Does codetermination reduce shareholder value? Board-level employee representation, firms’ market value, and operational performance

We analyze the relationship between board-level codetermination and shareholder value. We use a unique dataset of listed German companies that enables us to identify heterogeneous aspects of codetermination and overcome otherwise common identification issues. We find that codetermination reduces firms’ market value. Though we do not find a consistent effect of codetermination on net operating performance, we find that employees of codetermination firms are able to extract rents from shareholders via increases in employee wages and count while negatively affecting dividends paid to shareholders. These results are mitigated by the presence of strong shareholder monitors. This study should be of interest for policy makers concerned about the potential economic consequences of codetermination