Skip to main content
SpringerLink
Log in

Insider ownership and corporate performance: evidence from Germany

  • Original Paper
  • Published:
Review of Managerial Science Aims and scope Submit manuscript

Abstract

In this paper we address the question whether insider ownership affects corporate performance. Evidence from studies dealing with Anglo-Saxon countries is rather inconclusive, especially because results seem to be significantly affected by endogeneity. Economically, this is due to the fact that in these countries insider ownership seems to be mainly driven by management’s compensation contracts. We argue that Germany is different in this regard, as insider ownership is often related to family control, stock-based compensation is less widespread, and the market for corporate control used to be less developed. Starting from this presumption, our data allows an unbiased observation as to whether insider ownership affects firm performance. Using a pooled data set of 648 firm observations for the years 2003 and 1998, we find evidence for a positive and significant relationship between corporate performance—as measured by stock price performance, market-to-book ratio and return on assets—and insider ownership. This relationship seems to be rather robust, even if we account for potential endogeneity by applying a 2SLS regression approach. Furthermore, the results hold for a sub-sample of firms that did not have a stock-based compensation program in place. Moreover, we find outside block ownership as well as more concentrated insider ownership to have a positive impact on corporate performance. Overall, the results indicate that ownership structure might be an important variable explaining the long term value creation in the corporate sector.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For a comprehensive overview of these studies see Demsetz and Villalonga (2001, pp. 231–233).

  2. See Stigler and Friedland (1983), Demsetz and Lehn (1985).

  3. Cf., among others, La Porta et al. (2000), La Porta et al. (1999), and La Porta et al. (1998).

  4. For an illustration of this network as of 1996 and 2002 see Wenger and Kaserer (1998b, pp. 51–61) and Höpner and Krempel (2005, pp. 10–11). The comparison shows that the density of this network was thinned out significantly during this 6 year period. This process has been perceivably accelerated by the tax-exemption on corporate capital gains introduced in 2001.

  5. Although dealing with a different context, also the interesting analysis of Schranz (1993) can be regarded as a pioneering piece of evidence supporting the positive relationship between managerial stock holdings and firm performance.

  6. Further studies about family firms are e.g., McConaughy et al. (1998), Chami (1999) or Burkart et al. (2003).

  7. The condition that companies must have been CDAX members for the 5 years preceding the cut-off dates (end 2003 and end 1998) is introduced because we decided to track performance over this 60 months period.

  8. Most of the 362 firms dropped from the 2003 sub-sample had their IPO after the cut-off date of 31 December, 1998 and hence were not listed for the 5 year period. Therefore, especially firms which went public during the “heyday of the new economy" were excluded from our analysis. As a consequence, our analysis refers more to the “traditional" market. Out of the 362 firms, only 86 were either acquired by another listed company or delisted after a squeeze-out. We are aware of the fact that this criterion may induce a sample selection bias into our analysis. However, since only few of these companies actually went bankrupt and we did not find any signs of systematic differences of these firms compared to the sample firms, we think that the potential bias is manageable from an econometric point of view.

  9. For a presentation and discussion of ownership disclosure requirements in Germany cf. Becht and Böhmer (2003).

  10. For a discussion of “agents watching agents” see Woidtke (2002).

  11. We measure ownership at the ultimate level. Hence, stakes of insiders held through a interim holding company will be classified as MB_SB_FBM at the ultimate level. Cf. Köke (1999); Becht and Böhmer (2003).

  12. For the definition of these different transformations see Table 1.

  13. Meanwhile, control rights are measured by the share of voting shares (usually ordinary shares), cash flow rights refer to the weighted portion of both voting and non-voting shares (usually preferred shares).

  14. Six values above 500% (4 in 1998 and 2 in 2003) were treated as outliers since the standardized residuals were above/below ±3 standard deviations in the regression analysis. Since four of the six cases showed MB_SB_FBM share over 40% (average 35.2%) a bias of a positive relationship between insider ownership and performance might be introduced if any.

  15. See Gorton and Schmid (2000 p. 44).

  16. Excluded negative/zero MTBVs: 7 (1998) and 14 (2003). Excluded MTBVs above 15: 17 (1998) and 3 (2003); cf. Drobetz et al. (2004, p. 17).

