This paper examines the influence of corporate tax exhaustion on the firm's financial and investment decisions. A dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods. The paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints. The cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed.

This paper examines the disciplining function of hostile takeovers in the U.K. in 1985 and 1986. We report evidence of high board turnover and significant levels of post-takeover restructuring. Large gains are anticipated in hostile bids as reflected in high bid premiums. However, there is little evidence of poor performance prior to bids, suggesting that the high board turnover does not derive from past managerial failure. Hostile takeovers do not therefore perform a disciplining function. Instead, rejection of bids appears to derive from opposition to post-takeover redeployment of assets and renegotiation over the terms of bids.

In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining, and only limited evidence that pyramid structures can be used for control purposes. The static relationship of ownership to control in Germany is therefore similar to the United Kingdom and the United States. However, there are marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control, but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

This paper examines the three cases of hostile takeovers in Germany in the post Second World War period. It describes the important role played by banks in affecting the outcome of the bids: bank representatives were chairmen of the supervisory board in all three cases and banks voted a large number of proxies in important decisions affecting the bids. The paper reports that low returns were earned by shareholders of two of the target firms and offers an explanation in terms of bank control and the regulatory regime operating in Germany.

Economic theory points to five parties disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in takeovers, nonexecutive directors, and investors during periods of financial distress. This paper reports the first comparative evaluation of the role of these different parties in disciplining management. We find that, in the United Kingdom, most parties, including holders of substantial share blocks, exert little disciplining and that some, for example, inside holders of share blocks and boards dominated by nonexecutive directors, actually impede it. Bidders replace a high proportion of management of companies acquired in takeovers but do not target poorly performing management. In contrast, during periods of financial constraints prompting distressed rights issues and capital restructuring, investors focus control on poorly performing companies. These results stand in contrast to the United States, where there is little evidence of a role for new equity issues but nonexecutive directors and acquirers of share blocks perform a disciplinary function. The different governance outcomes are attributed to differences in minority investor protection in two countries with supposedly similar common law systems. Journal of Economic Literature Classification Number: G3.

The ownership of German corporations is quite different today from that of Anglo-American firms. How did this come about? To what extent is it attributable to regulation? A specially constructed data set on financing and ownership of German corporations from the end of the 19th century to the middle of the 20th century reveals that, as in the UK, there was a high degree of activity on German stock markets with firms issuing equity in preference to borrowing from banks, and insider and family ownership declining rapidly. However, unlike in the UK, other companies and banks emerged as the main holders of equity, with banks holding shares primarily as custodians of other investors rather than on their own account. The changing pattern of ownership concentration was therefore very different from that of the UK with regulation reinforcing the control that banks exercised on behalf of other investors.

We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of their real seat. We analyze foreign incorporations in the U.K., where incorporations of limited liability companies can be arranged at low cost. Using data for over 2 million companies from around the world incorporating in the U.K., we find a large increase in cross-country incorporations from E.U. Member States following the ECJ rulings. In line with regulatory cost theories, incorporations are primarily driven by minimum capital requirements and setup costs in home countries. We record widespread use of special incorporation agents to facilitate legal mobility across countries.

Twentieth century Japan provides a remarkable laboratory for examining how an externally imposed institutional and regulatory intervention affects the ownership of corporations. In the first half of the century, Japan had weak legal protection but strong institutional arrangements. The institutions were dismantled after the war and replaced by a strong form of legal protection. This inversion resulted in a switch from Japan being a country in which equity markets flourished and ownership was dispersed in the first half of the century to one in which banks and companies dominated with interlocking shareholdings in the second half of the century.

We show that in countries with strong investor protection, developed financial markets, and active markets for corporate control, family firms evolve into widely held companies as they age. In countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries that have low investment opportunities and low merger and acquisition (M&A) activity, the same is not so in countries that have low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity.