The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement

Transcription

1 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement In a state where corruption abounds, laws must be very numerous. Gaius Cornelius Tacitus A.D. 100 Abstract I use a dataset of 600 companies across 16 countries, both developed and developing, to identify the most significant factors in the determination of ownership concentration in companies. The results show that Government enforcement, in the form of control of corruption, helps to further explain, across countries, the differences between companies with diffuse ownership and those with concentrated ownership. The Legal origin of a country also has a strong relationship with ownership concentration, but I find that there is disparity in the results within Legal families. Understanding the rationale and determinants of ownership concentration will help to show what can be changed in the developing countries to facilitate the growth of their companies and ultimately their stock markets. The findings of the paper have important implications as economic development is tied to development of their financial markets, which is in turn enhanced by diffusely held companies such as those found in the United States, the UK and in Japan. The ownership concentration of the Japanese companies can be attributed to the difference in control of corruption, in which Japan has a high control. The developing countries should try to emulate this high level of control to help accommodate and optimise further economic growth.

2 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 1 1. Introduction Ultimate ownership of companies and the concentration of this ownership has been a topical area of study since 1932 with the publication of Berle and Means classic book, The Modern Corporation and Private Property, in which they address the then growing support for widely held corporations in the United States. Papers since then such as Shleifer and Vishny (1997), La Porta et al. (1999), and Faccio and Lang (2000) have been critical of the prevalence of this model, stating that it is not common, even in developed countries. I believe that the Berle and Means (1932) dispersed corporate ownership model is far from out dated and in fact is a victim of the success of the United States, which dominates other developed countries in terms of investor protection and this is due to its legal origin as stated by La Porta et al (2000). This paper investigates 16 countries, both economically developed and developing, looking at the determinants of ownership concentration. The combination of legal origin and government enforcement of a country are the most important factors in determining its companies ownership concentration. Unlike other studies, such as La Porta et al. (1999), this paper will not be categorising companies into certain ownership types such as widely held or as having a dominant shareholder. It will however look at a measure of ownership in the form of a percentage of closely held shares. The paper will answer five questions. Firstly, the main question of the paper will investigate; how important is legal origin to ownership structure across companies? Following on from the main question the paper will ascertain how can differences in ownership structure between countries of the same legal origin be explained? Do developed countries have more diffuse ownership than developing countries? Can the differences in ownership structure across countries be attributed to dominant industries? The last question is what impact does government stability have ownership structure? To answer these questions, ownership data on 600 companies over two samples has been collected from 16 countries, made up of the G7 and the groups known as BRICS and MIKT, as coined by Goldman Sachs economist Jim O Neill. The first sample is the top 30 companies of each country in terms of market capital and the second sample is the top 10 industrial companies from each country. The paper will help to show the importance of the determinants of ownership concentration and comparisons between developing countries and developed countries, as the developing countries chosen are seen as having a high potential of becoming the world's largest economies in the 21st century. Government enforcement in the form of control of corruption is found to be the most important factor in the determination of ownership concentration, with common law legal

3 2 origin marginally less important. These findings relate to the full sample of data. A sample of only the developed countries found that legal origin was the most significant factor, surpassing control of corruption, which was reduced dramatically compared to the full dataset. This can be compared to a sample of the BRICS countries, in which control of corruption was by far the most important factor but legal origin was still significant. Developing countries tended to have less control of corruption leading to a higher percentage of closely held shares. Section 2 focuses on similar studies and the empirical work of the paper. Section 3 describes the data, the variables chosen and the methodology used to calculate the significance of the variables. Section 4 provides the results and an analysis of those results contrasting the different samples used and Section 5 concludes. 2. Literature Review Berle and Means (1932) have created an image of how ownership concentration can be under optimal legal protection for shareholders. However, they fail to integrate their image of the modern corporation into suboptimal areas. Their model is truly an American Dream ideology of the modern corporation. My first hypothesis is that companies from Common Law countries have more diffuse ownership than those from Civil Law countries. La Porta et al (1999) took a critical view of Berle and Means (1932) and in contrast found that in their dataset of 27 countries, diffuse ownership isn t as widespread as stated by Berle and Means. They focus on the largest countries by GDP and this reason could be why they do not take into account the possibility of countries with a dominant industry. They do however exclude financial and utility companies, in fear of them dominating their dataset. This paper however, will not focus just on the developed economies, but also factor in the developing economies in the hope of getting an understanding of the importance legal origin has in these countries. Zhan and Turner (2012) for example, look at the development of the Chinese stock market and economic reform through a partial privatisation process. China, with German civil law origin, is expected to be one of the largest if not the largest economy in the next 50 years. Zhan and Turner find that concentrated ownership of Chinese companies in the form of local governments, can act as a suitable substitute for well-enforced investor protection laws. Allen et al (2005) find similar results in the importance of alternative methods of investor protection, in the form of reputation. La Porta et al (1998) find that common law countries have superior investor protection leading to a prevalence of diffuse ownership compared to concentrated ownership in civil law countries.

