The Modern Firm, Corporate Governance and Investment
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The Modern Firm, Corporate Governance and Investment

Edited by Per-Olof Bjuggren and Dennis C. Mueller

This book explores the revolutionary development of the theory of the firm over the past 35 years. Despite rapid progress in the field, new developments in the microeconomic and industrial organization literature have been relatively scant. This book attempts to redress the balance by providing a comprehensive overview of the theory of the firm before moving on to examine firms and the organization of their economic activities. The contributors also investigate the impact of ownership structure and board composition on firm performance and study how the institutional framework of an economy affects investment decisions.
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Chapter 14: The Determinants of German Corporate Governance Ratings

Wolfgang Drobetz, Klaus Gugler and Simone Hirschvogl


Wolfgang Drobetz, Klaus Gugler and Simone Hirschvogl 1. INTRODUCTION In recent years many countries have introduced ‘corporate governance codes’. These codes represent unmistakable improvements in minority shareholder right protection as well as transparency, and they generally entail a movement towards Anglo-Saxon institutions. Many of the rules in these codes are only recommendations, however, and there is much scepticism that best-practice recommendations and/or principles-based approaches are effective substitutes for more rule-based approaches, such as the US Sarbanes-Oxley Act. This is all the more the case since there is the widespread perception that markets do not function well in punishing deviant behaviour of managers, particularly in Continental Europe, where regulators tend to rely heavily on principles-based approaches in their attempts to reform corporate governance. There are many reasons to believe that markets are less of a constraint on managerial discretion in Continental Europe than in the US or the UK, in particular. For example, ownership and voting right concentration is tremendous, liquidity of shares is low, and there is frequently a separation between cash flow and voting rights.1 In general, therefore, the ‘exit option’ is less of a threat to firms’ management, and the ‘voice’ of institutional investors, in particular, ought to be strengthened. The existing literature on codes is scant at best, and if it exists it is on the effects of corporate governance codes on performance.2 Most recently, Drobetz et al. (2004) construct a corporate governance rating for 91 German firms and find that the rating of a firm positively...

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