Antecedents and consequences of corporate governance reform: the case of Germany

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.