New Evidence on Ownership Structures in Germany

Köke, F. Jens Article New Evidence on Ownership Structures in Germany Kredit und Kapital Provided in Cooperation with: Duncker & Humblot, Berlin Suggested Citation: Köke, F. Jens (2001) : New Evidence on Ownership Structures in Germany, Kredit und Kapital, ISSN 0023-4591, Duncker & Humblot, Berlin, Vol. 34, Iss. 2, pp. 257-292, https://doi.org/10.3790/ccm.34.2.257 This Version is available at: https://hdl.handle.net/10419/293439 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Introduction Corporate ownership structures around the world are very diverse but there seem to be two distinct groups (La Porta et al. (1999)). In the Anglo-Saxon countries the majority of shares is widely held, whereas in continental Europe shares tend to be concentrated in the hands of a few large shareholders.1 For Germany, empirical studies report large share blocks and cross-ownership of firms (Adams (1994), Wenger and Kaserer (1997), Becht and Bóhmer (1999)). The ownership structure of firms is an important element of corporate governance - the complex system of legal, institutional and market forces by which firms are governed (Berle and Means (1932)).2 Economic theory suggests that large shareholders have the power and the incentives to monitor management and to press for value maximization (Shleifer and Vishny (1986)). On the other hand, when protection of minority shareholders is weak they might be exploited by large shareholders. The classical problem of corporate governance - the minimization of agency costs resulting from a separation of ownership and control (Jensen and Meckling (1976: 328)) - also depends on the type of the shareholders. Corporate shareholders have internal agency conflicts and might therefore be weak monitors (von Thadden (1990)). Likewise, pyra- * Financial support was given by Deutsche Forschungsgemeinschaft (DFG) (grant no. BO 934, 71). This support and valuable comments from Axel BörschSupan and Joachim Winter (both University of Mannheim), Silke Januszewski (Massachusetts Institute of Technology), Rainer Feuerstack (Monopolkommission) and an anonymous referee are gratefully acknowledged. The author also feels indebted to Jens Kammerath (Verlag Hoppenstedt) who kindly supported the calculations on cross-ownership. Dominik Krupp and Ingo Sänger provided excellent research assistance. 1 See Prowse ((1994)) and Franks and Mayer ((1995)) for international comparisons. 2 See Short ((1994)) for a survey of empirical studies examining the effect of ownership structure on performance. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 258 F. Jens Köke mid structures and cross-shareholdings might limit efficient monitoring of managers (Bebchuk et al. (1998)). The empirical evidence for Germany on the relationship of ownership structure and shareholder value is limited and often contradicting.3 Descriptive evidence, however, on the German ownership structure is accumulating. Böhmer (1998) and Becht and Böhmer (1999) analyze the ownership structure of the listed Aktiengesellschaft (AG),4 one form of a Kapitalgesellschaft,5 in detail but neglect non-listed firms. Kammerath (1999) provides valuable information on a much wider sample of all large German firms. Beyer (1998) focuses on pyramids and cross-shareholdings of German firms. But both studies neglect changes in the ownership structure over time. New Questions Ownership structures are not necessarily constant over time. If they change, this might have an effect on corporate governance which should be considered in any empirical study. When ownership structures change over time but are treated as being constant this will bias estimates.6 Denis and Sarin (1999) find for the US that changes in the ownership structure are closely linked to prior stock price performance and consecutive board changes. Currently, we can identify several forces of change. Institutional investors have been increasing their participation in equity markets for two decades (Blommestein (1998)). Deregulation within the EU will free those investors from portfolio restrictions which could lead to a further increase in their investment activity. Founder succession - which is of particular importance in Germany (Gerke et al. (1995)) - could change the composition of shareholders significantly. Finally, international competition and current concentration on so-called 'core competencies' could cause firms to divest peripheral activities which in turn would result in ownership changes. Here causality is not totally clear. But the study of the time changes in the ownership structure may provide additional insights into causality. 3 See Cable (1985), Nibler (1995), Seger (1997) and Gorton and Schmid (2000). 4 Public company with limited liability. 5 Company with limited liability which is generally run by managers who are not the single owners. 6 See Himmelberg et al. (1999) for formal evidence and an empirical example on this. