Continental European Companies Research Articles

Accounting Choice under IFRS: The Role of Accounting Tradition and Managerial Opportunism

The present study investigates the role of accounting tradition and managerial opportunism when companies are given by IFRS the option to choose whether to book accounting items following the historical cost or the fair value method. We hypothesize that accounting tradition still plays a role in the choice, with Continental European companies preferring the historical cost and the Anglo-Saxon companies choosing more often the fair value. We also hypothesize that managers will act opportunistically, choosing the historical cost or the fair value method in order to influence the performance of the company and/or their remuneration. By using a hand-collected sample of 480 companies belonging to Continental Europe (Italy, Germany and France) and Anglo-Saxon countries (United Kingdom and Australia) we find support for the first hypothesis while we reject the second hypothesis. Accounting tradition does still play a role in the accounting choice, while managerial opportunism does not.

When does ownership matter? Board characteristics and behavior

We develop a contingency approach to explain how firm ownership influences the monitoring function of the board—measured as the magnitude of external audit fees contracted by the board—by extending agency theory to incorporate the resource dependence notion that boards have distinct incentives and abilities to monitor management. Analyses of data on Continental European companies reveal that while board independence and audit services are complementary when ownership is dispersed, this is not the case when ownership is concentrated—suggesting that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the type of the controlling shareholder. Copyright © 2013 John Wiley & Sons, Ltd.

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

In this paper Swedish listed companies use of capital budgeting and cost of capital estimation methods in 2005 and 2008 are examined. The relation between company characteristics and choice of methods is investigated and both within-country longitudinal and cross-country comparisons are made. Larger companies seem to have used capital budgeting methods more frequently than smaller companies. When compared to U.S. and continental European companies, Swedish listed companies employed capital budgeting methods less frequently. In 2005 the most common method for establishing the cost of equity was by asking the investors what return they required. By 2008 CAPM was instead the most utilised method, which could indicate greater sophistication. The use of project risk when evaluating investments also seems to have gained in popularity, while the use of company risk declined. Overall, the use of sophisticated capital budgeting and cost of capital estimation methods seem to be rising and the use of less sophisticated methods declining.

Can Capital Expenditures be Value Destroying?: An International Perspective

We look at the effect of capital expenditures on firm performance in an international context. We find that increases in capital expenditures increase ROA and Firm Q but only up to a certain point, after which value is destroyed. This is especially true for U.S. firms and continental European companies, but less so for U. K. firms over the period 2003 through 2011. Firms with high free cash flow destroy value more. In the U.S. and U.K., high free cash flow in conjunction with excessive CAPEX is value decreasing.

Ownership structure, family control, and acquisition decisions

We investigate how ownership and family control influence the decision to take part in M&As as an acquirer or as an acquired company in a sample of 777 large Continental European companies in the period 1998–2008. We find that ownership is negatively correlated with the probability of launching a takeover bid, and family firms are less likely to make acquisitions, especially when the stake held by the family is not large enough to assure the persistence of family control. On the passive side of M&A deals, the effect of the largest shareholders' ownership on the decision to accept an acquisition proposal depends non-linearly on the voting rights they hold, and family control reduces the probability of being acquired by an unrelated party. We do not find evidence that family-controlled firms destroy wealth when they acquire other companies. Finally, we document that ownership and family control, while being negatively correlated with M&A activity, are not negatively correlated with growth in firm size.

When Does Ownership Matter? Board Characteristics and Behavior

We extend agency theory with the notion that boards have distinct incentives and abilities to monitor management and develop a contingency approach to explain how firm ownership influences the monitoring function of the board — measured as the magnitude of external audit fees contracted by the board. Analyzing Continental European companies, our results demonstrate that while audit services and board independence are complementary when ownership is dispersed, this is not the case when ownership is concentrated. This suggests that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the identity of the controlling shareholder. We uncover that the influence of board characteristics on audit fees is larger for family and non-financial controlled firms than for bank controlled firms, relative to firms with dispersed ownership. In total, we find that board monitoring is contingent on the firm’s ownership structure, which demonstrates that board strategic behavior is contextually dependent. We argue that theory and empirical research in corporate governance should progress to a more context dependent analysis, which, in turn, will prove useful for practitioners and policy makers.

Wettbewerb und Leistung auf zwei ungew�hnlichen M�rkten

Abstract: This article argues that the European Union needs more competition in the market for corporate control and in the academic market. Evidence is presented of poor investment performance by Continental European companies relative to companies in Anglo-Saxon countries. The article claims that an important reason for this is that hostile takeovers are much easier to undertake in the Anglo-Saxon countries. Evidence is also presented regarding the underfunding and lack of competition among universities in Continental Europe relative to the United States. To improve the quality of Continental European universities they need to have more resources. These can be obtained by charging higher tuition fees for university education and through greater emphasis on alumni contributions. In addition, Continental Europe needs more competition among universities for both students and faculty.