  17. Cf. Edwards and Weichenrieder (2004, p. 152).

  18. For a similar argument cf. Gompers et al. (2003); they label this approach a kind of a long-run event study.

  19. A similar approach has been used in some recent corporate governance studies, e.g., Drobetz et al. (2004).

  20. See Graham and Harvey (2001, p. 195).

  21. See Demsetz and Villalonga (2001, p. 221).

  22. Cf. Beiner et al. (2006, p. 257); Edwards and Weichenrieder (2004, pp. 155–156).

  23. Our industry classification differs from the current scheme used by Deutsche Börse AG, which classifies Prime Standard companies into 18 different industries, since the new classification scheme differs from the one in place at the end of 1998. Furthermore, we reduced the number of industry categories in place as of end 1998 by grouping from 15 to 8 non-financial categories as follows in order to increase the number of cases in each category: automobiles, chemicals, construction, consumers, electronics, food and beverages, industrial and utilities and transportation.

  24. For corporates the mean equity stake is 19.4%, while the median is 0.0%. For insiders, the mean and median are equal to 29.0 and 21.1%, respectively.

  25. See footnote 7.

  26. This is also supported by the fact that in our sample equity stakes of board members alone sum up to an average of 20.6% for 2003 and 22.5% for 1998.

  27. Please note that, according to panel A of Table 2, the average blockholding, i.e., the sum of all external equity stakes individually larger than 5%, is 32.0%. Together with insider equity holdings of 29.0% this adds up to a closely-held equity stake of 61.0% on average. Again, this figure is very close to the corresponding figure for 1998 given in panel B of Table 2, which reveals a closely-held equity stake of 62.2%.

  28. Similar figures for the UK are reported by Faccio and Lasfer (1999).

  29. This result should be viewed with caution since insider ownership and block ownership are partial substitutes and, not surprisingly, are highly negatively correlated. However, as more than these two shareholder groups exist, both shares must not add up to 100% and, hence, observed correlations are not totally trivial.

  30. Cf. in this regard also Edwards and Weichenrieder (2004, p. 152).

  31. Similar simultaneous equation systems were used by, among others, Agrawal and Knoeber (1996), Cho (1998), Davies et al. (2005), and Beiner et al. (2006) to address the potential endogeneity effect.

  32. As it was not possible to get sufficiently reliable information concerning the existence of a stock-based compensation program in 1998, the variable SOP was excluded in the calculations presented here. As an additional insight one can see that the results for model 2 are pretty stable, regardless of whether the existence of a stock-based compensation program is taken into account or not.

  33. German codetermination law requires that in companies of a certain size half of the supervisory board members must be representatives of the employees. Since this narrows the scope of managerial action, the managers might be restrained from owning larger stakes in such types of companies. Cf. Gorton and Schmid (2000).

  34. Cf. Himmelberg et al. (1999, p. 379).

  35. As a corollary it should be noted that the results of Eq. 13 indicate that insider ownership is more effective in value creation than external blockholdings, as the ratio of both coefficients is equal to 1.6.

  36. We doubt the reliability of results including higher terms of insider ownership as independent variables because of arising multi-collinearity. In our sample, the VIFs for MB_SB_FBM and MB_SB_FBM_SQ reach 16.5 and 12.6, respectively, indicating presence of multi-collinearity. We find no procedure to deal with this problem in McConnell and Servaes (1990).

  37. It should be noted that we also included higher terms of MB_SB_FBM as done by Davies et al. (2005) without obtaining more promising results than those found in our base case model 2.

  38. This also holds if we use MTBV or ROA as performance variables instead of BAHR. However, results will not be reported here.

  39. Note again that as it was not possible to get sufficiently reliable information concerning the existence of a stock-based compensation program in 1998, the variable SOP was excluded in the calculations presented here.

  40. It should be noted that this equation could only be estimated for the 2003 sub-sample since ownership structure data were only available at the end of the years 1998 and 2003. Moreover, for the reasons mentioned above the variable SOP was not included in this regression.

  41. Cf. Barnhart et al. (1994) and Bøhren and Ødegaard (2004).

References

  • Agrawal A, Knoeber CR (1996) Firm performance and mechanisms to control agency problems between managers and shareholders. J Financ Quant Anal 31(3):377–197

    Article  Google Scholar 

  • Anderson RC, Reeb DM (2003) Founding-family ownership and firm performance: evidence from the S&P 500. J Financ 58(3):1301–1327

    Article  Google Scholar 

  • Barnhart SW, Marr MW, Rosenstein S (1994) Firm performance and board composition: some new evidence. Manag Decis Econ 15(4):329–340

    Article  Google Scholar 

  • Barontini R, Caprio L (2005) The effect of ownership structure and family control on firm value and performance. Evidence from Continental Europe. European Corporate Governance Institute (ECGI), Finance Working Paper No. 88/2005