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 259 Purpose of the Study The purpose of this study is to document the ownership structures of large German manufacturing firms. It tries to address several shortcomings of the previous German empirical literature: First, we include all types of firms in the legal form of a Kapitalgesellschaft in the analysis.7 We therefore have data on a large number of firms which are not listed on the stock exchange but are also likely to have agency conflicts. This increases sample size considerably. Second, we document the development of the ownership structures over the years 1993-1997 showing that they are not constant as often assumed. Third, we try to find the ultimate owners in complex ownership structures like pyramids. This is an essential approach when firms are governed through pyramids. Finally, we quantify cross-ownership and find that - contrary to the general perception - this issue is of minor relevance in the German manufacturing sector. However, our measure of cross-ownership represents only a lower bound. The paper is organized as follows: Section II. discusses why the ownership structure of firms theoretically affects corporate governance and what measures of ownership structure are suitable in this context. Section III. describes the data source. Section IV. presents the results and discusses implications for the size of agency costs. Section V. concludes with some implications for future research in the field of corporate governance, in particular in Germany. II. Measurement Concepts Economic theory suggests that the ownership structure of enterprises affects their performance. In this chapter we discuss the role of different dimensions of ownership structure: size of share blocks, types of shareholders, pyramids and cross-ownership and suggest empirical measures of ownership structure which are based on economic theory. We begin with a short discussion of the type of the firm which is relevant for corporate governance analysis. 7 These are: the listed/non-listed public company with limited liability (AG), the limited partnership on shares (KGaA) and the private company with limited liability (GmbH). Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 260 F. Jens Köke L Agency Conflicts and Ownership Structure From the theoretical perspective, any firm with a separation of ownership and control should be included in a study on corporate governance {Jensen and Meckling (1976)). For Germany this means to focus on Kapitalgesellschaften8 because these firms, in contrast to partnerships and single proprietorships, generally are run by managers who only own small ownership stakes - if at all.9 There are two legal forms for a Kapitalgesellschaft: the GmbH10 (private company with limited liability) and the AG11 (public company with limited liability).12 Both will be considered in this study. Various differences between both forms of a Kapitalgesellschaft might affect agency costs.13 In the GmbH owners can monitor their managers much more closely than in the AG.14 Hence agency costs might be lower in the GmbH. But shares of an AG are easier to trade than shares of a GmbH, especially when the AG is listed on the stock exchange. This makes monitoring by "exit" more attractive compared to monitoring by "voice" as in the GmbH. The threat of exit also can put management under pressure (Steiger (2000)). But new capital is easier to raise by a listed AG in the stock market. Wealth of shareholders puts a constraint on this in the GmbH.15 In this case, higher agency costs resulting from a dispersed shareholder base might be incurred by a listed AG for the benefit of better risk diversification of shareholders. Of course, ownership structure is only one element in the corporate governance system.16 And the choice of the legal form might be determined by other factors besides agency costs.17 Even causality between ownership structure and firm performance is not clear (Bórsch-Supan and Kóke 8 Firm in a corporate form with limited liability of the owners. 9 There is no agency problem only when a firm is 100 percent owned by a single shareholder who is at the same time the only manager. He also must be an individual. This issue will be discussed in detail below. 10 Gesellschaft mit beschränkter Haftung (GmbH). 11 Aktiengesellschaft (AG). 12 Two other legal forms are of minor importance: the GmbH & Co. KG (a mixture of a partnership and a Kapitalgesellschaft) and the KGaA (a partnership that emitted tradable shares). 13 See Steiner (1998) on the benefits and costs of different legal forms. 14 The general meeting of shareholders can give directions to the management in the GmbH. is See Bolton and von Thadden (1996) on the decision to go public and its implications for control. 16 See Shleifer and Vishny (1997) for an excellent survey on this system. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 261 (2000)). But for Germany little is known in particular on ownership structures of GmbHs and non-listed AGs although these firms, if they are large, are also likely to have a separation of ownership and control. 2. Size of Share Blocks Shleifer and Vishny (1986) use the size of the largest share block as a measure of ownership. They argue that only in the presence of a large minority shareholder can takeovers be an effective disciplining device.18 When all shares are dispersed initially, free-riding of small shareholders will make any takeover attempt unattractive (Grossman and Hart (1980)). But concentration of shares also has costs. Demsetz and Lehn argue (1985) that large shareholders are typically not diversified and hence bear excessive risk. A growing literature discusses expropriation of small minority shareholders by a large shareholder. Large owners who are also the managers can have full control over the firm's assets but do not share in all the costs they generate. If they are wealthy enough they might prefer private benefits to the maximization of firm value.19 Our preferred measure of the voting power of the largest shareholder is the size of the largest share block (Ci).20 However, we