Institutional Passivity and "Shadow" Corporate Governance: European Evidence

Abstract

This study seeks to extend the literature on how a Continental European firm's performance is impacted by the second largest investor when its dominant owner has a capacity to control but is not actually involved in its management. Using data gathered from ORBIS for publicly-traded firms from Austria, Belgium, France, Germany, the Netherlands, Spain and Portugal, and controlling for firm size, industrial sector and country-specific factors, we find statistical support for a relationship between ownership of the second largest or shadow owner and performance for firms in which an institutional investor was the dominant owner. This statistical relationship varied in direction and significance depending on whether the shadow owner was a block (another corporation), bank or family/individual. The findings in this study represent first time evidence to explain the seemingly unrelated association between CE firm performance and ownership share when an institution is the largest owner. The findings also speak to investors about the importance of identifying the type of owner filling the control vacuum left by the institutional owner, and how for each of these ownership types, the share of the shadow owner now becomes the main link with firm performance.