4 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 3 This leads me to my second hypothesis, which states that legal origin is the most significant factor in the determination of ownership concentration. La Porta et al (1998) compile an index of investor protection in the form of an Anti-Director Rights Index (ADRI), using six measures of shareholder protection and aggregates them to come up with a figure for each country. This ADRI is out of date due to changes in government policy and economic reform in some countries. Spamann (2010) revisited the ADRI under the above impressions and has updated the ADRI. I will be using Spamann s ADRI as a variable to investigate the significance of investor protection, as not all countries within a legal family will have the same laws. ADRIs in general will have to be updated every few years due to the constant global and local economic reform. Any reform is engrained in economic development. There are very few studies that look specifically at the importance of economic development in the determination of ownership concentration. Studies such as La Porta et al (2008) and Xu (2011) focus more on the effect legal origins can have on economic growth. Musacchio (2008) explores whether Brazil, a civil law country, can get good institutions and in turn further develop financial markets. A relationship exists between financial development and economic development. 1 Economically developed countries such as the United States, Japan and the UK have very well developed financial markets. In developed financial markets there tends to be diffuse ownership of the main companies. Development of financial markets can be investigated by looking at the market capitalisation of the companies from each country. I will also be exploring the impact of economic development on ownership concentration across countries. Chernykh (2008) considers ultimate ownership structure in Russia. She states that evidence suggests important determinants of ownership are the legal weaknesses in disclosure requirements. The paper goes on to say that company owners incentives for secrecy include but are not limited to tax avoidance, reluctance to reveal affiliation with structures involved in self-dealing, and questionable origins of invested capital. These problems are judged to be down to the exploitation of legal loopholes. However Chernykh doesn t look into the possibility of a lack of government intervention or enforcement in the corrupt activities, as being the reason for the concentrated nature and obscurity of ownership found in Russia. 1 King and Levine (1993) find that financial market development is a good predictor of economic growth. Rousseau and Sylla (2006) focus on the importance of economic development and the development of a sophisticated financial system in the United States. Other studies on financial development by Patrick (1966) and Beck and Levine (2008) have focused on legal origin and undeveloped countries.

5 4 Variations in law and its enforcement are central to understanding why companies have diffuse or concentrated ownership (La Porta et al (2000)). This enforcement is very much related to governments control of corruption, where investor protection must be strong enough to act as a deterrent against political interference. This forms the basis of my third hypothesis, which is that Government practice and enforcement, in the form of control of corruption, explains the differences in ownership concentration within legal origin families. 3. Data A. Construction of the Database The database is made up of 16 countries, which can be categorised into three sections. Firstly the developed countries of the G7 comprising of the United States, the UK, Japan, Germany, France, Canada and Italy. The other two sections are classified as developing countries and are labelled under the acronyms BRICS and MIKT. BRICS stands for Brazil, Russia, India, China and South Africa, whereas MIKT stand for Mexico, Indonesia, South Korea and Turkey. Encompassing the database are two samples. The first of which is the top 30 companies of each country, ranked by market capitalisation of common equity at the end of The second sample is the top 10 companies of the industrial sector for each country, also ranked by market capitalisation of common equity at the end of The reason for the inclusion of the second sample is to proxy for dominant industries in certain countries, with the industrial sector being one of the more unbiased sectors. For example, financial companies tend to have diffuse ownership and are major companies in the United States, the UK and Japan, whereas mining companies tend to be found in China and Russia with quite concentrated ownership. The dataset should, in relation to the two samples, have a total of 640 companies. However, the total number of companies is 600 and this is due to the fact that there is an overlap in the two samples within 40 companies. There was one problem with the collection of information in that there was limited availability of the ownership measure. The solution was to take the top companies where the information was available. I had to transform two of the variables, GDP and Market Capitalisation, by getting the logarithm of each due to the numerical size of the data compared to the other variables and as it was affecting the results.