calculate some additional measures: the combined stake of the two and three largest shareholders (C2 and C3 respectively) to get an idea of the upper distribution of the ownership structure. Second, we use an approximation of the Herfindahl index to measure absolute concentration of shares and to allow for comparison with other studies.21 Third, we calculate a measure of the voting power of the largest shareholder as suggested by Cubbin and Leech (1983).22 It approximates the probability that the largest share17 For example, worker participation in the supervisory board (Aufsichtsrat) probably influences the choice between the two legal forms but also agency costs because the supervisory board is an important internal monitoring institution in German companies (Hopt (1998)). Taxes and liability play no role in this decision because they are identical for all forms of the Kapitalgesellschaft. Disclosure requirements depend on firm size. But most firms covered in this analysis are large. See Franks and Mayer (1994) who find that large shareholders are associated with higher turnover of directors in Germany. 19 See Morck et al. (1988) for empirical evidence for the US. 20 This is a valid proxy when the largest shareholder holds more than 50 percent of the shares in most firms. 21 This is a lower bound of concentration because we do not have data on all shareholders (e.g. dispersed shares). 22 When the largest share block Ci is over 50 percent (as is the case here), the difference between absolute and relative measures of concentration is negligible (Feuerstack (1999)). Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 262 F. Jens Kòke holder can win a vote given that small shareholders might oppose.23 Definitions of all measures are summarized in the appendix. 3. Type of Shareholders A second dimension of ownership structure is the type of shareholders. In the center of corporate governance analysis stands the distinction between dispersed and concentrated shareholdings. Although dispersion of shares is a matter of size of share blocks as discussed above, we treat dispersed shares as one type of shareholder. It is calculated as the residual from the other five shareholder categories.24 Individuals can be good monitors in comparison to corporate shareholders because they do not have any internal agency conflicts. Corporate shareholders substitute one agency conflict for another (von Thadden (1990)). On the other hand, if individuals own a large block of shares in one firm their wealth portfolio will generally be badly diversified. If this is the case they will be too risk-averse and favor too conservative investment decisions which are inefficient from the perspective of welldiversified shareholders. The group of corporate shareholders is diverse. So is their monitoring behavior. For example, creditors as shareholders might force a company to forego good investment opportunities because they focus on the downside of the earnings distribution (Myers (1977)). Insurance companies or universal banks which have regular business relationships besides their investment are unlikely to oppose management (Pound (1988)). This also applies to non-financial firms as shareholders. Pension funds, on the contrary, with no business relationships in addition to their investment might be good monitors. But the merits of institutional investors are highly debated.25 In the following we differentiate only between financial and non-financial enterprises because we have no consistent information on different types of financial enterprises. 23 See Leech and Leahy (1991) for an application of this measure on British firms. 24 Mostly, KSD explicitly states the fraction of dispersed shares. In a few cases ownership of shares does not add up to 100 percent. In these cases the rest was also treated as dispersed shares. 25 See Black (1997), Karpoff (1998) and del Guercio and Hawkins (1999) for recent surveys on institutional investor activism. See Black (1992) and Blair (1995) on the theoretical merits of this class of investors. See Porter (1992) for critical arguments. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 263 Another type of shareholder is the state. Shapiro and Willig (1990) show that firms governed by bureaucrats should perform better under private management because bureaucrats lack the incentives to maximize shareholder value. Finally, foreigners might exhibit a different control behavior from domestic investors. For example, institutional investors especially from the United States and Great Britain are very active shareholders (Smith 1996, Carleton et al. (1998)). Combined with their growing importance as a shareholder group (Blommestein (1998)) this makes a separate category for those shareholders desirable.26 In sum, we look at six different types of shareholders: dispersed shares, individuals, non-financial enterprises, financial enterprises, the state and foreigners. 4. Pyramids and Cross-Ownership Third, we look at the vertical dimension of the shareholder structure. We consider several levels of ownership. In Germany, pyramids and cross-ownership are the most important ownership characteristics.27 a) Pyramids In this pyramid firm A is controlled by firm B whereas firm B is controlled by firm C, the ultimate owner. We define the ultimate owner as the shareholder who has full control over a firm (either direct through a share of over 50 percent or indirect through a control chain as depicted in Figure 1) and is himself not controlled by another majority shareholder.28 We define a pyramid as a control structure by which an ulti26 The term "foreigners" here and in the following refers to corporate foreigners only, both financial and non-financial. Data do not allow to consistently distinguish between these two foreign types of corporates. 