Essays in Empirical Corporate Finance and Corporate Governance

Guided by the observation that ownership in large U.S. corporations is dispersed rather than concentrated in blocks of control (Berle and Means, 1932) and Jensen and Meckling's (1976) seminal principal-agent theory, much corporate governance research has put its focus on the conflict between managers and shareholders and the Anglo-American system of corporate governance. The present thesis provides several contributions to this literature in the substantially different context of the German corporate governance system. Chapter 1. Most existing theories of dividend policy imply that dividend announcements convey value-relevant information to market participants. However, in an efficient market, only the unexpected part of a dividend announcement should contain value-relevant information. The evaluation of the informational content conveyed by dividend announcements therefore crucially relies on the proper modeling of dividend expectations. We find that differences in modeling expectations have severe implications for the investigation of theories explaining the share price reaction to dividend announcements, including agency-based explanations. Chapter 2 provides novel contributions to the literature on dual-class share structures. Rather than focusing on a firm's decision to issue more than one share class, the chapter explores the drivers behind firms' decisions to abandon existing dual-class structures. We exploit a change in the index selection rules of Deutsche Boerse that discriminated against dual-class companies by adversely affecting their relative weight within selection indices. We suggest and empirically support the hypothesis that the change in rules resulted in a trade-off for large controlling shareholders between safeguarding their extant private benefits of control and the costs associated with a loss in index weight. Aside from the concentration of control, the two-tier board structure is another distinctive feature of Germany's corporate governance system. As the name suggests, German corporations are governed by two separate boards: an executive board managing the firm and a supervisory board overseeing management. Frequently, members of the board do not only serve on their own board, but are also simultaneously active in several other outside boards. The literature on busy boards suggests that such additional commitments may put too much strain on the board's resources and thereby adversely affect the compliance with its monitoring duties. Chapter 3 employs methods from social network analysis to explore aspects of board busyness and revisits the relationship between firm governance and the board's position in the network of directors

Index membership vs. loss of voting power: the unification of dual-class shares

A change in the index selection rules of Deutsche Börse provides a unique opportunity to investigate the drivers behind the decision to abolish dual-class shares. As of June 2002, selection is based on the market capitalization of the free-float of the more liquid share class rather than the overall market capitalization. Hence, firms have had to reassess the benefits from their dual-class shares by weighing them against the cost from foregone index weight associated with having two share classes. Our findings suggest that index membership significantly affects the controlling shareholder’s motivation to unify preferred and common stock

Das Ende der Deutschland AG

The Demise of Germany, Inc.This article looks into the development of cross-ownership of capital and of management networks in the capital market on the basis of the 150 biggest listed companies in the period 1998/2006. Owing to various institutional changes in the period under review (especially the adoption of the 2000 Tax Cut Act (Steuersenkungsgesetz), we have derived the conclusion that the traditional management structures of Germany Inc. have dissolved. This conclusion is based on the empirical results set out below: We have observed (1) a decline in capital investments inside of the network, (2) the dissolution of the complex capital ownership structures of financial services providers, (3) a thinning out of management networks based on supervisory council positions

All is not lost that is delayed : overconfidence and investment failure

Using a unique panel data set of private German firms over the period 2002 to 2013 we analyze the relation between managerial overconfidence and investment policy in small and medium-sized firms. We construct direct estimates of managerial overconfidence that are based on sales forecasts. We find that overconfident managers are more likely to invest, and that this relation is driven by expansion investments (as opposed to replacement investments). Most importantly, we provide empirical evidence on the determinants of failed (downsized, delayed or abandoned) corporate investment projects. Controlling for socio-demographic variables and firm characteristics, we find that investment projects planned by overconfident managers are more likely to fail. When we differentiate between the three categories of failure (abandoning, delaying, and downsizing) we find that overconfident managers are more likely to delay, rather than to abandon or downsize, an investment project. We offer an explanation that is based on the theory of cognitive dissonance