The Emergence of Shareholder Value in the German Corporation

Abstract

We analyze the effects of changes in the purpose of large German corporations from stakeholder-oriented organizations to shareholder-oriented organizations during the decade of the 1990s. We document this transformation by first examining the annual reports of large firms at strategic points in time relative to significant changes in German corporate law. We find that changes in the law over this period both reflected and facilitated a fundamental shift in the operations of German corporations as evidenced by their adoption of stock- and option-based incentive compensation plans, adoption of US GAAP-based (or related) accounting systems, ADR listings, and restructuring activity. We also document the emergence and adoption of the rhetoric of shareholder value among German managers, the public, and the media. Detailed empirical analysis shows that German firms that embraced shareholder value as their corporate purpose and operating strategy realized a slight gain in equity values over the decade of the 1990s, as well as a significant increase in their Betas relative to the S&P 500, when compared to less shareholder-oriented firms. We interpret the Beta shifts as evidence that focusing on shareholder value leads firms to adopt entrepreneurial risk-taking strategies that reflect shareholder, rather than stakeholder, concerns. We conjecture that the increase in Betas might also be due to the adoption by some German firms of a similar operating philosophy to that of the traditionally shareholder-oriented US corporation. Finally, we show that German firms that embraced shareholder value-orientation during the 1990s realized significantly greater growth in their Market-to-Book ratios and market capitalizations relative to their less shareholder-oriented counterparts.