27 La Porta et al. (1999) document that pyramids are a worldwide phenomenon. On cross-shareholdings in Germany see Adams (1994), Beyer (1998) and Kammerath (1999). 28 A majority of 50 percent does not guarantee ongoing control. A majority of 75 percent is required to exchange management during its period of office (§ 103 (1) AktG) or to incorporate a firm into the own firm (§§ 2 ff. UmwG). But a 50 percent majority is sufficient to dismiss management after their regular period of office. A share much lower than 50 percent can be sufficient when the rest of the shares is dispersed or when the corporate charter limits the voting rights of minority shareholders. Without more detailed information 50 percent is the best proxy available. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 264 F. Jens Köke Firm C 50.1% • FirmB 50.1% y Firm A Figure 1: Pyramid of Owners mate owner controls another firm through a control chain of over 50 percent at each level with at least one intermediate firm.29 This kind of ownership structure can generate agency costs. First, control might be diluted within high pyramids when transaction costs affect the flow of information. Second, pyramids can serve large shareholders as a control device to expropriate minority shareholders. Grossman and Hart (1988) and Harris and Raviv (1988) argue that pyramids generate a departure from the one-share-one-vote scheme. Large shareholders can divert cash flow to themselves rather than pay it out to all shareholders. On the other hand, if we assume that cash flow is paid out to investors according to their voting rights, the ultimate shareholder in a pyramid might receive less cash flow than would be expected according to his actual voting power. To give an example, firm C in Figure 1 controls firm A but receives only a minority share of cash flow (50.1% x 50.1% = 25.1%). This could weaken its incentive to control firm A efficiently (.Bebchuk et al. (1998)).30 In sum, we use three measures to characterize pyramids: first, the level of ultimate control. Second, the measure proposed by Bebchuk et al. (1998): i = 1 29 La Porta et al. (1999) use a share size of 10 percent and 20 percent at each level for 27 countries, Renneboog (1996) share sizes of 25 percent, 50 percent and 75 percent for Belgium. 30 Full control over cash flow requires a majority of 75 percent (§§ 2 ff. UmwG). But when dividends are paid out relative to share size, share size can be used as a proxy for cash flow rights. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 271 Table 4 Cumulative Distribution of Largest Share Block (C^)1 in percent GmbH Non-Listed AG Listed AG Weighted Average2 > 99 % of shares 71.03 56.76 6.69 54.87 > 90% of shares 75.74 64.53 20.33 62.04 > 75 % of shares 79.55 70.19 33.10 68.03 >50% of shares 93.74 88.01 59.77 85.61 > 25 % of shares 98.00 95.69 82.28 94.28 Number of Observations3 3355 1151 1184 5712 Note: 1 The measure could not be calculated for 76 observations because only dispersed shares were recorded for these. 2 Including KGaA. 3 The KGaA is not reported here as a separate category because the number of observations is only 22. Table 4 shows how many of the sample firms have a large shareholder and the size of the largest block. We see that in 55 percent of all firms the largest shareholder holds 99 percent or more of the shares. Thus the majority of firms is controlled by a single owner. From this perspective, agency problems resulting from expropriation of small shareholders through large shareholders are unlikely because most firms do not have any minority shareholders. In over 85 percent of the firms the largest shareholder owns 50 percent or more of the shares. Thus most firms have a large shareholder - which is very large in comparison with UK and US shareholders40 - that could govern the firm efficiently. But the quality of monitoring also depends on the type of the largest shareholder. Table 4 also shows that - on average - the largest shareholder is relatively small in the listed AG. In only 6.7 percent of the listed AGs he holds 99 percent of the shares or more, compared to 56.8 percent of the non-listed AGs and 71 percent of the GmbHs. Almost 60 percent of the firms listed on the stock exchange have a shareholder that holds 50 percent and more of the shares. The numbers for the non-listed AG and the GmbH are still higher: 88 percent and 93.7 percent respectively. From this perspective it seems reasonable to analyze primarily the listed AG because agency costs resulting from weak control by the dominant shareholder might be the highest here. 40 See Becht (1997) for the US and Franks and Mayer (1994) for the UK. