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Nationality and ownership structures: the 100 largest companies in six European nations.

Introduction

Corporate governance has become a fashionable topic in international business. In the U.S., Michael Porter and others criticize American capital markets for myopia and underinvestment in soft resources like research, development and education (Porter 1992). In Great Britain institutional investors and public authorities strive to make company managers more responsible to investor interests (e.g. the Cadbury report).

In continental Europe business executives and policy makers are discussing the pros and cons of their national models. It is debated, to what extent there is a European company model as distinct from an Anglo-American one. This question is particularly important in setting the standards for integrated European capital markets. To what extent, for instance, should an emerging European Union adopt Anglo-American style stock markets? The Booz-Allan report (1989) on the European markets for corporate control argued that European industry is inefficiently structured because of capital market barriers and that such barriers need to be dismantled in favour of open Anglo-American style stock markets. EU initiatives to regulate the issue of dual class shares are also part of this debate (the proposed 5th company law directive). The continental governance debate has important business implications, the most notable recent example perhaps being the decision of a leading European company like Daimler Benz to opt for the Anglo-American model and to register on the New York Stock exchange.

In response to the corporate governance debate a number of excellent publications have appeared comparing and evaluating national systems of corporate governance (Walter 1993, Roe 1994, Baum et al. 1994, Charkham 1994, Prentice and Holland 1994). This literature has mainly addressed the "soft" sides of corporate governance - the division of labour between management, company board and shareholders within a given structural setting. This paper aims to analyze (measurable) ownership structures that condition corporate governance - with particular emphasis on the differences in national ownership structures. While previous research in this area has been based mainly on descriptive and anecdotal evidence this paper identifies measurable and comparable variables influencing corporate governance. To our knowledge, this is the first attempt to carry out a test of international differences in ownership structure based on comparable cross-country variables.

We compare ownership structures among the 100 largest independent non-financial ownership units (companies) in 6 European nations: Denmark, France, Germany, Great Britain, the Netherlands and Sweden. For a start, we place each of these 600 companies in one of 6 categories and present the findings in Table 1 (the definition of these categories and their theoretical justification are explained in the next section).

[TABULAR DATA FOR TABLE 1 OMITTED]

We note first of all that pluralism is a general characteristic of ownership structures in the countries studied. No single ownership mode appears to be dominant in European business.

Nevertheless, distinct "modes of capitalism" seem to be identifiable and to correspond well to ideal types in the corporate governance literature - e.g. highly dispersed ownership of British companies, French state ownership, German financial capitalism etc. It appears, for instance, that Great Britain has a disproportionate degree of ownership dispersion. This is consistent with the common view of the British system as market based - i.e. that share markets are open and play a major role in the allocation of capital and monitoring company performance. Non-bank financial institutions (pension funds and insurance companies with a fiduciary risk aversion to large shareholdings) apparently hold more than 50% of all British shares (Charkham 1994).

Germany appears to have very few companies with dispersed ownership, but a large number of companies (30) in which a single owner holds a large minority stake (dominating ownership). In 10 of these companies, the dominant owner is a bank or financial institution. Banks own an estimated 8% of all German shares (Charkham 1994) which is high for European standards and very high compared to Anglo-American standards (although far below the level in Japan). And furthermore, the influence of banks is increased by the German system of placing shares in custody of banks. For the same reason the influence of "dominant" minority owners is probably larger than the ownership shares as such imply. All in all these observations are consistent with the common view of German "financial capitalism" (Roe 1994).

France and Sweden seem to have particularly high percentages of government ownership, perhaps reflecting a ("dirigiste") tradition for government intervention. Both countries, incidentally, appear to have high degrees of cross-ownership and therefore high values of what we call "dominating ownership" (Agerutredniningen 1988). It is notable that more than 50% of all French shares appear to be held by other corporations (Charkham 1994). The inference that corporate control in Germany and France (and Sweden) is probably more concentrated than implied by ownership shares underscores even further the difference between the open Anglo-American stock markets and the more closed and concentrated continental models.

