Corporate efficiency in Europe

We analyze the impact of ownership structure on firm efficiency in the European Union. We employ firm-level unbalanced panel data for the period 2001–2007 from the Amadeus database. Our exceptionally sizable dataset of firm-level balance-sheet data (sales, working capital, and number of employees) covers more than 5 million firm/years from multiple EU countries operating in both manufacturing as well as service sectors during the period 2001–2007.

We analyze what drives firm’s efficiency in two steps. First, we describe how firm’s efficiency is derived from the stochastic production possibility frontier. In the second step we relate firm’s efficiency to number of factors that are shown in the literature to affect it; namely: ownership structure and firm specific characteristics (capital structure, size, age, market concentration). Estimation itself is performed within a one-stage procedure. We perform the estimation as a panel with fixed effects to alleviate the potential problem of unobserved (fixed) firm heterogeneity, including the endogeneity of firm ownership with respect to efficiency. The model is estimated using the maximum likelihood one-stage procedure.

We provide evidence that ownership structure matters quite a lot and indicate numerous detailed results. Specifically we show that the economic effect of a firm’s age is negligible, larger firms are less efficient, greater leverage contributes to firm efficiency, and that moderate market concentration, implying greater competition, is beneficial. Majority ownership does not provide a contributing effect toward efficiency in most of the countries. On the other hand, a combination of majority and minority owners exhibit a positive disciplining effect in terms of improvement in firm efficiency when a majority owner must account for the presence of a minority shareholder irrespective of its type (legal or blocking minority). Controlling minority ownership does not provide a basis for conclusions due to insufficient data or lack of statistical significance. Finally, the combined controlling minority type of ownership provides mixed results depending on the country group.

In terms of ownership domicile, the foreign owners do not seem to play any strong role with respect to efficiency in old EU firms. Foreign majority owners combined with a blocking minority contribute to efficiency in new EU firms, though, and a generally beneficial effect is evidenced for firms in Bulgaria and Romania. These results should be attributed to the foreign ownership presence through the FDI as in the new EU countries many privatized firms can be associated with new foreign owners.