  • Becht M, Böhmer E (2003) Voting control in German corporations. Int Rev Law Econ 23(1):1–29

    Article  Google Scholar 

  • Beiner S, Drobetz W, Schmid MM, Zimmermann H (2006) An integrated framework of corporate governance and firm valuation. Eur Financ Manag 12(2):249–283

    Article  Google Scholar 

  • Berle AA, Means GC (1932) The modern corporation and private property. Harcourt, Brace and World, New York

    Google Scholar 

  • Bhagat S, Jefferis RH Jr (2002) The econometrics of corporate governance studies. The MIT Press, Cambridge

    Google Scholar 

  • Bøhren Ø, Ødegaard BA (2004) Governance and performance revisted. European Corporate Governance Institute (ECGI), Finance Working Paper No. 28/2003

  • Börsch-Supan A, Köke J (2002) An applied econometricians’ view of empirical corporate governance studies. Ger Econ Rev 3(3):295–326

    Article  Google Scholar 

  • Bott C (2002) Aktionärsstruktur, Kontrolle und Erfolg von Unternehmen. Gabler Edition Wissenschaft. Deutscher Universitäts-Verlag, Wiesbaden

  • Burkart M, Panunzi F, Shleifer A (2003) Family firms. J Financ 58(5):2167–2201

    Article  Google Scholar 

  • Chami R (1999) What’s different about family businesses? University of Notre Dame and IMF Institute, available at SSRN: http://ssrn.com/abstract=38041

  • Chen CR, Guo W, Mande V (2003) Managerial ownership and firm valuation: evidence from Japanese firms. PacBasin Financ J 11(3):267–283

    Article  Google Scholar 

  • Cho MH (1998) Ownership structure, investment, and the corporate value: an empirical analysis. J Financ Econ 47:103–121

    Article  Google Scholar 

  • Davies JR, Hillier D, McColgan P (2005) Ownership structure, managerial behavior and corporate value. J Corp Financ 11(4):645–660

    Article  Google Scholar 

  • Demsetz H (1983) The structure of ownership and the theory of the firm. J Law Econ 26(2):375–390

    Article  Google Scholar 

  • Demsetz H, Lehn K (1985) The structure of corporate ownership: causes and consequences. J Polit Econ 93(6):1155–1177

    Article  Google Scholar 

  • Demsetz H, Villalonga B (2001) Ownership structure and corporate performance. J Corp Financ 7(3):209–233

    Article  Google Scholar 

  • Drobetz W, Schillhofer A, Zimmermann H (2004) Corporate governance and expected stock returns: evidence from Germany. Eur Financ Manag 10(2):267–293

    Article  Google Scholar 

  • Edwards JSS, Nibler M (2000) Corporate governance in Germany: the role of banks and ownership concentration. Econ Policy 15(31):239–267

    Article  Google Scholar 

  • Edwards JSS, Weichenrieder AJ (2004) Ownership concentration and share valuation. Ger Econ Rev 5(2):143–171

    Article  Google Scholar 

  • Ehrhardt O, Nowak E (2003) Private Kontrollrenten in deutschen Unternehmen. Die Betriebswirtschaft 63(4):363–377

    Google Scholar 

  • Ehrhardt O, Nowak E, Weber FM (2006) Running in the family—the evolution of ownership, control, and performance in German family-owned firms 1903–2003. Swiss Finance Institute Research Paper No. 06-13

  • Faccio M, Lasfer MA (1999) Managerial ownership, board structure and firm value: the UK evidence (working paper)

  • Franks J, Mayer C (1990). Capital markets and corporate control: a study of France, Germany and the UK. Econ Policy 5(10):189–231

    Article  Google Scholar 

  • Franks J, Mayer C (2001) Ownership and control of German corporations. Rev Financ Stud 14(4):943–977

    Article  Google Scholar 

  • Gompers P, Ishii J, Metrick A (2003) Corporate governance and equity prices. Q J Econ 118(1):107–155

    Article  Google Scholar 

  • Gorton, G, Schmid FA (2000) Universal banking and the performance of German firms. J Financ Econ 58(1–2):29–80

    Article  Google Scholar 

  • Graham J, Harvey C (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243

    Article  Google Scholar 

  • Himmelberg CP, Hubbard RG, Palia D (1999) Understanding the determinants of managerial ownership and the link between ownership and performance. J Financ Econ 53(3):353–384

    Article  Google Scholar 

  • Höpner M, Krempel L (2005) Ein Netzwerk in Auflösung: Wie die Deutschland AG zerfällt. In: MPIfG-Jahrbuch 2003/04, pp 9–14. Max-Planck-Institut für Gesellschaftsforschung, Köln

