The Emerging Market for European Corporate Governance: the relationship between governance and capital expenditures, 1997-2005

We examine European corporate governance with respect to the relationship between shareholder value and capital investment. Based upon Europe’s largest listed companies, it is shown that Anglo-American conceptions of shareholder value are increasingly important for European firms whatever their home jurisdictions and inherited traditions. Using annual capital expenditures (CAPEX) as a proxy for corporate managers’ commitment to shareholder value, it is shown, contra arguments to the effect that the map of European corporate governance regimes is fixed and virtually immutable, even large firms from paradigmatic stakeholder regimes believed focused upon long-term value
increasingly act to maximize short-term shareholder value. We divide Europe into three regions based on ownership concentration, legal systems, board structures and the presence of corporate governance codes. In this multi-jurisdictional setting, we compare the effects of different elements of corporate governance on CAPEX in each region. Our analysis shows that the overall effect of investor-sensitive corporate governance on CAPEX is consistently negative notwithstanding differences in the formal nature and quality of governance standards between regions. We explain this finding by reference to the governance standards of the United Kingdom: a market for corporate governance that has come to dominate its continental European neighbours.