The Netherlands seem to have a particularly large number of foreign owned companies which is consistent with a view of this nation as highly open to international influence. Finally, Denmark is characterized by a particularly large frequency of family and especially foundation/trust ownership as well as a particular large share of cooperatives. The Danish model therefore appears to be neither market-based nor financial capitalism but rather a kind of "attenuated capitalism".

In sum, there appears to be substantial international differences in ownership structures among the largest companies. It remains to be explored, however, to what extent these differences are real (e.g. statistically significant) and to what extent they reflect nationality as such or may be explained by differences in industrial structure (e.g. differences in industry composition and company size). These research questions motivate the rest of this paper.

Ownership Categories

The complexity of European ownership structures makes it necessary to pay some attention to measurement in order to carry out meaningful cross-country comparisons. Our delimitation of ownership modes is pragmatic, i.e. influenced by measurability and (what we perceive to be) business relevance as well as by theory. Our viewpoint is that ownership matters because potential owners differ with respect to goals, economic competence, information access, risk preference etc. and because the ownership mode regulates the nature of relations between owners and other stakeholders (Fama and Jensen (1983a, 1983b, 1985), Hansman (1988) and Putterman (1993), for further theoretical discussion see next section). Ownership therefore has at least two dimensions: 1) the identity and concentration of owners and 2) the legal status of the contract which regulates the ownership (e.g. cooperative vs. joint stock company).

Ownership concentration, i.e. the distribution of ownership rights over the group of (potential) owners, has been studied by a number of authors (e.g. Demsetz and Lehn 1985). In principle, this distribution may be summarized in a conventional measure of concentration (e.g. the Herfindahl index) which may be an adequate measure for the study of relatively dispersed ownership as observed e.g. in the U.S. However, for larger ownership stakes as in Europe, there is a qualitative difference between a single owner holding say 49% or 51% of a company's shares which is greater than would be implied by a conventional concentration index. Furthermore, for large stakes, ownership share must be seen in conjunction with the identity of the owner(s): it may matter if a company is controlled by a single person, a family, a financial or industrial corporation, foreign or domestic investor, government or private etc.

The type of contract between owners and between owners and other stake-holders in a company is also important. For instance, both cooperatives and joint stock companies may have highly dispersed ownership, but to mention a few differences, shares in a cooperative are usually illiquid (they cannot be resold) and decision power in cooperatives is measured by simple vote counting rather than by capital invested. In the same way we would expect differences between private and public companies, partnerships and non-profit organizations etc. Furthermore, companies may have dual share classes with differential voting rights or other voting regulations.

Reflecting these considerations, we categorize companies into one of the following ownership categories:

- Dispersed ownership: No single owner owns more than 20% of the company's shares.(2)

- Dominant ownership: one owner (person, family, company) owns a sizeable (voting) share (20% [less than] share [less than or equal to] 50%) of the company.

- Personal/family ownership: one person or a family owns a (voting) majority of the company. We include in this category foundation (trust) ownership because it reflects the will of a personal founder and often gives the family (heirs) some degree of control.

- Government ownership: the (local or national) government owns a (voting) majority of the company.

- Foreign ownership: a foreign multinational (MNE) owns a (voting) majority of the company.

- Cooperatives: the company is registered as a cooperative or (in a few cases) majority owned by a group of cooperatives.

The categorization procedure is represented in the flow chart [ILLUSTRATION FOR FIGURE 1 OMITTED].

Evidently these categories represent a compromise between several relevant dimensions of company ownership. The most important trade offs are discussed below.

First, we choose as the focus of our study the ownership modes of independent ownership units - i. e. we exclude from our sample companies that are owned by other companies. This is because we are interested in ownership as such and want to sidestep the "boundaries of the firm" issue which has already been extensively researched (Williamson 1985, Hart 1988). As the exception to the rule the foreign owned companies in the sample are subsidiaries of multinationals and would therefore belong to one of the other categories if evaluated in their home country, usually to the dispersed ownership group. This contradicts the intention to focus on independent ownership units and introduces a "markets and hierarchies" noise in the analysis: to what extent do subsidiaries differ from independent ownership units? We have, however, chosen to keep the category since we want to analyze differences at the national level.