6 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 5 Table 1 Definition of the Variables VARIABLE Closely Held Shares (%) Market Cap ($Mil) Common Law Origin Developed Country Industrial Company Gross Domestic Product (US$) Description Closely held shares represents shares held by the ten largest shareholders. Closely held shares percentage equals the number of closely held shares divided by the total common shares outstanding all multiplied by 100. Source: Thomson One Banker. Market value of firms as of 31 December 2012 in millions of dollars. Source: Thomson One Banker. Equals one if the origin of the commercial law of a country is English Common Law, and zero if the origin of the commercial law of a country is the French Commercial Code or the German Commercial Code. Source: La Porta et al. (1999) and Reynolds and Flores (1989). Equals one if the country is in the G7 and therefore deemed a Developed country. Equals zero if the country is a Developing country, and part of either the BRICS or MIKT groups, and zero otherwise. The acronym BRIC was coined by Goldman Sachs economist Jim O'Neill in a 2001 paper entitled "Building Better Global Economic BRICs", and is the four most developed of the developing countries, Brazil, Russia, India and China. The inclusion of South Africa is due to when then BRIC countries formed a political organization among themselves, they later expanded to include South Africa. Jim O Neill also coined MIKT, which is a neologism referring to the economies of Mexico, Indonesia, South Korea, and Turkey. These countries belong to Next Eleven countries, which are seen as having a high potential of becoming, along with the BRICs/BRICS, the world's largest economies in the 21st century. Equals one for an industrial company, and zero otherwise. GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used. Source: World Bank Economic Policy Indicators - GDP (current US$) 2011.

7 6 Control of Corruption Spamann Anti- Director Rights Index Reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. Source: The Worldwide Governance Indicators, 2012 update. A measure of shareholder protection introduced after La Porta et al. ( Law and Finance. 1998, Journal of Political Economy 106: ). An index aggregating shareholder rights labelled as "antidirector rights." The index is formed by adding one when: (1) the country allows shareholders to mail their proxy vote to the firm; (2) shareholders are not required to deposit their shares prior to a General Shareholders Meeting; (3) cumulative voting or proportional representation of minorities in the board of directors is allowed; (4) an oppressed minorities mechanism is in place; (5) the minimum percentage of share capital that entitles a shareholder to call an Extraordinary Shareholders Meeting is less than or equal to 10 per cent; or (6) shareholders have pre-emptive rights that can only be waived by a shareholders vote. The index ranges from 0 to 6. Holger Spamann re-examined the legal data underpinning the above measure. This led to corrections for thirty three of the forty six countries analysed by La Porta et al. Source: Spamann, H. (2010), The Antidirector Rights Index Revisited, Review of Financial Studies, 23: B. Definitions of Variables Unlike La Porta et al (1999), I look at a measure of ownership concentration in the form of closely held shares of the companies, taken from Thomson One Banker along with market capitalisation of the companies. These two variables are the only company specific variables I look at. Instead I focus more on country specific variables, such as GDP, legal origin and control of corruption. These variables form the basis of my investigation into the significant determinants of ownership concentration. Table 1 details each of the variables and a description of each, including their sources. 4. Methodology A. Country Average Analysis This paper s first hypothesis is that Common Law countries have more diffuse ownership than Civil Law countries. I adopt a country-by-country analysis to test this hypothesis, examining the average ownership concentration of the 16 countries. The median of the company specific variables, closely held shares percentage and market capitalisation, are included along with the country specific variables of GDP, control of corruption, legal

