Competition for Corporate Charters: Transatlantic

DifferencesColin Mayer

Saïd Business School

University of Oxford

The Issues

• Run to the top or bottom

• Impediments to competition

• Externalities

• Effective competition

• Outcomes – place of incorporation

• Share price reactions

Percentage of Listed Companies Under Majority Control

68 65.7 64.2

56.1

39.432.6

26.3

2.4 2 1.70

10

20

30

40

50

60

70 Austria

Belgium

Germany

Italy

NL

Spain

Sweden

UK

Nasdaq

NYSE

Source : country chapters in Barca and Becht (2001)

Percentage of Voting Blocks Associated With Different Types of Investors in

Germany

0%

5%

10%

15%

20%

25%

30%

35%

Individuals and Families

Trusts & HoldingCompanies

Companies

Financial Institutions

Government

Porsche AGVoting Stock

Porsche AGNon-Voting

Porsche/PiechFamily Voting Pool

100% 10%*

Source : Hoppenstedt Guide 1999; * estimate

50:50 capital

Porsche AG

ING

Source : Form 20-F

100% capital 100% votes

ING Administratie Kantoor

Certificate Holders

100% capital 0% votes

ING Groep N.V.

Diversity of Financial Systems

• Banks versus markets

• Concentrated versus dispersed ownership

• Stakeholder versus shareholder

• Common versus civil law

• Single party versus coalition governments

Differences Particularly Pronounced in Europe

• Significance of banks and stock markets

• Size of blockholdings

• Nature of blockholdings

• Anti-takeover devices

• Legal and political systems

Causes: Investor Protection

• Financial development required for external financing

• External financing promotes growth

• Investor protection necessary condition for financial development

• Therefore, investor protection necessary condition for growth

Evidence from UK

• There was financial development without investor protection

• There was external financing without investor protection

• There wasn’t any more with it• Therefore investor protection was neither a

necessary nor sufficient condition for growth

First Caveat on Policy

Simple rules don’t work

Consequences: Agency Versus Investor Abuse

• Agency problem in dispersed systems

• Minority investor abuse in concentrated ownership system

Evidence on Performance in Europe

• Bank control limited

• Concentrated owners do not exercise control

• Independent directors do not intervene

• Takeovers do not discipline bad management

=>Most conventional wisdom is not accurate

Second Caveat on Harmonization

We don’t know much

Systems View

• Theory:

Different forms of information

Different types of control

Different degrees of commitment

• Evidence

Association of different systems with different economic activities

Example 1

• External equity financed and skill dependent industries grow particularly rapidly in countries with good information disclosure

• Particularly closely associated with R&D not fixed investment

• Relations dependent on stage of economic growth

Example 2

• VC firms are primarily financed by banks in Germany and Japan

• Bank financed VC firms invest in later stage activities than individual and corporate funded VC firms

Example 3Patent Specialization: USA and Germany

-0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80

Agric.,Food P roc. Mach.

Civil Engineering

Transport

Machine Tools

Consumer Goods

Thermal P rocesses

Mechanical Elements

Environment Tech.

Handling Machinery

Audiovisual Tech.

Mater. P roc., Textiles

Electrical Machinery

Mater., Metallurgy

Engines, Pumps, Turbs.

Space Tech., Weapons

Control Systems

Organic Chemistry

Chemical Engineering

Basic Materials Chem.

Optics

Surf. Tech., Coating

Telecommunications

Macro.Chem.,Polymers

Agric., Food Chem.

Semiconductors

Nuclear Engineering

Biotechology

Pharmaceuticals

Information Tech.

Medical Technology

Germany USA

Third Caveat on Harmonization

There isn’t a best system

Different systems serve different purposes

Effect of Harmonization

• Presumes best practice

• Standardizes on presumed best practice

• Limits variation

• Discourages innovation

What is Required?

• Diversity

• Experimentation

• Innovation

How Should It Be Achieved?

• Choice not harmonization

• Enabling not prescriptive regulation

• Freedom to choose

• Strong disclosure

• Harmonization where there are cross-border externalities, as in banking

Arguments Against Freedom to Choose

• European playing-field is too unlevel

• Distorted by pursuit of private benefits

• Need to establish pre-conditions for competition

• Competition inimical to systems based on long-term relations

• Best system will not emerge through mobility

Perfect Competition and Product Differentiation

• Not seeking system that maximizes shareholder value

• Difference is that US is competition within a system

• Europe is selection between systems• Providing best environment (financial system,

labour markets, legal and political system) for diverse corporate activities

• Competition and survival of fittest in product markets not corporate form

Justification for Freedom of Mobility

• Allows matching of corporate activities with different systems

• Exploits not destroys diversity of European systems

• Through strong disclosure enhances not detracts from financial integration