Does Codetermination Reduce Shareholder Value? Board-Level Employee Representation, Firm Value, Performance, and Rent-Seeking Behavior

ABSTRACT We analyze the relation between board-level codetermination and shareholder value. We use a unique dataset of listed German companies that enables us to identify heterogeneous aspects of codetermination and overcome otherwise common identification issues. We find that codetermination reduces firm value but does not have a corresponding negative effect on firm performance. However, we find that codetermination increases employee wages and employee count while decreasing dividends paid to shareholders, thus providing some justification for the decrease in firm value. Our findings highlight how heterogeneity of firm governance structures can result in tradeoffs in economic outcomes that are a function of the structure’s economic characteristics. This study should improve policy makers’ understanding of the economic consequences of codetermination. Data Availability: Please contact the authors. JEL Classifications: G30; J53; L25.