8 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 7 origin and Spamann ADRI. The median is used, as I want the analysis to be free from extreme outliers, which would be taken into account using the mean average. The analysis is broken up into three sections, which are Developed Countries, Developing Countries and finally Legal Origins, which focuses on the median average of the separated legal families. To analyse the results I will eyeball the data, looking specifically at the comparison of civil law countries and common law countries, as well as the differences in legal families. B. Regression Analysis To test the second and third hypothesis I need to look at the data in terms of the determinants of ownership concentration. Ultimately, I am looking to discover which of the variables is the most significant in the determination of ownership concentration. To do this I need to run a regression on the dataset. The closely held shares percentage is the dependent variable. There will be 10 samples of data and the reason for these samples is to differentiate significant determinants by excluding certain variables throughout the samples. To test the third hypothesis that Government practice and enforcement in the form of control of corruption explains the differences in ownership structure within legal origin families, I am going to look at a sample of companies from common law countries and another sample of companies from civil law countries. By doing this I am excluding the legal origin variable and will be able to effectively test the hypothesis. Other samples include only industrial companies to proxy for dominant industries in countries. 5. Results and Analysis Table 2 analyses the dataset on a country basis, ultimately focusing on the median average ownership concentration for each country. The lowest median ownership concentrations can be found in three common law countries; the United States (0.15%), Canada (0.36) and the UK (0.91%). This can be contrasted directly to the three largest median ownership concentrations of Turkey (74.68%), China (66.86%) and India (63.54%). The surprise is in the high concentrated ownership in India, which in theory should have diffuse ownership if going by previous studies. India has the highest ADRI of all 16 countries as well as having common law legal origin. Theoretically, high investor protection in the form of a high ADRI and common law origin would lead to diffuse ownership. A possible reason for India s concentrated ownership could be attributed to the control of corruption rating of The lack of government enforcement could be undermining the strong investor protection laws.

9 8 In terms of legal origin, India is an anomaly of the English Common law family. As mentioned above, the United States, Canada and the UK make up the three lowest median closely held shares. The other common law country is South Africa, which has an average ownership concentration of 26.70%. Panel C of Table 1 details the average data for the Legal Origins. The Common law sample has a median ownership concentration of 4.50%. In terms of the United States, Canada and the UK, the Berle and Means (1932) image of ownership structure holds. There is a stark difference on the other side, with the Civil law sample having a median ownership concentration of 51%. As I mentioned above, Turkey and China, which are both civil law countries, have the highest ownership concentration. As well as this, the Civil law countries, with the exception of India, make up the bottom half of the 16 countries if ranked by closely held shares percentage. From these results I can clearly see the difference between common law countries and civil law countries, in terms of ownership concentration. I can therefore accept the null of my first hypothesis, that companies from Common Law countries have more diffuse ownership than those from Civil Law countries. Japan has the least concentrated ownership of the Civil law family with a median of 16.84%. This level of ownership concentration could be attributed to the high control of corruption index value of 1.50, but this is nulled by the fact that Germany and France have higher values with 1.68 and 1.51 respectively, whereas they have ownership concentration of 32% and 17.07%, which is higher compared to Japan. The reason then for Japan s lower ownership concentration could be down to the dominance of its financial industry, which tends to have diffuse ownership. To round off the G7 in terms of Civil law countries, Italy (44.50%) has the most concentrated ownership of the developed countries. Italy, along with Russia, has the lowest ADRI with a value of 1 and a negative corruption value (-0.01), which may be the reasons for the high concentration of ownership compared to the other G7 countries. The G7 sample of countries has a median ownership concentration of 23%, compared to the developing countries BRICS sample (50.35%) and MIKT sample (55.61%). It can be expected that the developing countries have a higher ownership concentration compared to the developed countries. For one, the BRICS (-0.41) and MIKT (-0.21) samples both have negative corruption indices values. The interesting point is that the MIKT sample has a higher ADRI value than both the BRICS and G7 samples, leading to the assumption that