Does Jensen's Free Cash Flow Hypothesis Explain European Lbos Today?

Jensen's Eclipse of the public corporation (1989) predicts that LBO transactions solve the agency problems of publicly listed companies with high levels of undistributed free cash flows (FCFs) and low growth opportunities. So far, empirical evidence in this context is mixed. This study is the first that provides evidence on the application of Jensen's FCF hypothesis (1986) to Leveraged Buyouts (LBOs) in the European market. My univariate and multivariate findings indicate that Continental European companies with high Cash Flows before distribution and few investment opportunities whose P/E ratio is significantly lower than that of their industry peer group are more likely to be an LBO target. I do not find any evidence that European LBO targets suffer from agency problems prior to the transaction.

Ownership, board structure, and performance in continental Europe

This study examines the empirical validity of claims that the composition of boards of directors and ownership structures affect firms' profitability ratios (ROE, ROA, MTB) using data from 87 European firms, which were foreign U.S. registrants during 2000–2001. Results indicate a strong positive relation between the level of relational ownership and profitability ratios, and between the portion of independent directors on the board and profitability ratios. No strong relation was found between the portion of inside directors or level of managerial ownership and profitability in continental European companies.

Investor relations: a European survey

Investor relations is the communication of information relating to the company to the financial community; analysts, investors and potential investors. It is regarded as a relatively new phenomenon, which has developed most rapidly in the USA followed by the UK. Traditionally continental European companies have been viewed as more reliant on loan rather than equity funding. However the development of increasingly important equity markets throughout Europe has led to a growth in importance of the Investor Relations function. This paper examines the importance of the investor relations function within the top 80 continental European companies by reporting on the result of a postal questionnaire. The results confirm that many continental European companies have well established investor relations practices and the function is growing in importance.

Hoechst – the Reports of the Board of Management, the Supervisory Board and the Auditors

In line with the journal's editorial policy, this case has been published to provide insights into a real governance situation. Supervisory boards are widely adopted as part of the governance mechanism of continental European companies. Yet their work remains largely hidden to directors and academics experienced in Anglo/American governance practices. In the last issue we introduced the governance structure in a leading company in Eastern Europe, MOL Hungarian Oil and Gas Company Limited. In this issue we report on the governance structure of a major international company incorporated in Germany and listed on the New York Stock Exchange.

An analysis of gains and losses to shareholders of foreign bidding companies engaged in cross-border acquisitions into the United Kingdom, 1986–1991

In this paper the gains and losses to shareholders of 71 foreign companies which made takeover bids for companies listed in the United Kingdom during the 1986–1991 period are analysed. The average abnormal return during the month of the bid announcement was positive, although not statistically significant. However, both prior to and sub-sequent to the bid announcement month, the overseas bidders earned highly significant negative abnormal returns. The cumulative abnormal returns over the five month period following the bid announcement were-4.77% with the index model and -9.79% with the market model. Further analysis established that Continental European companies performed significantly worse than American bidders. In addition, large companies and companies bidding for large targets, performed significantly better than the other bidders.

Managing industrial pharmaceutical R&D. A comparative study of management control and innovative effectiveness in European and Anglo‐American companies

AbstractDrug regulation and pricing have put strong pressure on the cost‐benefit ratio of the innovative pharmaceutical industry. Therefore a study has been conducted in fourteen large and medium sized companies to determine some important organisational and managerial factors influencing success in pharmaceutical innovation. The study consists of structured interviews with Research Directors and questionnaires, submitted to the heads of the different research departments. The following conclusions are tentatively drawn. Firstly, the data suggest that a threshold investment of approximately $150–200 million is needed to maintain the innovative potential. Above approximately $750 million, ‘economies of scale’ seem to appear in pharmaceutical innovation. Secondly, an incremental strategy aimed at reducing the duration of the development process seems to be more successful than a radical strategy which lays more emphasis on discovery. Thirdly, pure play pharmaceuticals seem to be more successful than the pharmaceutical divisions of conglomerates. Management control, especially the way in which reorganisations are performed, is assessed more positively in pure play pharmaceuticals. Fourthly, the greater emphasis on human resources management in Anglo‐American companies, in comparison to continental European companies, seems to be an important explanatory factor for their greater success on the pharmaceutical market.

Globalization of Stock Markets and Foreign Listing Requirements: Voluntary Disclosures by Continental European Companies Listed on the London Stock Exchange

This study investigates the extent to which the disclosure requirements of the London Stock Exchange relating to company annual reports are complied with or exceeded by Continental European companies listed on the Exchange. It was found that the companies exceeded Exchange requirements through a wide range of voluntary disclosures, which in some cases were substantial. The significance of the Stock Exchange requirements appeared to be relatively minimal compared to competitive pressures associated with the need to raise capital in the international capital market context. At the same time, there were persistent national characteristics in the pattern of items voluntarily disclosed.