Minority Shareholder Expropriation and Asymmetric Information Flows in a Global Registered Share: The Saga of Daimler Chrysler

Abstract

The Daimler foray into the international equity market, beginning with its 1993 cross-listing in the U.S. and peaking with its 1998 merger with Chrysler, provides an uncommon opportunity to explore the interplay between competing approaches countries may take in their treatment of minority shareholders. In the common-law approach often adopted in the U.K, present and former Commonwealth countries, Israel and the U.S., strict disclosure and reporting requirements are combined with strong corporate governance standards on board structure, incentive-based executive compensation, and voting rights to protect minority shareholders from expropriation by controlling shareholders and principal creditors. In contrast, as a cross-listed German stock corporation, DaimlerChrysler's civil-law approach to governance was dominated by direct monitoring by controlling shareholders and principal creditors who imposed strict internal accounting standards and extraordinary confidentiality designed to prevent the leakage of asymmetric information to minority shareholders. In this paper we use the DaimlerChrysler events to generate unique evidence on the extent to which two methods - disclosure requirements and corporate governance standards - can substitute for one another in protecting minority shareholders from expropriation. We find that strict disclosure requirements, though they provide measurable reductions in asymmetric information, are an insufficient substitute for strong corporate governance measures. Strict disclosure complements strong corporate governance, and both may be required to create environments in which firms can raise capital and fund growth opportunities most efficiently.