Capital Markets and Corporate Control: A Study of France, Germany and the UK

This paper examines the relation between capital markets and corporate control in France, Germany and the UK. It compares levels of takeover activity in the three countries and describes the degree to which takeovers are associated with changes in corporate control. The paper examines the influence of regulation on forms of corporate ownership and control. It compares regulation pertaining to the rights of employees, managers and shareholders in the three countries and finds that regulatory rules are related to patterns of ownership and control changes. The paper suggests that a fundamental objective of control changes is to correct managerial failure, and that takeovers are suited to the correction of particular classes of managerial failure that cannot be readily rectified by contracts. Thus, markets with low levels of takeovers may suffer from a low level of correction of managerial failure. However, by changing ownership, takeovers may give rise to an inability of owners to commit themselves to the long-term interests of managers and employees. As a consequence, financial systems with active takeover markets may be associated with inadequate investment in firm-specific assets and an unduly short-term investment horizon. There is, therefore, a tradeoff between alternative methods of correcting managerial failure. This is particularly important for European countries facing an extension of UK takeover activity to the Continent. The process is being encouraged by the European Commission which aims to harmonize regulation on a UK-style takeover code. Harmonization of regulation may have far-reaching consequences for the structure of different countries' capital markets and, in view of the tradeoff, is of uncertain merit.