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1、13Universal Banking and the Performance of German Firms*GARY B. GORTON AND FRANK A. SCHMID?13.1. INTRODUCTIONGerman universalbanksappear to bepowerful institutionsinthat they can own blocksofequityandvoteindividualshareholdersvotesinproxy.Thissystemhas been controversial for over a century (e.g., Hi
2、lferding, 1910) and is addressed more recently in the report of the Gessler Commission (e.g., Studienkommis- sion, 1979; and Krmmel, 1980), but apart from Cable (1985) there has been no empirical analysis of this corporate governance system and there is certainlynoagreementabouttheeffects ofGermanba
3、nksontheperformanceoffirms. One view of the German system is that German banks are large, active,informedinvestorsthatimprovetheperformanceoffirmstotheextentthatthey hold equity and have voting power from casting the votes of small investors inproxy. Banks are seen as long-term investors who oversee
4、 firms investments and organize internal capital markets, rather than acting as myopic investors (e.g., Porter, 1992; Grundfest, 1990). The banking relationship mitigates thecosts of both external financing and of actively monitoring management. Pro- ponents of this view see German banks as a model
5、of active block shareholders*ThankstoAnupAgrawal,JrgBorrmann,WilliamCleveland,BillEmmons,SilverioForesi,Javier Hidalgo, Chris James, Shmuel Kandel, Mark Lang, Erich Loitlsberger, Claus Niemann, Benedikt Ptscher, Ragu Rajan, Reinhard H. Schmidt, Ren Stulz, and Andrei Shleifer (the referee) for sugges
6、tions and discussions. Also, thanks to Lori Gorton, Tatjana Greil, Helge Hagge, Thomas Hansen, Joachim Pansgerau, Ruth Paschka, and Martina Venz for research assistance. Gorton thanks the Bank of England for support during his tenure as a Houblon-Norman Fellow. Schmid thanks Deutsche Forschungsgemei
7、nschaft for support when visiting the Wharton Finan- cial Institutions Center. The views expressed in this paper are those of the authors and not necessarily thoseoftheFederal ReserveBankofSt.LouisortheFederal ReserveSystem.UniversalBankingandGermanFirms355thatshould be emulated instock-market-based
8、economies (where shareholders are dispersed and institutional investors are passive). For example, Grundfest (1990) asserts: “In Germany, large banks and industrial combines exercise sub-stantial influence over the operation of many companies and are able to effect managementandstrategicchangeswhen
9、circumstanceswarrant”(p.105). Critics of universal banking see the enormous power of banks as harmfulbecauseofconflictsofinterestthatabankfaceswhenitsimultaneouslyisalargeequity holder in the firm, is in control of a large number of proxy votes, con-trols access to external capital markets, and has
10、loans outstanding to the firm. Because banks themselves seem impervious to external control, the concentra-tion of power in banks is seen as allowing them to essentially run firms in theirowninterests.Forexample,bankscanrefusetoallowcashtobepaidoutoffirms in order to maintain “hidden reserves.” Or a
11、 bank might force a value-reducingmergerbetween adistressedandanondistressedfirm,bothofwhichitcontrols. WengerandKaserer(1998) expressthisunfavorableviewonGermanbanks:. .German banksdonotonlyprovideindustrialcompanieswithloancap- italbutalsoexerciseconsiderablevotingpower instockholder meetingsof ma
12、ny public corporations. This is partly due to proxies of their clients andpartlydue tostockownership. . . we would argue thatthis specificinstitu- tionalenvironmentdoesnotreduceagencyproblems;onthecontrary,this situationispronetoenlargeandperpetuatetheseproblems(p.50).Banking laws in Germany do not
13、legally restrict commercial banks fromholding blocks of equity in nonfinancial firms. Consequently, banks can have control rights in the form of votes that they would not have in the U.S., for example. As we will see below, however, bank blockholding is not so perva- sive in Germany, while blockhold
14、ing by nonbanks is extensive. The control rights of these blockholders can be limited by voting restrictions. For exam-ple, the voting rights of shareholders can be restricted by the firms charterto a maximum fraction in the firms total voting stock, regardless of the frac- tion of shares owned. Whi
15、le voting restrictions apply to any shareholder, banks can potentially exercise more votes because voting restrictions generally do not apply to votes that banks cast on behalf of small shareholders. For exam-ple, a firm can be owned by a single bank with 5% of the shares, a non- bank blockholder wi
16、th 50% of the shares, and dispersed shareholders with the remainder. If there is a voting restriction constraining the votes of the non- bank blockholder to 10%, and if the bank further controls all of the proxy votes of the small shareholders, then the bank, in the absence of any otherconsiderations, effectively controls this firm. (Changes to the firms charter typically require a 75% majority.) Note that this could occur even if the bankowned no shares. In such a case, there is no l