10 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 9 Table 2 Average analysis of full sample! of 16 countries.! The! table looks! at the median! of the company! specific variables, closely held shares percentage and market capitalisation. The other variables are country specific and therefore are not averaged. Country Panel A: Developed Countries! Closely!!!!! Market Held GDP Control of Legal Spamann Cap Shares ($Millions) Corruption Origin ADRI ($Millions) (%) USA , ,653, English 2.00 Canada , ,770, English 3.00 UK , ,433, English 3.00 Japan , ,984, German 4.00 France , ,580, French 3.00 Germany , ,366, German 3.00 Italy , ,980, French 1.00 G , ,824, n/a 2.71 Panel B: Developing Countries South Africa , , English 4.00 Brazil , ,425, French 3.00 Russia , ,953, French 1.00 India , ,946, English 5.00 China , ,250, German 3.00 BRICS , ,634, n/a 3.20 South Korea , ,151, French 5.00 Indonesia , , French 2.00 Mexico , ,162, French 2.00 Turkey , , German 3.00 MIKT , , n/a 3.33 Panel C: Legal Origins English/Common Law , ,438, n/a 4.22 Civil Law , ,775, n/a 3.11 French Law , ,808, Civil 2.90 German Law , ,323, Civil 3.50 investor protection is less important than government enforcement in the form of control of corruption. Russia (-1.09), Indonesia (-0.66) and China (-0.62) have the worst corruption index values and this seems to have a similar effect on the ownership concentration, with all

11 10 three having highly concentrated ownership percentages of 61.54%, 60.27% and 66.86% respectively. The importance of control of corruption cannot be ignored, but all three of these countries are of a civil law origin, so I intend on exploring the significance of these variables on the determination of ownership concentration. I adopt a critical view of these findings from La Porta et al. (1999), who also find that the majority of United States and UK companies are widely held. The critical view would be to say that as the United States and UK hold most of the value of the world s stock markets, why would anyone then worry about the less developed countries such as those detailed in Table 2. The developing countries are expected to become the biggest economies within the next 50 years. My interest is in determining the components that have contribute to the environment in which US and UK companies have thrived. Understanding the rationale and determinants of ownership concentration will help to show what can be changed in the developing countries to facilitate the growth of their companies and ultimately their stock markets. I use a regression analysis to empirically investigate the determinants of ownership concentration, as detailed in Table 3. I regress the measure of ownership concentration, closely held shares percentage, on the other variables detailed in Table 1. As can be seen in Table 3, there are 10 regressions, which are all different samples used to determine the significance of the variables, by excluding certain variables such as the legal origin dummy variable. The first regression in Table 3, with the full dataset, has a R 2 of 38.8%. This full dataset regression is the investigation of the second hypothesis that legal origin is the most significant factor in the determination of ownership concentration. It shows that the Common Law legal origin dummy variable is statistically significant and has a coefficient of , showing a strong negative relationship with ownership concentration. However the control of corruption is statistically more significant than legal origin and with a coefficient of , it also has a more substantial relationship with ownership concentration. Therefore, the second hypothesis can be rejected on the basis that control of corruption is the most significant factor in the determination of ownership concentration. Also statistically significant in the first regression, were the logarithm of market capitalisation and the Industrial company dummy variable to the 1% level and the Spamann ADRI to the 5% level. Market capitalisation was a proxy for size and as previously thought, there is a negative relationship with ownership concentration, indicating that larger firms

