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The paper examines the antecedents and consequences of the voluntary adoption of corporate governance reform in firms embedded in a relationship-based governance system with less protection of minority shareholders. In such locations, ownership structure should be a key determinant of governance reform. Firms with dispersed ownership are likely to face agency problems but may lack sufficient ownership power in the hand of external owners for adoption to occur. Extensive ownership by external parties facilitates adoption but decreases the need and motivation to adopt governance reform. We examined the adoption of stock-based incentive plans and transparent accounting regulations (e.g., greater disclosure to shareholders) among large German firms (DAX 100) during the late 1990s. We found an inverse 'U'-shaped relationship between ownership concentration and governance reform. In addition, we found that firms adopting governance reform were more likely to engage in corporate divestitures and achieve higher levels of market performance than firms not adopting governance reform. Copyright © 2003 John Wiley & Sons, Ltd.
Key words: corporate governance; ownership structure; firm performance
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Historically, the corporate governance of AngloAmerican firms has differed dramatically from that in many other regions of the world (Walsh and Seward, 1990). For instance, in many European countries, ownership concentration is significantly greater than in the United States and United Kingdom (Gedajlovic and Shapiro, 1998; Kaplan, 1994). Conversely, Anglo-American firms face greater institutional ownership of stock (Useem, 1996), active markets for corporate control (Hitt et al, 1996), and strong executive performance incentives (Murphy, 1999), which have played a lesser role in European firms (Walsh and Seward, 1990). Notwithstanding these historical differences in ownership and control, governance mechanisms fashioned after those found in the United States are beginning to emerge in many European countries. Whereas the antecedents and consequences of agency control mechanisms in U.S. firms have been widely researched (e.g., Jensen and Meckling, 1976; Fama and Jensen, 1983; Eisenhardt, 1989; Walsh and Seward, 1990; Murphy, 1999), adoption of these mechanisms in countries with different ownership structures and governance norms remains largely unexplored. This study examined the causes of governance reform and its effects on firms' strategic actions and performance. Specifically, we study the adoption of stock-based pay and transparent accounting standards in Germany-a country...