Corporate control mechanisms and investment efficiency in developed European countries

Abstract

The objective of this dissertation is to examine the effect of corporate control mechanisms on firm investment policy, providing evidence from the developed European countries over the period 2000-2016. Leverage, debt maturity, institutional investors are the internal mechanisms while the product market competition is the external control mechanism. Besides providing evidence for the external validity of previous findings which mostly rest on the US market, this dissertation uses firm-level and industry-level product market competition measures and investment efficiency instead of using simple investment level to provide more reliable and comprehensive results for the investment policy of European firms. Classifying firms according to the deviations from their expected investment level allows us to figure out why control mechanisms work differently when a firm over- or underinvests. In the second part of the study, we analyze how each of the internal mechanisms affects investment efficiency under product market competition. This dissertation provides evidence that banks, through both lending and ownership, are the main controlling mechanisms for European firms. Besides leverage, institutional investors and competition are other control mechanisms mitigating the overinvestment problem by reducing the deviations from expected investment level. Moreover, our results demonstrate that leverage and institutional ownership reduce overinvestment when competition in the industry is low, which is consistent with the hypothesis that product market competition acts as a substitute governance mechanism.