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 272 F. Jens Köke Table 5 Ownership Concentration of Shares by Legal Form (1993-1997) GmbH Non-Listed AG Listed AG Weighted average1 Herfindahl index of share concentration (0 = infinite number of shareholders, 1 = one shareholder) 0.856 0.769 0.403 0.741 Percent of observations with voting power index = 1 indicating high voting power of largest shareholder 85.25 80.79 62.30 79.35 Number of observations2 3357 1197 1207 5788 Note: 1 Including KGaA. 2 The KGaA is not reported here as a separate category because the number of observations is only 27. Table 5 presents further evidence on concentration of shares. The Herfindahl index, theoretically ranging from zero (full dispersion) to one (full concentration in the hands of a single shareholder) indicates that concentration is high in GmbHs (H = 0.856) and non-listed AGs (H = 0.769). It is much lower in the listed AG (H = 0.403). The measure of voting power developed by Cubbin and Leech (1983) also indicates high concentration of shares: the largest shareholder is likely to decide a vote for himself in 62.3 percent of the listed AGs and over 80 percent in both types of unlisted firms. Changes in Size of Share Blocks Previous German studies neglect changes in the ownership structure. Figure 4 addresses this issue. It depicts the percentage of firms for which shareholder concentration increases, decreases or does not change over the years 1993-1997. Concentration is measured by the Herfindahl index; it rises in about 20 percent and falls in about 12 percent of firms, but it is constant in the large majority of firms (68.0 percent). From this perspective, the selection of a single year to describe the ownership structure of a firm - as not only previous German studies do - should Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 273 • Rising • No Change I Falling 1 GmbH Non-Listed AG Listed AG All Note: Percentage of firms with increasing, decreasing or stable shareholder concentration over the years 1993-1997. Shareholder concentration is measured by the Herfindahl index. A firm is classified as having rising (falling) shareholder concentration if the geometric mean of the firm-specific growth rate of the Herfindahl index is greater (smaller) than zero. A mean growth rate equal to zero means stable shareholder concentration. Figure 4: Changes in Shareholder Concentration (1993-1997) not generate a significant bias because ownership structures seem fairly stable. However, when a distinction is made between GmbH and AG and between listed versus non-listed AGs the assumption of stable ownership structures cannot be maintained, particularly not for listed firms. Almost half of the firms being traded on the stock exchange exhibit increasing shareholder concentration over 1993-1997 (47.2 percent). This is a consequence of smaller shareholders selling out to the largest shareholders. At the same time, more than a quarter of listed firms show a decreasing concentration of shares (27.8 percent). Concentration of shares does not change in the majority of non-listed firms. Firm-specific concentration changes in 20-30 percent of these firms. To check whether shareholder concentration increased also in the aggregate we compare the median annual growth rate of the Herfindahl index for firms with rising and falling concentration. The results (not tabled here) show that the (positive) median annual growth rate of the Herfindahl index is larger in firms with increasing shareholder concentration than the (negative) median annual growth rate in firms with decreasing shareholder concentration. Hence, more firms increase than decrease shareholder concentration (Figure 4), and the average increase is larger than the average decrease. Taken together this means that Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 274 F. Jens Köke aggregate shareholder concentration increases over the years 1993-1997. When differentiating by legal form we confirm this result for the GmbH and the non-listed AG. In case of the listed AG the result is ambiguous because more firms increase than decrease concentration but the absolute median annual growth rate of the Herfindahl index is larger for firms with decreasing concentration. In sum, shareholder concentration is high for all types of firms. From this perspective, agency costs could be small due to the absence of a separation of ownership and control or good monitoring by the large shareholder. Ownership structure as measured by share concentration is fairly stable.41 But in about one third of the firms concentration increases or decreases. Changes particularly occur in the listed AG. Whether the neglect of changes in ownership structures produces a bias in empirical studies must be examined by further research.42 2. Type of Shareholders We next classify shareholders into the six groups defined in section II.3: dispersed shareholdings, individuals, non-financial firms, the state, financial enterprises and foreigners. During 1993-1997, on average, the largest group of shareholders were non-financial enterprises with a share of 65.1 percent (Table 6). Foreigners hold about 11 percent and individuals about 8 percent of outstanding shares. In contrast to the influential role assigned to banks in various studies on German corporate governance43 stands their - on average - very low share of 1.9 percent. However, banks' voting power is potentially much greater due to the specific system of proxy voting, widespread membership of bankers on boards and their role as creditors.44 Table 6 describes the aggregate shareholder structure, i.e. the fraction of shares which is owned by a particular type of shareholder. Most 41 Changes in the shareholder structure which do not lead to changes in share concentration are neglected here. We therefore estimate only a lower limit of all changes. 42 A bias would occur if the changes in the ownership structure were not random but would be caused by an exogenous variable which also influences performance measures. 43 See for example Nibler (1995) and Gorton and Schmid (2000). 