Secondly, "influence spheres" or Japanese style Keiretsu groups based on cross ownership is not a category as such in our analysis, but the presence of influential minority owners is counted in the dominant ownership. This does not reflect a belief that such structures are irrelevant but rather a preference for units of analysis that are more easily and less subjectively measured. We are aware, however, that such structures in conjunction with statutory amendments imply that measured ownership shares may underestimate (or in some cases overestimate) the influence of individual owners.

Thirdly, we do not distinguish between the identities of minority owners which would have complicated the analysis by adding more categories. It is clear, however, that the identity of a large minority owner - e.g. Deutsche Bank's stake in Daimler Benz - may matter.

Fourth, there is a question of the relation between ownership share and control. We have used votes rather than shares as our criteria, since dual class share schemes are common in small European countries and often give some owners a much greater vote than others. But aside from this, it is clear that effective control of a company can sometimes be acquired with a minority of the votes depending on the overall level of ownership dispersion. A 19% share of a very large company like General Motors would probably be decisive. While majority ownership must by definition confer something like complete control on the owner (subject to legal protection of minority interests), the distinction made between dominant and dispersed ownership remains somewhat arbitrary.

Explaining Corporate Ownership

The economic literature on corporate ownership remains somewhat scattered although steps towards a unified framework have been taken by Fama and Jensen (1983a, 1983b), Hansman (1988) and Putterman (1993). We draw on these contributions, but also introduce the work of Douglas North (1990) and Marc Roe (1991, 1994) adding a nation-effect to the list of explanatory variables.

We propose the following hypotheses.

Hypothesis 1: The size effect: The frequency of dispersed and government ownership will increase and the frequency of cooperative and personal ownership will decrease with company size.

A separation of ownership and control is the most efficient solution, if managers/operators are unwilling or financially unable to bear the risks of ownership (risk aversion) and if owners do not possess the management know-how required to run the company (Fama and Jensen 1983a, 1983b, 1985). Both of these factors indicate a diminishing role for personal ownership and increasing ownership dispersion with greater company size. Likewise government ownership is likely to be more frequent for natural monopolies which are likely to be large companies. And the inability of cooperatives to attract outside equity capital is likely to make cooperative ownership less efficient relative to dispersed share ownership the larger the size of the company.

Hypotheses 2: The industry effect: corporate ownership patterns will vary across industries beyond what differences in company size can explain.

The theoretical justifications for this hypothesis are that

a) some industries are more likely than others to experience market failure (external effects, monopoly etc.) and thereby to invite government ownership (Putterman 1993, Shepherd 1989). Interest group pressures (e.g. to salvage failing firms or industries by government ownership) may also be stronger in some industries than others.

b) some industries are more likely than others to experience monopsony and monopoly problems inviting cooperative ownership (Hansman 1988). Cooperatives have been modelled as a response to market power problems, e.g. where a large number of farmers must deal with a monopsonist buyer or a monopolist seller, or where a large number of consumers face a monopolist retailer (see e.g. Hansman 1988). These market power inefficiencies are dissolved by vertical integration where the multitude of farmers set up their own distribution and supply chains. This is especially so where the members are sufficiently homogeneous to have common interests and to be able to overcome the efficiency problems inherent in voting processes.

c) some industries will be more likely than others to exhibit significant asymmetric information which makes it optimal to allocate ownership to agents with the best information (Hart 1988) rather than to potential outside investors who can only with great difficulty evaluate managerial performance. The agency problems of separating ownership and control are likely to increase with the asymmetry of information,

d) industries are likely to differ with respect to investment risk (asset specificity) and need for equity finance (Williamson 1988).

e) some industries rely more than others on proprietary information and other firm specific assets which should in theory affect the degree of foreign (multinational) ownership and have been explained by e.g. the advantages of joint ownership in safeguarding proprietary information and other firm specific assets as well as reducing other kinds of transaction costs (Caves 1982, Casson 1987). This suggests that foreign (multinational) ownership should be unevenly distributed across industries.

Hypothesis 3: The nation effect: Political, institutional and cultural differences between nations will have an independent impact on corporate ownership patterns beyond what differences in industrial structure (size structure, industrial composition) can explain.

