Corporate efficiency in Europe

Jan Hanousek, Evžen Kočenda, Anastasiya Shamshur

19 July 2015



Based on firm performance, managers earn rewards and investors decide whether to invest in a firm. Therefore one of the key questions in corporate finance is to identify factors that contribute to firm performance. Since the early 1930s, when Berle and Means (1932) found a positive correlation between ownership concentration and firm performance, ownership structure has been recognised as an important factor.

A concentrated ownership structure can help reduce the risk that managers will abuse their power at the expense of corporate shareholders, since greater monitoring efforts by large shareholders can be expected (Jensen and Meckling 1976). On the other hand, ownership concentration also has costs, not least that it may lead to the expropriation of minority shareholders (La Porta et al. 1999), with possibly negative repercussions on firm performance.

By and large, existing empirical work equates firm performance with accounting ratios such as profitability and labour productivity. However, such ratios are unlikely to reflect the full value created by a firm. For example, Japanese companies have historically been less profitable than their American counterparts, but their remarkable productivity performance in sectors such as autos and electronics led to rapid growth in their global market share in the 1970s and 1980s. Moreover, profitability captures only the part of the value added that goes to shareholders, while labour productivity can be an inadequate measure of overall performance, especially in capital intensive industries. Finally, financial ratios can be easily manipulated for tax or other reasons, particularly in countries where the rule of law is weak, and among small and medium sized private enterprises.

A different measure of firm performance

In a recent paper, we address these concerns by examining the effect of ownership and other firm-level variables using a different measure of firm performance – technical or production efficiency (Hanousek et al. 2015). The efficiency of a firm captures its ability to produce the maximum output from a given set of inputs. Technical efficiency may be more difficult or less important to manipulate than accounting ratios. For that reason, it is a suitable tool for analysing firm performance. In our paper, we associate firm inefficiency with the distance of the actual output from the potential output given production inputs and technology, and estimate it using a stochastic frontier model. We further relate the technical efficiency of a firm to its specific characteristics (size, capital structure, degree of competition) and its ownership structure.

The analysis is performed on a large and comprehensive firm-level unbalanced panel data (more than 3 million firm/year observations) that cover manufacturing and services firms from 22 ‘old’ and ‘new’ EU countries over 2001-2011.1 Several specific ownership categories are tested for effects of the different degrees of control that an owner is able to exert over a company. Simple majority ownership is easy to understand, and provides an owner with full control. However, a majority owner may face the presence of minority owners who may be able to contest or even block some managerial decisions. A very subtle ownership structure emerges when two minority owners alone are not strong enough to impact decision making, but together are able to form a majority. The authors also distinguish two cases related to ownership dynamics. A permanent ownership effect is identified for firms with stable ownership. Alternatively, there is a changing ownership effect in firms in which the ownership structure did change during the research period. These distinctions prove to be important with respect to firm efficiency.

The results for old EU countries are presented in Figures 1 and 2. The results support the idea that control by large shareholders is often misused when not counterbalanced by the presence of minority owners with sufficiently large stakes in the company. Unaccountable to dispersed minority shareholders, permanent majority ownership is not beneficial for firm efficiency. A majority owner has unlimited power and can much more easily become involved in value expropriation activities. At the same time, changes in majority ownership have a disciplining effect and contribute to firm efficiency. Interestingly, a change in ownership improves efficiency only in firms owned by domestic majority owners, but not in firms owned by a foreign majority owner. This is consistent with the idea that domestic majority owners are able to exercise better control over management.

However, in cases when a strong minority owner is present, controlling shareholders may be less able to expropriate funds. A blocking minority ownership has the power to challenge the decisions of a majority owner that may be crucial for the firm, such as those related to increasing or reducing assets and implementing major changes in business activities (Hanousek et al. 2007). While the presence of a minority owner with a sufficiently high stake (more than 10%) is not as powerful as a blocking minority, it can still exert an important monitoring influence and is potentially important because national laws entitle the holder of this stake to call general shareholders' meetings and to obstruct decisions by delaying their implementation through lengthy court proceedings (ibid. 2007).

Figure 1. Old EU countries, effect of stable ownership

Figure 2. Old EU countries, effect of change in ownership

Majority ownership doesn’t mean firm efficiency

Results of the analysis performed on firms in new EU countries are less informative due to the lack of statistical significance of many effects. Still, similarly to the results from the old EU, majority ownership doesn’t contribute to firm efficiency when the ownership is stable. However, when ownership changes, the efficiency of majority-owned domestic firms operating in manufacturing industries improves.

Further, Hanousek et al. (2015) investigate several factors that may have an effect on the ability of a firm to operate at the best (most efficient) technical level. These factors include firm size, financial leverage and market competition. The statistically significant results are depicted in Figure 3. The findings presented highlight that larger firms are characterised by lower efficiency. This result might be driven by higher bureaucracy, higher communication costs and greater resistance to change in large firms as compared to smaller firms. Capital structure matters as well, since greater leverage is associated with improved efficiency; this is consistent with the free cash flow theory (Jensen 1986) that projects financed by loans must meet the market interest rate and are likely to be more profitable than projects financed by internal funds (free cash flow). Firms using chiefly loans become more leveraged and should engage in profitable projects. This should positively affect their efficiency. Finally, high competition is less conducive for efficiency than moderate or low competition, possibly because firms operating under higher competition pressure have quite narrow margins with little space to adjust, especially during an economic downturn.

Figure 3. Old EU, effect of size, leverage and competition

The importance of firm characteristics

In sum, the importance of firm characteristics on efficiency is evidenced, and ownership structures are even more important. In particular, the type and origin, stability and changes in ownership structures are drivers of efficiency in European firms. From the efficiency standpoint, the optimal ownership structure is a majority ownership confronted with minority owners holding more than 10% of shares. The strong disciplining effect of this model drives improved efficiency in firms, including those with foreign owners.


Berle, A, and G Means (1932), The Modern Corporation and Private Property, New York: MacMillan,

Hanousek, J, E Kočenda, and J Svejnar (2007), “Origin and Concentration: Corporate Ownership, Control and Performance in Firms after Privatization”, Economics of Transition 15(1): 1-31.

Hanousek, J, E Kočenda and J Shamshur (2015), “Corporate Efficiency in Europe”, CEPR Discussion Papers 10500, forthcoming in Journal of Corporate Finance 32: 24–40.

Jensen, M (1986), “Agency costs of free cash flow, corporate finance, and takeovers”, The American Economic Review 76(2): 323–329.

Jensen, M, W Meckling (1976), “Theory of the firm: Managerial behavior, agency costs and capital structure”, Journal of Financial Economics 3(4): 305-360.

Porta, R, F Lopez‐de‐Silanes, A Shleifer (1999), “Corporate ownership around the world”, Journal of Finance 54(2): 471–517.


1 Specifically, based on the availability of reliable firm-level data, the following two groups are defined. Old EU – Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. New EU – Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Poland, Romania, Slovenia, Slovakia.



Topics:  Financial markets

Tags:  firms, productivity

Full Professor at CERGE-EI; Research Fellow at the William Davidson Institute, Michigan Business School; Research Fellow, CEPR

Professor of Economics at the Institute of Economic Studies, Charles University

Lecturer in Finance at Norwich Business School, University of East Anglia