Center for International Economics University of Paderborn Warburger Strasse 100 33098 Paderborn / Germany No . 2006 - 01 The Measurement of Firm Ownership and its Effect on Managerial Pay Jeremy Edwards , Wolfgang Eggert , Alfons Weichenrieder December 2006

This paper uses German evidence to address two questions about corporate governance. The effects of ownership on corporate governance have received much recent attention, but very little of this has been devoted to the appropriate way to measure firm ownership. The results of this paper show that the conclusions reached about the effects of ownership on corporate governance can depend critically on the particular ownership measure used, and that the widely-used weakest-link principle is wholly unsatisfactory as a means of dealing with the issues raised by pyramid ownership structures. The paper also shows that greater ownership concentration typically weakens the link between managerial pay and firm profitability. This is inconsistent with the hypothesis, emphasised in the recent literature on the USA, that large owners are a complement to, rather than a substitute for, such a link. JEL Codes: G32, L25, M52. Addresses of authors Jeremy S.S. Edwards Wolfgang Eggert Alfons J. Weichenrieder Faculty of Economics Department of Economics Goethe University Frankfurt University of Cambridge University of Paderborn Mertonstr. 17 Sidgwick Avenue 33098 Paderborn 60054 Frankfurt (Main) Cambridge CB3 9DD Germany Germany United Kingdom Tel: ++44 1223 335232 Tel: .++49 5251 60 5002 Tel: ++49 69 798 22720 Fax: ++44 1223 335475 Fax: ++49 5251 603 513 Fax: ++49 69 798 22697 Email: [email protected] Email: wolfgang.eggert@ Email: a.weichenrieder@ uni-paderborn.de em.uni-frankfurt.de ∗ We thank Dennis Leech for allowing us to use his algorithms for computing voting power indices, and Tim Guinnane, Andrew Harvey, Hamish Low, Sheilagh Ogilvie and Melvyn Weeks for helpful comments. The research reported in this paper was started during a joint visit to CES, University of Munich, and completed during visits of Edwards and Weichenrieder to the University of Konstanz and the ifo Institute for Economic Research in Munich. We thank the three institutions for their hospitality, especially Bernd Genser and Hans-Werner Sinn.