While previous research has studied size and industry effects, the nation effect has not been explicitly recognized in the economic literature on ownership. However, modern economics (e.g. public choice theory or the related work of North 1990) offers a more sophisticated view of government intervention than naive "Nirvana economics" in which the government acts impeccably to correct market inefficiencies. It provides a theory which can explain why political intervention is sometimes socially inefficient due to political vote maximization, interest group pressures and bureaucratic behaviour. And since government intervention is not limited to nationalization/privatization decisions, the political process may affect the distribution of ownership in a number of ways - e.g. by differences in taxation or maximum limits on the share holdings of financial institutions. A political theory of ownership has been suggested by Marc Roe (1991, 1994) to explain U.S. patterns of ownership and corporate governance.

The tension between economic (agency) theory and a broader socio-economic approach may be phrased as a discussion of the relative influence of "national" vs. "economic" factors on ownership structure, cf. Roe (1994 p. 26-27): "The economic model says many corporate structures arise due to economies of scale, wide capital-gathering and the resulting divergence of managerial goals from stockholder goals . . . But if the economic model were universal it would predict that other nations with similar economies would have similar structures. There is a best way to make steel and presumably there is a best way to organize large steel firms". On the contrary international differences in ownership structure according to Roe (1994, p. 27) suggest that: ". . . there is more than one way to deal with these economic problems. And, the differences suggest that differing histories, cultures and paths of economic development better explain the differing structures than economic theory alone."

Hypothesis 4: There will be no significant difference in economic performance between ownership categories.

The theoretical rational for this hypothesis is common to all economic (and functional) theories of ownership. Ownership patterns on the whole will be (privately) efficient in the sense of being adjusted to the pattern of transaction costs and other economic conditions. No one mode of ownership will in general be more efficient than others. Rather, the optimal ownership mode will vary with company, industry and nation characteristics.

The hypotheses are summarized in the table below.
Table 2. Factors Explaining Ownership Structure


Size effect - Risk sharing
 - Natural monopolies


Industry effect - Monopoly and monopsony problems
 - Market failures
 - Asymmetric information (agency problem)
 - Asset specificity


Nation effect - Political regulation
 - Institutions
 - Cultural differences


Performance effect - No performance differences
 - Only efficient ownership modes survive


The Empirical Evidence(3)

We begin by evaluating our first impression of ownership differences by a correspondence analysis which represents graphically the association between countries and ownership categories [ILLUSTRATION FOR FIGURE 2]. Numerically, dimension 1 explains 66.5% of the variance, and dimension 2 adds another 19.6%. Our intuitive interpretation is that the ownership differences presented do differ in two dimensions: a) the degree of ownership dispersion which separates the U.K. from continental Europe, b) a (less important) state/dominant - cooperative ownership axis which separates Denmark from more "centralist" continental countries. The Netherlands appear to be a medium case in both respects.

Given real ownership differences between European nations it seems natural to inquire whether these differences reflect nationality effects or can be explained by differences in industrial structure. It is clear, for instance that the 3 large European nations (Germany, Great Britain and France) have much larger companies than the 3 small ones (Denmark, Sweden and Netherlands).

Ownership Concentration

We then analyze ownership concentration because this dimension of corporate ownership is, in principle, easy to measure and analyze statistically. Concentration is a meaningful if incomplete way of comparing dispersed ownership, dominant ownership and personal/family (majority) ownership. But there is some doubt as to the meaningfulness of ownership concentration among cooperatives (set close to zero: 1/number of members), government and foreign (multinational) ownership.

We use linear regression with ownership share of the largest owner as the numeric response variable as an initial test of hypothesis 1, 2 and 3. None of the hypotheses can be rejected (Table 3A). Parameter estimates of the controlled and uncontrolled nation effect are given in Table 3B.

The test indicates that a company's size (log assets), nation (of operation) and main industry all exert a significant influence on the share of the largest owner. The parameter estimate of the size effect shows that the share of the largest owner decreases with company size - i.e. that ownership dispersion increases with company size (as predicted).

The high percentage of variance explained by industry effects (R-square) is not surprising given the detailed (4-digit ISIC) definition of industry and a large number of industry categories. Controlling for industry increases the variance explained, but reduces the degrees of freedom and reduces the F-value (which remains significant, however). The size effect, on the other hand, explains a much smaller percentage of the variation in ownership shares, but is highly significant.

