The project will use the latest lines of research that are being pursued in regard to both theoretical and empirical analysis of corporate governance. It will draw on new areas of research in the field of economics, finance, management, political economy and law. It will exploit the rich endowment that Europe possesses in the field of corporate governance reflecting its diverse institutional, legal and political structures. It will also draw on the varied historical evolution of corporate governance systems. It will therefore utilise these cross-sectional differences across countries and time, as well as between institutions and firms within countries.
The first line of research involves providing training in relevant theoretical tools. There have been considerable advances in the modelling of corporate governance arrangements drawing on principal-agent, imperfect information and incomplete contract models. These have broadened our knowledge of the relevance of corporate governance systems and the different instruments of corporate governance. However, there remains a great deal of theoretical modelling to be done.
As one illustration, the recent corporate governance failures in the U.S. have pointed to the failure of intermediary institutions, such as accountancy firms, credit rating agencies and investment analysts, in providing appropriate monitoring of corporate activities and performance. There are a variety of causes that have been suggested ranging from the inadequate access to information of these agencies to collusion and corruption. It is critically important that we improve our understanding of the way in which different institutional arrangements operate and the factors that promote good corporate governance.
A critical element of the corporate governance network will be to provide students with tools to undertake theoretical analysis at the frontiers of research. They will develop skills in game theory, contracts and incomplete contract models. In addition they will develop an understanding of current research which is being undertaken in, law, finance and political economy modelling.
The second line of research is empirical. There are two aspects to this. The first is to assemble relevant data sets on corporate governance, institutional structures, legal systems and political institutions. Several of the principal academics are leaders in this line of research and have gained considerable experience in undertaking both cross-country and single country data collection. There are some relevant data sets that are available on companies and financial institutions but there is also a pressing need for data on particular aspects of corporate governance.
An example of this is the extent to which institutions are active in Europe in initiating corporate actions against poorly performing management. There has been much study of the role of institutions in corporate governance in the US but little is known about how equivalent institutions in Europe compare. The links to industry and financial institutions will be invaluable in assisting in such data collection.
Linked to this is the empirical analysis of the data sets. As previously indicated, a problem that many existing studies have encountered is one of causality and exogeneity of the data. There are, firstly, econometric techniques that provide methods for testing and correcting for endogeneity. Secondly, there are differences across countries and across time in Europe that can be exploited to great advantage to evaluate the impact of exogenous influences on corporate performance. Examples are the institutional reforms that have recently occurred in transition economies and during the course of the twentieth century in Western Europe. Such approaches have already been used in a study of the impact of institutional change over the twentieth century on the ownership of corporations. It is therefore intended that students in this programme will develop expertise in the design and assembling of large data sets and in the application of the latest econometric techniques.
Integration of Complementary Methods
A distinguishing feature of the network and the research programme is its multidisciplinary approach on the interface of economics, finance, management, political economy and law. This will be reflected in the type of data that will be collected. We intend to combine information on corporate governance, ownership and control of firms with data on the legal and political structure of economies. There are already some international data banks that can be used and we will supplement them with more detailed information on individual countries. The type of data that we have in mind include descriptions of changes in the regulatory rules relating to disclosure of information, anti-director provisions, and rights of shareholders and creditors. Such detailed analysis has already been undertaken for the UK and in the process it has revealed some significant insights on the link between law and corporate governance.
One aspect of this insight comes from the substantial structural break that occurred in the UK in the middle of the twentieth century. There was a marked shift in regulation from a largely unregulated to a heavily regulated capital market in the second half of the twentieth century. This shift has allowed researchers to evaluate the way in which regulation affects patterns of ownership and control of corporations. There is considerable opportunity to apply such techniques to the study of evolution of corporate governance in other countries. This area of the evolution of the corporate governance and control of corporations is one of the most interesting current lines of research and it extends the interdisciplinary approach to business history. It provides students on the network with training in the use of historical sources of information.
There has been much discussion of the policy reforms that are required to overcome the failures of corporate governance observed over the last few years. Many reforms have been proposed and one of the primary objectives of the network will be to evaluate the appropriateness of different proposals. The diverse institutional and regulatory structures in Europe provide a rich basis for evaluating these proposals. In particular, we already have information on such factors as the structure of boards, the representation of independent directors and the separation of chairman and chief executive officers of companies in different countries. We will use this to evaluate the range of policy proposals that are emerging from different countries and the European Commission concerning corporate governance reforms and takeover proposals. The analysis will give students basic insights into how to evaluate policy reforms.
In addition to econometric analyses and large data set studies, the research will involve detailed case studies and clinical papers. For example, in the context of the evolution of ownership and control to which reference was made above, much insight came from looking at specific cases. Students will therefore gain training in case study writing as well as large data set analysis.
Although there are some links with an existing RTN on ‘Understanding Financial Architecture: Legal and Political Frameworks and Economic Efficiency’ (funded under the Fifth Framework Programme), there will not be duplication of research and training activities proposed by this network. This previous network has been highly successful in training and developing researchers in areas of applied finance economics with research produced on various aspects of the analysis of law, institutions, and their impact on economic efficiency. ECGTN will train researchers in areas related specifically to corporate governance.