”

“…Cable (1985), Schmid (2000a, 2000b), Lehmann and Weigand (2000) and Köke and Renneboog (2003), for example, find that banks as large shareholders improve corporate profitability. However, Edwards and Nibler (2000) report this effect only for the "3 big banks".…”

“…Empirical evidence on the differences in incentives, abilities and costs in the governance of German firms can be found in e.g. Gorton and Schmid (2000b), Lehmann and Weigand (2000), Januszewski et al (2002), Köke and Renneboog (2003), Edwards and Nibler (2000) and .…”

“…One reason why bank influence is particularly strong is that historically German banks have acted as so-called house banks, providing long-term loans to long-term clients (Baums 1994;Edwards and Fischer 1994). Köke and Renneboog (2003) provide empirical evidence that German firms exposed to tight creditor control operating in competitive markets experience higher productivity growth, especially if these firms are performing poorly or are in financial distress. Lehmann and Neuberger (2001) and Edwards and Fischer (1994) also document that banks intervene in case their corporate client runs into financial distress.…”

“…Moreover, they conclude that competition (and debt) may be a substitutive mechanism to internal control. Following the same econometric methodology, two recent studies -Januszewski et al (2002) and Köke and Renneboog (2003) -provide evidence on German firms.…”