12 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 11 have more diffuse ownership. Interestingly, the Spamann ADRI had a positive relationship with ownership concentration, which is counter intuitive in how an increase in investor protection should in theory decrease ownership concentration not increase it. The Industrial company dummy variable has a strong negative relationship with ownership concentration, implying that non-industrial companies have more diffuse ownership. The 9 samples following the full dataset can be categorised into three sections. The first is in relation to the proxy for country specific dominant industries and includes the second and third regressions. The second section is developed countries against developing countries, encapsulating the three separate regressions on the G7, BRICS and MIKT samples. Legal Origin is the basis of the third section, comprising of the four regressions on the Common law, Civil law, French law and German law samples. As detailed above, the first section includes the second and third regressions. For both regressions, the Industrial Company dummy variable is dropped. The second regression, which has a R 2 of 47.2%, is the industrial companies sample and the results show that the Common Law legal origin dummy variable is the most statistically significant factor in the determination of ownership concentration. As well as this, the legal origin dummy also has the strongest relationship with ownership concentration, with a coefficient of Control of corruption is still statistically significant but only to the 5% level. It also maintains the strong negative relationship with ownership concentration. For this sample, legal origin is the most important factor in the determination of ownership concentration and therefore the second hypothesis holds. This can be directly contrasted to the third regression for the sample of Top 30 companies excluding the Industrial companies, with a R 2 of 37.1%. It shows that for this sample, control of corruption is statistically most significant and has the most substantial relationship with ownership concentration (coefficient of ), which would mean that the second hypothesis would be rejected, as with the full dataset sample. The Developed Economy dummy is dropped for the second section of the G7, BRICS and MIKT samples. There is disparity in the results from the three regressions and these can be used to explain the results from the first regression on the full dataset. An interesting finding is in regards to the coefficient of control of corruption for each of the three regressions. For the G7 sample, with a R 2 of 36%, the control of corruption is statistically insignificant and the relationship between it and ownership concentration is positive and relatively smaller compared to the other independent variables. There are similar results for the MIKT sample, which has a R 2 of 20.4%. The findings are contrasting when compared to the BRICS sample, where the control of corruption is not only statistically significant, but

13 Table 3 The table details the results of the regression analysis, which investigates the determination of ownership concentration. SAMPLE Industrial Top 30 excl. English/Common Full Data Companies Industrial G7 BRICS MIKT Law Civil Law French Law German Law (16 Countries) (16 Countries) (16 Countries) (7 Countries) (5 Countries) (4 Countries) (5 Countries) (11 Countries) (7 Countries) (4 Countries) Dependant Variable: Closely Held Shares (%) VARIABLES (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Log of (Market Cap ($Million)) Common Law Legal Origin Industrial Company Log of (GDP (US$ Millions)) Control of Corruption Spamann ADRI Developed Economy *** * *** *** * * *** *** (-4.151) (-1.844) (-3.643) (-3.275) (-1.691) (-1.695) (-0.881) (-3.957) (-2.937) (-1.029) *** *** *** *** (-5.465) (-5.310) (-3.250) (-6.194) (-0.523) *** *** * *** * (-3.206) (-2.670) (-1.833) (-0.793) (-2.933) (-1.881) (-1.374) (-0.414) *** 11.77** * (0.406) (0.661) (0.169) (0.157) (-0.207) (-4.067) (2.592) (1.463) (-1.863) (-1.307) *** ** *** *** *** (-6.375) (-2.500) (-5.765) (0.670) (-3.145) (0.286) (1.104) (-0.326) (0.468) (-4.954) 2.757** ** * 18.95*** ** ** * (2.243) (0.944) (1.994) (-1.523) (0.670) (-1.677) (5.644) (-2.277) (-2.564) (-1.747) ** (1.117) (-0.231) (1.237) (-1.579) (-2.019) (-1.544) Constant 77.52*** *** 99.21*** *** ** 64.63** 263.1*** 190.2*** (4.090) (1.255) (3.904) (3.476) (0.375) (4.928) (-2.589) (2.273) (3.126) (4.975) Observations R-squared t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1

