Working Paper

Class struggle inside the firm: a study of German codetermination

Abstract: Under the German system of \"codetermination,\" employees are legally allocated some control rights over corporate assets, in the form of board seats. We empirically investigate the implications of equal board representation compared with one-third employee representation and find a 26% stock market discount on firms with equal representation. Employees redistribute the firm's surplus towards themselves but may also prefer a different objective function for the firm, maximizing employee utility rather than shareholder value. We investigate the shareholder response to codetermination via higher leverage that commits more cash to leave the firm. We also examine the relationship between codetermination and the performance sensitivity of compensation for board members.

Keywords: Germany; Corporations - Finance;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2002

Number: 2000-025