Adjusting for size and industry effects reduces the variation in ownership share but does not remove it.(4) Differences between the large countries continue to be significant while Denmark and Sweden after adjustment appear to be borderline cases between the large continental nations and Britain. The difference between Great Britain and continental Europe do, however, appear to be reduced by controlling for industrial structure. Denmark's relatively high ownership shares appear to be mainly a result of its small companies. France, on the other hand has more concentrated ownership than one would expect given its industrial structure.

[TABULAR DATA FOR TABLE 3A OMITTED]

[TABULAR DATA FOR TABLE 3B OMITTED]

Ownership Categories

We proceed to analyze the magnitude of "economic" and "nation" effects on (qualitatively different) ownership categories. Table 4 presents partial statistical analysis of the size effect (Hypothesis 1) which cannot be rejected at the 5% level of significance. We use partial logistic regression for each ownership category to estimate the probability of a company falling into that category as a function of its size (log assets).

The results are as predicted and highly significant: the bigger a company, the greater the probability of government and dispersed ownership and the smaller the probability of personal and cooperative ownership. In addition, the probability of dominant ownership appears to increase and the probability of foreign ownership to decrease with the size of the company. The positive size effect on dominant ownership is less strong than the size effect on dispersed ownership and may reflect that dominant ownership is an intermediate step between personal and dispersed ownership. However, the negative size effect on foreign ownership is probably an artefact: the figures count the total activities of nationally owned firms but tend to include only the national operations of multinational subsidiaries.
Table 4. Effects of Company Size (Log Assets) on Ownership Modes.
Partial Logistic Regressions


Ownership category Size (parameter) Chi-Square (value)


Dispersed ownership 0.43(***) 35.082(***)
Dominant ownership 0.20(***) 8.645(***)
Family/personal owned -0.20(***) 8.582(***)
Foreign owned -0.29(***) 18.996(***)
State owned 0.25(***) 9.020(***)
Cooperative -0.63(***) 43.676(***)


[TABULAR DATA FOR TABLE 5 OMITTED]

With regard to the industry effect on ownership mode, Table 5 shows the most important industry for each ownership category and the concentration (percentage share) of companies of this particular ownership category in this particular industry - an intuitive measure of the strength of the association between ownership category and industry.

The table shows that a significant share (22%) of government owned companies and cooperatives are concentrated in the most important industry whereas the association between industry and ownership appears to be much weaker for the other ownership categories. This observation reflects a general pattern: government ownership being common for public utilities, cooperatives for farm products and retail trade.

Table 6 presents a formal test of the effect of industry on ownership category controlling for company size (log assets) which is found to be highly significant in accordance with Hypothesis 2. The industry effect remains significant, but less so, if cooperatives and government ownership are excluded from the analysis.

[TABULAR DATA FOR TABLE 6 OMITTED]

[TABULAR DATA FOR TABLE 7 OMITTED]

With regard to the nation effect (Hypothesis 3), a partial nation effect has already been documented (Table 1 and the correspondence analysis). It remains to be established, however, whether this factor has an independent influence on ownership modes or should be attributed to differences in industrial structure. Table 7 presents a significance test of the nation effects on ownership category controlling for company size (log assets) and industry.

The test compares ownership profiles of different nations under the hypothesis of independence (i.e. assuming that the national distributions of companies over ownership categories are identical). The test value indicates that we can reject the hypothesis of independence with only a marginal risk (less than 5%) of making an error - even after controlling for differences in size and industry. In other words, the perceived nation effect is not just a result of differences in industrial structure.

