The Performance of Measures of Shareholder Influence

Abstract

This article investigates the performance of various measures of shareholder influence. Performance is evaluated on the basis of the measures' ability to explain the representation of the two largest shareholders in the boards of German stock corporations. This yardstick for the shareholders' power seems to be more closely related to actual shareholder power than the yardsticks used in the small stock of previous studies. The measures of shareholder influence comprise the share in voting rights, the Shapley-Shubik index, and the Banzhaf index, from all of these measures several variants enter the analyses. In case of the principal shareholder, the plain share in voting rights can fend off all competitors. For the second largest shareholder, the ability of power values to accentuate the strength of the second largest shareholder's position subject to the principal shareholder power emerges as an important improvement, but it can be conveniently reproduced by simple modifications of the share in voting rights. The results reveal that the fine tuning of the power values is of little importance, even the choice between Shapley-Shubik index and an identically defined Banzhaf index does not matter much. The most important dividing line separates the power indices with adjusted majority requirement from all remaining measures, including the share in voting rights. Another major insight is the context sensitivity of many results. As a consequence, the perspective to find a single measure of shareholder influence for all corporations is unfavorable. Possibly the most striking outcome is that all measures of shareholder influence, including the plain share in voting rights, sramatically lose explanatory power for board representation when corporations with a majority shareholder are excluded from the sample. All measures fail to explain our yardstick of shareholder power for samples which only consist of corporations without majority shareholder. The poor performance of all measures of shareholder influence might hint at another potential cause why the empirical research of the relationship between shareholder structure and corporate performance yields such inconclusive results.