14 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 13 also has a strong relationship with a coefficient of This is most likely to be related to the findings from Table 2, where Russia, India and China, as part of the BRICS sample, had the lowest corruption index values and high concentrations of ownership. The BRICS sample has a R 2 of 30.7%. The control of corruption is also the only significant variable at the 1% level, while the Industrial Company dummy and the logarithm of market capitalisation are significant at the 10% level. The Common Law origin dummy has a stronger relationship with ownership concentration than the control of corruption but it is statistically insignificant. The findings for the G7 sample regression show that the Common Law origin dummy is the most significant variable, both statistically and relationship-wise, with a coefficient of Other variables that have a substantial and significant relationship with ownership concentration include the Industrial Company dummy (-9.41 at 1% level) and the logarithm of market capitalisation (-5.97 at 1% level), which fall in trend with previously findings. Firstly for the MIKT sample, the legal origin dummy is dropped, as all four countries making up the sample are civil law countries. The regression results are interesting in the fact that the logarithm of GDP, statistically and relationship-wise, is the most significant variable. It has a coefficient of , which is the largest coefficient of any variable over all 10 regressions. On closer inspection of the data, the reason for this finding becomes clear. The inclusion of South Korea in this sample may be creating distortion in the data due to its high GDP in comparison to the other countries in the MIKT sample. This would lead me to revise the inclusion of South Korea in the MIKT sample; with it being better suited to the BRICS sample, as the GDP levels are more comparable. For the second section, the findings would therefore lead to disparity in the first hypothesis, in that it would be accepted for the G7 sample but rejected for the BRICS and MIKT samples. The third section focuses on the legal origins. For all four regressions, the legal origin dummy is dropped and because of this I will be able to determine the validity of the third hypothesis, which states that Government practice and enforcement, in the form of control of corruption, explains the differences in ownership structure within legal origin families. The majority of my analysis of this section is concerned with the common law and the civil law samples, but I have also included the French law and German law samples for comparison. The R 2 for Common law origin is 54.5%, the highest of the regressions. The Civil law, French law and German law samples have R 2 s of 21.7%, 22.5% and 37.2% respectively. The regression for the Common law sample showed that the Spamann ADRI is the most statistically significant variable. The Developed Economy dummy has the strongest

15 14 relationship with a coefficient of , however it is statistically insignificant. Control of corruption is also statistically insignificant. Results show that Spamann ADRI and Control of corruption have positive relationships with ownership concentration. Similar to the first regression, these results are counter intuitive in that the relationship between them and the ownership concentration should be negative, due to the fact that theoretically as investor protection and control of corruption increases ownership concentration should decrease. For this sample, the third hypothesis can therefore be rejected, as control of corruption is not the most important factor in the determination of the ownership concentration. The third hypothesis is also rejected for the Civil law sample, as the control of corruption is insignificant. The logarithm of market capitalisation is the most statistically significant at the 1% level, whereas the developed economy dummy has the strongest relationship with ownership concentration, while also being statistically significant at the 5% level. I get the same results for the French law sample but the developed economy dummy is not statistically significant. The third hypothesis is accepted for the German law sample as control of corruption has the strongest relationship with ownership concentration and is the most statistically significant. As I am concentrating on the Common law and civil law samples the third hypothesis is rejected. 6. Conclusion The evidence from this paper shows that in general the Common Law countries have more diffusely owned companies compared to Civil Law countries, following the findings of Faccio and Lang, as well as La Porta et al. The importance of legal origin in the determination of ownership concentration cannot be denied as can be seen in the results. However, Government enforcement, in the form of Control of Corruption, plays a more vital role in explaining the differences across countries in companies with diffuse ownership and those with concentrated ownership. These findings have important implications for the developing civil law countries. Their economic development is tied to development of their financial markets, which is in turn enhanced by diffusely held companies such as those found in the United States, the UK and in Japan. As with Japan, the Civil law origin has less of an impact on ownership concentration compared to other countries. This is down to the difference in control of corruption, in which Japan has a high control. The developing countries should try to emulate this high level of control to help accommodate and optimise further economic growth.

16 The Importance of Legal Origin on Ownership Concentration: Corruption or Enforcement 15 South Korea for example has a fairly accommodative level of control and this is reflective in both its economic development and ownership concentration. South Korea s position within the MIKT group would be one retrospective change that I would make to the paper, as it would be better placed in the BRICS sample due to the comparable GDP and level of economic development. The main weakness of the paper is the scarcity of Common law countries compared to Civil law countries, as there should be a better ratio to accrue more robust results. La Porta et al. (2008) conclude somewhat pre-emptively that the conditions in terms of ownership and regulation will remain strong, under the assumption that nothing like the Great Depression will repeat itself. My future research would follow on from the work of this paper by looking at a database of the same variables, with a few modifications and additions, but over the period of the last 10 years, which focus on the periods before and after the financial crisis to see how investor preferences changed the face of corporate ownership.

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