Is It Still Pizza, Spaghetti and Mandolino? Effect of Governance Reforms on Corporate Ownership in Italy

Abstract

This paper investigates the effect of corporate governance reforms on the balance between ownership and control in a country characterized by poor investor protection. We use the example of Italy, where major reforms were passed in 1998 to protect minority shareholders from the risks of expropriation on account of the exercise of high voting rights (or high control) by the ultimate owner despite low cash flow rights (or low ownership). Using a two-stage longitudinal research design incorporating both quantitative and qualitative analyses (1995-2005), we find that reforms led to improved disclosure and greater representation of minority shareholders. In turn, this led to a decline in the risk of expropriation of minority shareholders. The reforms had a greater effect on firms where an institutional investor was present. We also find that while reforms led to an increase in the cash flow rights of the ultimate owner, they did not lead to a decrease in voting rights. This paper highlights the importance of studying the mechanisms by which the content of reforms affects actual business practices through the use of longitudinal research designs and the crucial role played by institutional investors in improving governance practices of firms. This paper also suggests that corporate governance reforms are more likely to be successful when regulatory coercion is accompanied by provisions that facilitate market-based control mechanisms.

Keywords: Corporate governance, Ownership structure, Expropriation, Regulation

JEL Classification: G32, G34, G38, G15