Does the Governed Corporation Perform Better? Governance Structures and Corporate Performance in Germany

The paper investigates the impact of corporate governance on the performance of 361 German corporations over the time period 1991 to 1996. We find ownership concentration to affect profitability significantly negatively. Representation of owners on the board of executive directors does not make a difference. The profitability-ownership concentration relation depends on both stock market exposure and the location of control rights. The negative effect of ownership concentration can be traced back to family- or foreign-owned non-quoted firms as well as quoted firms with different large shareholders. A positive impact of ownership concentration on profitability, supportive of managerial discretion and agency theories, shows up for quoted firms which have financial institutions as large shareholders. Our results imply that (1) the presence of large shareholders does not necessarily enhance profitability, and (2) the high degree of ownership concentration seems to be a sub-optimal choice for many of the tightly held German corporations.