Do Corporate Control and Product Market Competition Lead to Stronger Productivity Growth? Evidence from Market-Oriented and Blockholderbased Governance Regimes

Abstract

This study investigates the impact of corporate governance and product market competition on total factor productivity growth in Germany and the UK. For Germany, the prototype of a bank-based governance system, productivity grows faster in firms controlled by financial institutions (in particular, banks and insurance companies) and intense competition reinforces this beneficial impact. Furthermore, the importance of the German creditors (mostly banks) for productivity growth is particularly significant in firms which experience financial difficulties or are in financial distress. For the UK, a market-based governance system, we do not find any evidence that creditors play a disciplinary role. Still, there is strong evidence that shareholder control (by insiders, private outsiders and financial institutions) leads to substantial increases in productivity in poorly performing firms. We also find evidence that product market competition is a substitute for blockholder control in the UK.

Keywords: corporate governance, productivity growth, ownership and control, product market competition, financial distress

JEL Classification: D24, D43, G32