Ownership and Performance

Our analysis of ownership categories is functional in the sense that it assumes the existence of an optimal range of ownership structures (for a company of given size, industry and nation) and that market forces will tend to produce an efficient match between company and ownership. In particular we would assume that if a particular ownership mode were associated with better financial performance (given size, industry and nation) this ownership category would tend to grow relative to other ownership categories, either because its companies would grow faster or because comparable companies would imitate them and change their ownership mode. We would expect the reverse to happen if a particular ownership mode were associated with inferior financial performance. Firms belonging to it would decline, exit the industry or change their ownership category. The implicit assumption is that the prevailing structure may be interpreted as efficient or in other words that there is no systematic differences in performance.
Table 8A. Ownership Category and Performance (Return on Equity,
Growth of Sales). F-values (in Parenthesis) and Levels of
Significance


Return on equity = 2.3 x Company size + Ownership type + Industry


 (2.25) (0.18) (0.88)


F-value = 0.90 R-Square = 23.5 df = 141


Change in sales = 1.8 x Company size + Ownership type + Industry


 (3.41) (*) (1.55) (0.93)


F-value = 0.97 R-Square = 25.4 df = 141


* = significant the 10% level


[TABULAR DATA FOR TABLE 8B OMITTED]

To check this assumption we test in a rudimentary way for significant differences in growth and profitability between ownership modes (Table 8). Our size variable here is log turnover which we chose to pick up a possible market share effect after controlling for industry. The results indicate no significant performance ROE-differences between ownership modes (Hypothesis 4 cannot be rejected). In terms of growth, foreign multinational and dominantly owned companies appear to do slightly better. However, the low F-values indicate that the models are not significant. We find no indication, therefore, that any particular ownership mode is particularly attractive in terms of performance. It must be stressed, however, that our performance measures are subject to noise in being estimates based on cross country accounting figures for only one particular year.

Conclusion

Our comparative study indicates that there are nation specific differences in the ownership modes of the largest companies. These differences are consistent with popular images as well as previous comparative systems classifications of German financial capitalism, the British market based system, French-Swedish State intervention etc. We have also found evidence, however, that economic conditions like firm size and industry influence ownership structures across national boundaries in ways that are broadly compatible with economic theory. We found no indication that ownership modes systematically affect company performance in terms of growth and profitability. In particular, ownership dispersion is not associated with better performance.

We regard these preliminary results as pointing towards a pluralistic view of European ownership structures. Companies differ, their industrial environments differ, nations differ. It is only natural, therefore, that ownership patterns differ. In particular there seems to be no particular idea in continental imitation of the Anglo-American model which is closely tied to Anglo-American history and culture. While ownership dispersion may prove beneficial in some instances it may also be harmful in other cases, in particular by increasing the agency problems of separating ownership from control.

A natural direction for further research in this area is to probe deeper into the nature of the nation effect. Does the nation effect apply to other nations than the ones studied here? To what extent can it be attributed to factors like law, culture, financial system, country and market size?

Notes

1 The authors would like to thank Arthur Stonehill, John Daniels, Peter Gray, Lauge Stetting, Gunnar Hedlund, Lars Oxelheim, Svend Kreiner, Jean-Francois Hennart, Sev Hirsch and these two anonymous reviewers for comments and suggestions.

2 Note that the distinction personal and dispersed ownership does not correspond precisely to the distinction between private and public ownership. Often (but not always) companies with dispersed ownership will have their shares publicly listed on the stock exchange, but so do many companies in the dominant, personal, foreign categories. Many family-owned companies, for instance, have their shares quoted on the stock exchange while only minority shareholdings are actually traded.

3 The database analyzed in this section covers the 100 largest independent ownership units among non-financial companies in 6 European nations: Denmark, France, Germany, Great Britain, the Netherlands and Sweden. For this group of 600 companies we have one year (1990) observations of accounting assets, turnover, equity, profits, industry, identity and share of the largest owner, and ownership mode (the 6 categories already described). The focus on the largest companies is partly a matter of data availability (more data is generally available on large companies) and partly motivated by a wish to cover as much of a nation's economic activity as possible. Definitions: Sales = net sales including service and rental revenue but excluding value added tax and state taxes. Profits = net profit before taxes and dividends. Equity = share capital, reserves and retained earnings at the company's year end. Sources: Europe's 15 000 largest companies. Ownership data was collected from a number of sources, e.g. the Directory of Multinationals and The Investtext database.

4 In interpreting these effects, there is no need to assume one way causation: it may well be that national ownership effects induces a specialization in certain industry structures.

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Authors

Steen Thomsen, Associate Professor and Torben Pedersen, Assistant Professor, both Institute of International Economic and Management, Copenhagen Business School, Copenhagen, Denmark.
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