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360

    Article  Google Scholar 

  • Köke J (1999) New evidence on ownership structures in Germany. ZEW discussion paper No. 60/1999

  • La Porta R, Lopez-de Silanes F, Shleifer A, Vishny RW (1998) Law and finance. J Polit Econ 106(6):1113–1155

    Article  Google Scholar 

  • La Porta R, Lopez-de Silanes F, Shleifer A (1999) Corporate ownership around the world. J Financ 54(2):471–517

    Article  Google Scholar 

  • La Porta R, Lopez-de Silanes F, Shleifer A, Vishny RW (2000) Investor protection and corporate governance. J Financ Econ 58(1):1–25

    Article  Google Scholar 

  • Loderer C, Martin K (1997) Executive stock ownership and performance: tracking faint traces. J Financ Econ 45(2):223–255

    Article  Google Scholar 

  • McConaughy DL, Walker MC, Henderson GV Jr, Mishra CS (1998) Founding family controlled firms: efficiency and value. Rev Financ Econ 7(1):1–19

    Article  Google Scholar 

  • McConnell JJ, Servaes H (1990) Additional evidence on equity ownership and corporate value. J Financ Econ 27(2):595–612

    Article  Google Scholar 

  • Morck R, Shleifer A, Vishny A (1988) Management ownership and market valuation: an empirical analysis. J Financ Econ 20:293–315

    Article  Google Scholar 

  • Schmid M (2003) Managerial incentives and firm valuation: evidence from Switzerland (working paper)

  • Schranz M (1993) Takeovers improve firm performance: evidence from the banking industry. J Polit Econ 101(2):299–326

    Article  Google Scholar 

  • Stigler GJ, Friedland C (1983) The literature of economics: the case of Berle and Means. J Law Econ 26:237–268

    Article  Google Scholar 

  • Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value? J Financ Econ 80(2):385–417

    Article  Google Scholar 

  • Wenger E, Kaserer C (1998a) German banks and corporate governance: a critical view. In: Hopt KJ, Kanda H, Roe MJ, Wymeersch E, Prigge S (eds) Comparative corporate governance—the state of the art and emerging research. Oxford University Press, New York, pp 499–536

  • Wenger E, Kaserer C (1998b) The German system of corporate governance—a model which should not be imitated. In: Black SW, Moersch M (eds) Competition and convergence in financial markets—the German and Anglo-American models, North-Holland Elsevier Science, Amsterdam, pp 41–78

  • White H (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48:817–838

    Article  Google Scholar 

  • Woidtke T (2002) Agents watching agents? Evidence from pension fund ownership and firm value. J Financ Econ 63(1):99–131

    Article  Google Scholar 

Download references

Acknowledgments

We thank Deutsche Börse AG for its cooperation in the German Entrepreneurial Index (GEX®) project, which is part of a broader research project concerning corporate governance and control structures in German listed companies with a special focus on insider ownership. We are grateful for financial support for this research project provided by the Bund der Freunde der Technischen Universität München e.V. and Deutsche Bundesbank. We owe special thanks to Ann-Kristin Achleitner, Markus Ampenberger, Stefan Bress, Wolfgang Drobetz, Silvia Elsland, Dietmar Harhoff, Felix Moldenhauer, Eric Nowak, Bernd Rudolph, Reinhard H. Schmidt, Martin Wallmeier, an anonymous referee, the participants of the CEFS-ODEON seminars in finance and entrepreneurship, Munich, the finance seminars at USI, Lugano, the annual meeting of the German Association of University Professors of Management 2006, Dresden, the EFMA annual meeting 2006, Madrid, the GEABA annual meeting 2006, Bielefeld, and the DGF annual meeting 2006, Oestrich-Winkel.

Author information

Authors and Affiliations

  1. Center for Entrepreneurial and Financial Studies (CEFS) and Department for Financial Management and Capital Markets, Technische Universität München, Arcisstr. 21, 80290, München, Germany

    Christoph Kaserer & Benjamin Moldenhauer

Authors
  1. Christoph Kaserer
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Benjamin Moldenhauer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Christoph Kaserer.

Additional information

CEFS Working Papier Series, No. 1/2005.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Kaserer, C., Moldenhauer, B. Insider ownership and corporate performance: evidence from Germany. RMS 2, 1–35 (2008). https://doi.org/10.1007/s11846-007-0009-3

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11846-007-0009-3

Keywords

JEL Classification

Search

Navigation