Abstract
Since 2004, companies located in member states of the European Economic Area (EEA) can opt to incorporate in a supranational legal form, the Societas Europaea (SE). Most importantly, the Societas Europaea offers the possibility to choose between the one-tier and two-tier board structure as well as to limit the extent of worker participation, two items that are not possible in some of the member states under national corporate law. In this paper, we investigate the reaction of investors to these changes in corporate governance structure. We find companies located in member states where the SE offers additional legal arbitrage opportunities benefit most. Moreover, our results show that stock price reaction is positive when the decision to incorporate as an SE involves moving the firm’s registered office and that firms are moving to jurisdictions with significantly lower corporate tax rates. Finally, we assess the importance of uncertainty surrounding managers’ decision to reincorporate as an SE and find evidence for corporate uncertainty at the registration date but not at the time of the shareholder meeting.
Highlights
The European Company (Societas Europaea or SE) has been an essential element for establishing the Common Market
Our results suggest that this uncertainty is not driven by the fact that the reincorporation needs to be approved by shareholders – we found no evidence of an additional stock price reaction at the time of the shareholder meeting, where shareholders may reject the plan of the management to incorporate as an SE
Belot et al (2014) hypothesized and found that the one-tier board offers benefits in terms of mitigating information asymmetry problems, while a two-tier board is more efficient for companies with high risks of managerial rent extractions, because this type of board limits discretion of management in the company. Given that both governance structures may have merits, we expected the value of firms to increase if this option becomes available to them, which we summarize in Hypothesis 1: Hypothesis 1:: Companies located in a country that allows only the one-tier or two-tier board structure under national corporate law will experience a positive abnormal return at the time when the first public information about the reincorporation leaks to the market
Summary
The European Company (Societas Europaea or SE) has been an essential element for establishing the Common Market. Ever since 2004 companies located in European Economic Area Member States have the option to reincorporate as an SE. The SE offers new ways to shape firms’ corporate governance structure that are not possible under national corporate law in some of the European Economic Area Member States. The two most important differences concern board structure and board-level worker representation. Both options affect the firm’s value if they help to mitigate conflicts of interests between management and shareholders (Belot et al, 2014). We examine whether incorporating as an SE affects a firm’s value and which factors drive these changes
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