44 See Baums and Fraune (1995) on banks' voting power through proxy votes and Pfannschmidt (1993) on personal interlockings. Taking into account these additional sources of bank influence Edwards and Fischer (1994) still reject the hypothesis of strong bank power in corporate governance. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 275 Table 6 Shareholder Structure by Type and Legal Form: All Shares in percent GmbH Non-Listed AG Listed AG Weighted Average1 1 Dispersed Shares 3.99 9.2 36.1 11.92 2 Individuals 4.00 15.39 10.79 7.85 3 Non-Financial Firms 75.57 62.63 39.55 65.14 4 State 3.04 2.11 1.04 2.41 5 Financial Enterprises 0.40 1.52 6.45 1.93 6 Foreigners 13.00 9.15 6.07 10.75 Total 100.00 100.00 100.00 100.00 Number of Observations2 3357 1197 1207 5788 Notes: 1 Including KGaA. 2 The KGaA is not reported here as a separate category because the number of observations is only 27. shares are held by non-financial firms in listed and non-listed firms. A relatively high fraction is dispersed in the listed AG, whereas dispersion is low in firms that did not go public. Dispersion of shares is of course a consequence of the decision to go public. The role of individuals as direct shareholders is small, looking at the fraction of all shares in their hands. They hold about 15.4 percent of the shares in the non-listed AG, 10.8 percent in the listed AG, and only 4 percent in the GmbH. This aggregate shareholder structure does not necessarily reflect actual voting power of the individual types of shareholders. Therefore we also look at the type of the largest shareholder in each firm-year. Since the largest shareholder is not always large enough to dominate all decisions,45 we additionally check whether the largest shareholder fulfills the voting power criterion of Cubbin and Leech (1983).46 If the largest shareholder does not fulfill this criterion, the respective observation is grouped as dispersed shares. More than 60 percent of the firms are governed by a large shareholder that is another non-financial firm (Table 7). These shareholders have not 45 For example, the largest shareholder holds 51 percent, the second largest shareholder 49 percent. Then the position of the largest shareholder is much weaker compared to a 99 percent stake in his hands. 46 See section IV. 1. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 276 F. Jens Koke Table 7 Shareholder Structure by Type1 and Legal Form: Largest Share Block in percent GmbH Non-Listed AG Listed AG Weighted Average1 1 Dispersed Shares 14.75 19.21 37.70 20.65 2 Individuals 2.83 11.78 10.60 6.39 3 Non-Financial Firms 67.92 58.81 41.18 60.25 4 State 2.80 1.59 0.83 2.13 5 Financial Enterprises 0.18 0.42 3.81 0.98 6 Foreigners 11.53 8.19 5.88 9.61 Total 100.00 100.00 100.00 100.00 Number of Observations3 3357 1197 1207 5788 Notes: 1 Type of largest shareholder that is classified as having voting power using the Cubbin and Leech (1983) index. All firms with no large shareholder (just dispersed shares) or those having no large shareholder with voting power using the Cubbin and Leech index are classified as "dispersed". 2 Including KGaA. 3 The KGaA is not reported here as a separate category because the number of observations is only 27. only large stakes. They also have high voting power due to the small size of other shareholders in their firms. About 20 percent of the firms can be classified as widely-held which is much more than indicated in Table 6. Foreigners dominate almost 10 percent of German manufacturing firms by vote, whereas individuals govern only about 6.4 percent of all firms. The state controls about 2 percent of all firms. Looking at the three different forms of firms we see differences in the shareholder structure. 38 percent of the firms traded on the stock exchange are widely-held, but only 15 percent of the GmbHs and 19 percent of the non-listed AGs. Non-financial firms control 68 percent of GmbHs, almost 60 percent of non-listed AGs, and more than 41 percent of listed AGs. Surprising is the small role of financial enterprises: they govern only about 4 percent of listed AGs, and their influence is even smaller in non-listed firms. At first sight this contrasts with the belief that German banks or insurance companies are powerful shareholders. But this result is based only on voting power connected to ownership of shares. Since financial firms typically do not own the majority of shares in German manufacturing firms, they do not fulfill the criteria of our concept of control to be counted as controlling shareholders. In the aggregate, foreigners play a significant role as shareholders. But foreigners are controlling shareholders more frequently in GmbHs than Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 277 I in listed AGs. This difference indicates that foreign investors prefer to invest in a GmbH rather than in a listed AG. Indeed, many of the foreign investments in GmbHs are 100 percent subsidiaries. Thus, full control seems to be important for a foreign direct investment in Germany. Changes in Type of Shareholders Figure 5 provides additional evidence on changes in the ownership structure. It depicts the changes in each shareholder category for the period 1993-1997. For example, given that non-financial firms own a share block in a firm, they do not change the size of this share block in only 25 percent of the cases. Rather, in 48 percent they increase the size of their block and decrease its size in 27.7 percent of the firms they are invested in. The state, in turn, changes the size of all its share blocks. Only non-financial firms and foreigners increase rather than decrease the size of their blocks. • Rising • No Change Dispersed Individuals NonShares Financial Firms State** Financial Foreigners Firms Type of shareholder Percentage of firms in which shareholder type x holds a share block larger than zero at least in one year during the period 1993-1997 and in which the mean annual change is different from zero. Depicted for the case of the listed AG. Excluded are firms that have over 50% of shares with no clearly identified type of shareholder and firms for which we do not have a continuous history of data without missing values. " 0 % have no change. Figure 5: Change in the Share Held by Each Type of Shareholder (1993-1997)* Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 278 F. Jens Kôke Table 8 Median Annual Change in Each Shareholder Category (1993-1997)1 Dispersed Shares Individuals NonFinancial Enterprises State Financial Enterprises Foreigners Rising 2.60 11.04 0.88 6.30 5.70 8.00 No Change 0.00 0.00 0.00 0.00 0.00 0.00 Falling -1.05 -6.00 -8.60 -11.25 -2.50 -8.33 Number of Obs.2 728 211 577 20 200 139 Note: 1 Median annual change in firm-specific size of the share block held by shareholder type x. Excluded are firms that have over 50% of shares with no clearly identified type of shareholder and firms for which we do not have a continuous history of data without missing values. 2 Data only for the listed AG. Next we check whether the size of share blocks which change from one shareholder category to another is significant, or whether we just observe highly frequent changes of small blocks. Table 8 shows for the listed AG that the size of share blocks which change ownership category is quite large. For example, individuals that increase their share blocks during 1993-1997 do this by about 11 percent annually. The decrease is smaller in size with -6 percent annually. The median annual increase in the share blocks held by non-financial firms is comparatively low with 0.9 percent, whereas the decrease is rather high with -8.6 percent. Figure 5 and Table 8 also reflect recent privatization: the state decreased 75 percent of its share blocks and reduced their size by about -11.3 percent annually. Overall, we see that not only the frequency of ownership changes is high. Also the average size of blocks traded is large. These changes in the shareholder structure can also be found for the non-listed firms but the frequency of changes is lower. In turn, the magnitude of changes is higher. What can be learned from this section is that non-financial enterprises are often the largest and the decisive shareholder. And there are differences in the shareholder structure between listed and non-listed firms. Differences can also be found among non-listed firms. Second, there is evidence of significant changes in the shareholder structure in terms of shareholder type even over the short period of five years. Third, these changes are not uniform over the three types of firms. Since ownership structure is not constant over time these changes in the ownership structure must enter empirical studies of corporate governance. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 279 Table 9 Level of Ultimate Control 1 2 3 4 5 6 Total Number of Obs. 2527 1478 494 128 8 3 4638 Percent of Total 54.48 31.87 10.65 2.76 0.17 0.06 100.00 Note: Necessary condition for control is a share size of over 50% on each level in the control chain. 3. Pyramids and Cross-Ownership The third characteristic of ownership structure besides the size and type of individual stakes is the location of control as defined in section II.4. Table 9 shows the level of ultimate control, i.e. the end of a continuous 50 percent-stake control chain. a) Pyramids In the majority of firms the ultimate owner is located on the first level of the ownership structure. This suggests that the agency problem resulting from dilution of control in the pyramid might be low. Only 13.6 percent of the firms are governed through a pyramid with at least three levels. Among the three types of firms the GmbH has the longest control chains. Out of the 633 observations with a level of ultimate control above 2 over 82 percent are in the form of the GmbH. This indicates that the GmbH is the preferred legal form to construct pyramids. It must be noted, however, that we probably underestimate the size of the pyramids because control chains are not always complete in KSD. Table 10 examines who is this ultimately controlling shareholder. It shows the type of the largest shareholder with high voting power - both on the first level and the ultimate level. As can be seen from Table 10, non-financial enterprises are the most important group of controlling shareholders on the first level and also on the ultimate level. In 60 percent of the firms the dominant shareholder on the first level is a non-financial firm. On the ultimate level, a nonfinancial firm is the ultimate shareholder in 42 percent of the cases. This means that a large part of German manufacturing firms ultimately is Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 280 F. Jens Köke Table 10 Ultimate Shareholder versus Dominant Shareholder on First Level by Type in percent Dispersed Individuals NonFinancial Enterprises State Financial Enterprises Foreigners Total First level1 20.65 6.39 60.25 2.13 0.98 9.61 100.00 Ultimate level2 27.79 9.95 41.59 3.09 0.74 16.84 100.00 Note: Number of observations is 5788. 1 Dominant shareholder on first level by type as shown in Table 7. 