Diversity of Institutional Investors and Foreign Blockholdings in France: The Evolution of an Institutionally Hybrid Economy

• Author: Dong Kwan Jung,Michel Goyer
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00880.x
• Published date: 01 November 2011
• Date: 01 November 2011

Diversity of Institutional Investors and Foreign

Blockholdings in France: The Evolution of an

Institutionally Hybrid Economy

Michel Goyer* and Dong Kwan Jung

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: What are some of the key factors that facilitate/constrain the acquisition of concentrated equity

stakes (>5 per cent) by Anglo-American institutional investors in French companies?

Research Findings/Insights: This study presents three central empirical f‌indings. First, different categories of institutional

investors exhibit substantial diversity in fund allocation: long-term oriented institutional investors are more likely to target

well-governed companies already paying high dividends and with lower discretionary spending; short-term oriented

institutional investors are more likely to target undervalued companies whose stock prices do not yet ref‌lect their potential

value. Second, the relationship between the acquisition of blockholdings and the ownership concentration of targeted

French companies is negative and statistically signif‌icant but subject to a qualif‌ication note. The high average ownership

concentration (in absolute terms) of targeted f‌irms suggests thatinstitutional investors have not been deterred from entering

into the French market despite lower degrees of legal protection associated with self-dealing by the controlling shareholder.

Third, f‌irms governed by CEOs that graduated from elite schools are less likely to be targeted by Anglo-American

institutional investors; but there is no relationship between the prior high civil service background of CEOs and the

investment allocation of institutional investors.

Theoretical/Academic Implications: This study provides two important implications. First, the strategy of international

investment allocation of UK/US-based funds has been encouraged by the institutional hybrid character of the French

economy. The French variety of capitalism has long been characterized by the absence of many f‌irm-level codetermina-

tion institutional arrangements that have reduced the managerial scope for unilateral action in coordinated market econo-

mies. Moreover, two recent developments – the withdrawal of the French state from many areas of economic activities

combined with the introduction of several institutional arrangements of corporate governance associated with the Anglo-

American outsider model – entail that the institutionally hybrid character of the French economy provides greater insti-

tutional “proximity” for UK/US-based institutional investors. Second, the opportunities provided by the occurrence of

these two recent developments have not been equally exploited by foreign institutional investors. Short-term funds have

been more successful in the introduction of strategic change in French companies.

Practitioner/Policy Implications: The empirical f‌indings presented in the article provide insights to enable policy-

makers to better understand how institutional investors deal with institutional diversity between national systems

of corporate, thus enhancing their ability to implement more effective regulations in inf‌luencing movements of capital.

Keywords: Corporate Governance, Shareholder Value, Institutional Investors, France

INTRODUCTION

Institutional investors have become major actors in the

corporate governance of liberal market economies. They

have increasingly engaged in numerous corporate gover-

nance activities (Gillan & Starks, 2007). Through public

criticisms or private negotiations, they have exercised tre-

mendous pressures on corporate executives for the imple-

mentation of changes in the strategyof the f‌irm – such as the

release of cash f‌lows to shareholders in the form of divi-

dends or share repurchases, and the focus on core activities

via the buyouts or sales of divisions. The existing literature

*Address for correspondence: Michel Goyer, University of Warwick, Warwick Busi-

ness School, Coventry,CV4 7AL, UK. Tel: +44 (0)24 7652 2310; E-mail: michel.goyer@

wbs.ac.uk

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Corporate Governance: An International Review, 2011, 19(6): 562–584

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00880.x

in f‌inancial economics has provided extensive empirical

support for the effectiveness of the activism of institutional

investors in terms of shareholder value creation, the

improvement in operating performance, and increases in

leverage and payouts (while cash holdings are reduced)

(Boyson & Mooradian, 2010; Brav, Jiang, Partnoy, & Thomas,

2008; Klein & Zur, 2009). Nonetheless, the greater promi-

nence of institutional investors in the corporate governance

of liberal market economies has also been interpreted as a

negative development (Davis, 2009; Whitley, 2009). The

current f‌inancial crisis, and the two preceding decades prior

to its occurrence, have highlighted the shortcomings associ-

ated with the unbridled pursuit of shareholder value by

American f‌irms in the context of the heightened inf‌luence

of institutional investors. Financial objectives (i.e., stock

market valuation) have become the guiding star for listed

companies at the expense of other goals. What then happens

when these same shareholder value oriented funds invest in

different corporate governance institutional settings?

