German Banks and Corporate Governance - a Critical View

Posted: 12 Sep 1997

See all articles by Christoph Kaserer

Christoph Kaserer

Technische Universität München (TUM)

Ekkehard Wenger

University of Wuerzburg

Date Written: August 1997

Abstract

It is the aim of this paper to take issue with the wide-spread belief that blockholdings - mainly by banks - in large German companies are suited to mitigate the free-rider problem of corporate control. This fundamental misunderstanding, especially popular among Anglo-American academic circles, is the result of the erroneous belief that German banks are located at the top of a hierarchically structured network of shareholdings and are acting in the interest of their own private shareholders. In reality, large German banks are sheltered from outside pressures by a dense network of cross-holdings, proxy votes and underdeveloped disclosure obligations. Therefore, bank managers are not forced to pursue a value maximizing investment and monitoring policy. Furthermore, one would expect that such a tight network of capital and personal relationships enhances collusion among management of all involved companies. In the first part of the paper it is shown that the German system of mutual shareholdings is dense and far-reaching. In the second part of the paper, we analyze newly introduced stock option programs. The findings suggest that there is indeed a great danger of collusion among managers tied together by a system of cross-holdings. Stock options are especially prone to collusive agreements because of the lack of relevant disclosure obligations and the almost complete absence of any understanding of these instruments. As we find out in our case-oriented analysis, stock option programs are more likely to be used as an instrument to exploit shareholders, if the company is bank-dominated or sheltered from capital market pressures through other arrangements. In companies with influential private shareholders, executive compensation by means of stock options was found to be incentive compatible. In order to support our view, in the final part of the paper the impact of bank control on the economic performance of industrial companies is analyzed from an empirical perspective. By measuring bank control in terms of long-run equity holdings of the financial sector we found out that there is a significant difference between bank-dominated companies and a control group in terms of total shareholder returns.

JEL Classification: G21, G34

Suggested Citation

Kaserer, Christoph and Wenger, Ekkehard, German Banks and Corporate Governance - a Critical View (August 1997). Available at SSRN: https://ssrn.com/abstract=11353

Christoph Kaserer

Technische Universität München (TUM) ( email )

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Munich, D-80290
Germany
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HOME PAGE: http://www.cefs.de

Ekkehard Wenger (Contact Author)

University of Wuerzburg

Sanderring 2
Wuerzburg, 97070
Germany
011-61-931-312931 (Phone)
011-61-931-59643 (Fax)

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