2 Ultimate shareholder classified according to voting power index as done in Table 7. under full control of other non-financial firms, not under control of individuals as usually assumed in economic theory.47 Cash flow rights of the ultimate shareholder can serve as an indicator of the size of another agency problem: the exploitation of minority shareholders by a majority shareholder. Calculation of the measure suggested by Bebchuk et al. (1998) shows that in 97.6 percent of the firms the ultimate shareholder receives over 50 percent of the cash flow. Only in 2.4 percent of the firms can he claim a minority fraction of cash flow. From this perspective, there is no problem of minority shareholder exploitation. This result is strongly influenced by the very large size of individual stakes on each level. For example, for over 45 percent of all observations control is exercised by 100 percent stakes on all levels throughout the pyramid. This mirrors a preference for strict hierarchies in large firms. To see if there is a discrepancy between cash flow and control rights we correct for the share size on the first level.48 Figure 6 shows the cash flow rights calculated as above as a percentage of the control rights on the first level of the pyramid. In over 76 percent of all firms cash flow rights are identical with control rights (Figure 6). There is no agency problem in these firms as far as they are caused by a discrepancy of cash flow and control rights. But for about a quarter of all firms Figure 6 indicates a discrepancy of cash flow and control. For 10 percent of all firms there is a clear divergence of In pyramids, the importance of non-financial firms as decisive shareholders increases with the height of the pyramid. 48 Share size on the first level is used as a proxy for the desired level of control (see section H.4.). 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S <U X! £ <v 43 XI Ö cd o ja •i-H X Ö £ o 43 ü cd » X t* Ö in O) 43 & o o 0> 43 IU •— <4H ^lIj h ° -W II » i ö ö cd U £ 2 cd X £ 50 ffsa Ö p. 0 Ö Ö £ Q o 1 * Ö w 2 u ö o O in Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 New Evidence on Ownership Structures in Germany 289 References Adams, M. (1994): Die Usurpation von Aktionärsbefugnissen mittels Ringverflechtung in der "Deutschland AG", Die Aktiengesellschaft 4, 148-158. - Baums, T. and C. Fraune (1995): Institutionelle Anleger und Publikumsaktiengesellschaft: eine empirische Untersuchung, Die Aktiengesellschaft 40, 97-112. - Bebchuk, L., R. Kraakman and G. Triantis (1998): Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control From Cash Flow Rights, NBER Working Paper No. 6951. - Becht, M. 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Summary New Evidence on Ownership Structures in Germany This study documents the ownership structures of large listed and non-listed German manufacturing firms as an important element of corporate governance. We find that shares are concentrated in the hands of few large shareholders. This limits agency problems resulting from a separation of ownership and control. Also, pyramid structures and cross-ownership exist but are not as widespread as commonly assumed. However, mostly the largest shareholder is another non-financial enterprise giving rise to a different kind of agency problem. But significant variation in the corporate ownership structures suggest that there is an active market for large share stakes which could act as a control device. (JEL G32) Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27 292 F. Jens Köke Zusammenfassung Neue Erkenntnisse zu Eigentümerstrukturen in Deutschland Diese Studie beschreibt die Eigentümerstrukturen bei großen deutschen, dem produzierenden Sektor zuzurechnenden Unternehmen mit und ohne Börsennotierung als ein wichtiges Element von Corporate Governance. Es wird gezeigt, daß sich die Unternehmensanteile oft in den Händen weniger Großaktionäre befinden. Dadurch werden die sich aus einer Trennung von Unternehmenseigentum und -führung ergebenden Vertretungsprobleme in Grenzen gehalten. Man trifft auch auf pyramidenförmige Strukturen und geschachtelte Eigentumsrechte, jedoch sind diese nicht so weit verbreitet, wie dies gemeinhin angenommen wird. In den meisten Fällen ist der größte Anteilseigner jedoch selbst ein nicht dem Finanzsektor zuzurechnendes Unternehmen, wodurch eine andere Art von Vertretungsproblemen entsteht. Aber signifikante Änderungen in den Eigentümerstrukturen der Unternehmen deuten auf einen aktiven Markt für große Aktienanteile hin, der als Kontrollmechanismus wirken könnte. Résumé Nouvelle évidence sur les structures de participation en Allemagne Cette étude documente les structures de participation d'un grand nombre d'industries allemandes cotées et non cotées comme un élément important de la politique gouvernementale. Nous constatons que les actions sont aux mains de quelques gros actionnaires. Ceci limite les problèmes d'agence qui résultent de la séparation de participation et du contrôle. Des structures pyramidales et des participations croisées existent aussi, mais elles ne sont pas aussi répandues que ce qui est généralement assumé. Cependant, le plus souvent, le plus gros actionnaire est une autre entreprise non financière, soulevant une autre sorte de problème d'agence. Mais, des variations significatives dans les structures de participation suggèrent qu'il existe un marché actif pour de larges participations qui pourrait agir comme dispositif de contrôle. Kredit und Kapital 2/2001 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/ccm.34.2.257 | Generated on 2023-01-16 13:17:27