Corporate control mechanisms, voting and cash flow rights, and the performance of Dutch firms

Abstract

This paper exploits several unique institutional features in the Dutch system of corporate control to examine the relations among investor protections, concentrated ownership, and firm performance. Four conclusions emerge. First, controlling shareholders do not appear to ameliorate corporate governance problems to any great extent. Second, the identity of ownership matters; when a firm is controlled by a few large individual shareholders, firm performance suffers. Expropriation costs are very high for this type of investor. Third, and somewhat at odds with the bulk of the prevailing literature, performance is enhanced when the firm is freed of equity market constraints. These results are consistent with recent theoretical models emphasizing that too much oversight can be detrimental to performance by forcing firms to underinvest in physical or human capital. Fourth, we distinguish between voting rights providing the means for intervening in firm affairs and cash flow rights providing the required motivation. Considering both rights are important for the empirical results. Apart from its substantive contributions, the paper develops a new four-step estimation strategy to control for the reverse causation problem plaguing econometric studies of corporate control mechanisms and firm performance.