Previous research on the evolution of national systems of

corporate governance has generated important insights for

the study of the intersection between national and global

f‌inancial markets (Aguilera & Jackson, 2003, 2010; Ahmad-

jian & Robbins, 2005; Gourevitch & Shinn, 2005; Jackson,

2005). The rise in importance of foreign shareholders is asso-

ciated with the increased propensity of f‌irms to implement

strategies of shareholder value enhancement but, at the same

time, subject to the strong mediating role of domestic corpo-

rate governance features – ownership structure of compa-

nies, institutional arrangements of employment relations,

identity of major domestic shareholder groups, and back-

ground of top corporate executives (Aguilera & Jackson,

2003; Fiss & Zajac, 2004; Tuschke & Sanders, 2003). These

studies highlight the importance of the interaction between

external stimuli (global) and domestic features of corporate

governance systems (national and/or f‌irm-level) with the

implication that the impact of the former is contingent upon

the specif‌ics of its interaction with the latter. National

systems of corporate governance are changing, but in differ-

ent ways and without a strategic process of convergence (see

e.g., Hall & Gingerich, 2009). In a similar vein, studies in

economic sociology have emphasized how the specif‌ic

content of the interaction between global forces and national

features often ref‌lects the strategic selection and reinterpre-

tation by domestic actors of specif‌ic aspects of the external

development to be imported (Djelic, 1998).

Other streams of studies on the interaction between

domestic features of national systems of corporate gover-

nance and global f‌inancial markets have highlighted the

importance of institutional “proximity” on the investment

allocation and portfolio performance of institutional inves-

tors in foreign settings (Chan, Corvig, & Ng, 2005; Portes &

Rey, 2005). Portfolio managers may often bring to other

systems of corporate governance a set of expectations that

challenge prevailing modes of f‌irm governance (Kahan &

Rock, 2007; Morin, 1998), but the effectiveness of active

investment strategies that seek out companies likely to

implement strategies of shareholder value enhancement (or

pressure portfolio companies to implement such changes) is

signif‌icantly inf‌luenced by features of the local context,

namelythe process by which f‌irms coordinate their activities

and the extent to which the circulation of information is

primarily internal to important stakeholders (Aguilera, Fila-

totchev, Gospel, & Jackson, 2008; Wójcik, 2009). Shareholder

value oriented funds can secure their strategic goal of

earning superior returns on their investments in foreign

markets through the use of expertise and the deployment

of resources for the acquisition of non-publicly available

information.

We build on the prior literature on the strategy of interna-

tional investment of foreign shareholders by exploring a

specif‌ic interaction between domestic (f‌irm-level) features of

corporate governance and global forces, namely the block-

holding acquisitions by the UK/US-based institutional

investors in institutionally hybrid economies. Specif‌ically,

we investigate the characteristics of targeted f‌irms and their

performance after the acquisition of blockholding stakes by

foreign investors in the context of France, the largest insti-

tutionally hybrid market economies with Italy and Spain

among advanced capitalist countries. The institutionally

hybrid character of these economies has been characterized

by two features.

The f‌irst one is the overall lack of institutional comple-

mentarities between the different spheres of the economy

(corporate governance, employment relations, and skill for-

mation) at the national aggregate level (Hall & Gingerich,

2009). France, alongside Italy and Spain, constitutes the key

representative of advanced capitalist economies in Europe

where the domestic institutional conf‌iguration does not

enable companies to rely on supporting institutional

complementarities across the spheres of the economy to

coordinate their activities (Hall, 2006; Molina & Rhodes,

2007). The presence of rigid labor laws combined with the

absence of in-f‌irm training result in the lack of institutional

support for strategic patterns of coordination found in coor-

dinated market economies. The presence of general skills

combined with the absence of labor market f‌lexibility leads

to the lack of institutional support for market patterns of

coordination found in liberal market economies (Soskice,

1999). The second feature of institutionally hybrid econo-

mies has been the importance of the state in the process by

which f‌irms coordinate their activities: regulation of the

f‌inancial sector designed to inf‌luence the allocation of f‌lows

in the economy, instauration of controls over inward/

outward f‌lows of capital, presence of state ownership in the

banking and non-f‌inancial sectors, periodic use of currency

devaluations to stimulate the economy, and reliance on the

regulation of the minimum wage as a system of wage

indexation (Eichengreen, 2007:113–118; Hall, 1986:139–191;

Lukauskas, 1994). The prominence of the state in the process

by which companies coordinated their activities in institu-

tionally hybrid economies also resulted in the non-

introduction of f‌irm-level co-determination institutional

arrangements, currently found in coordinated market

economies. Policy-makers sought to exercise inf‌luence over

large companies and, thus, avoided giving legal rights to

employees that would have acted as constraints on manage-

rial autonomy (Hall, 1986:155–159; Lange & Ross, 1982;

Molina & Rhodes, 2007).

The French case, and those of large institutionally hybrid

market economies, is highly interesting for the analysis of

the strategy of international investment by UK/US-based

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Volume 19 Number 6 November 2011© 2011 Blackwell Publishing Ltd