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Fuzzy Sets Analysis: Applications for Comparative Corporate Governance Gregory Jackson Kings College London Presentation at Oxford University ESRC Methods.

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Presentation on theme: "Fuzzy Sets Analysis: Applications for Comparative Corporate Governance Gregory Jackson Kings College London Presentation at Oxford University ESRC Methods."— Presentation transcript:

1 Fuzzy Sets Analysis: Applications for Comparative Corporate Governance Gregory Jackson Kings College London Presentation at Oxford University ESRC Methods Festival July 19, 2006

2 2 Corporate Governance Research Corporate governance –Corporate governance consists of the rules and beliefs that shape the relationships among stakeholders in the decision-making and control over firm resources. Comparative research –What differences in corporate governance exist across countries? –Why did diverse sets of institutions emerge historically, and change over time? –How does institutional diversity impact firm strategy and structure, performance and power of different stakeholders?

3 3 Methodological Issues Only two models across countries? –Conclusions drawn from strong correlations among elements of corporate governance in Anglo-American countries –But diverse configurations in other countries that are not well understood Methodological issues –Large number of variables, but small N –Much literature is based on variable based study of correlations, only a case-based attempts to explain why countries differ –conjunctions of different causal factors (e.g. Complementarities) –multiple paths to same outcome possible Most work in this area largely ignores these issues!

4 4 Application Explaining employee representation on corporate boards Jackson, Gregory, "Employee Representation in the Board Compared: A Fuzzy Sets Analysis of Corporate Governance, Unionism, and Political Institutions". Industrielle Beziehungen, Vol. 12, No. 3, pp. 1-28, 2005 Available at SSRN:

5 5 Table 1 Codetermination Rights in 22 OECD Countries: Fuzzy-set Memberships Fuzzy ScoreCharacteristicsCountries 0No constitutional rights, and no statutory or tri-partite regulation Australia, Canada, Japan, New Zealand, South Korea, Switzerland, United Kingdom, United States 0.1Constitutional rights, but no statutory or tri-partite regulation Italy, Portugal 0.3Some statutory or tri-partite regulation of public sector firms Belgium, Greece, Ireland, Spain 0.7Legal right to attend board at private firms. France 0.9Legal rights to nominate some members to the board. Finland, Netherlands 1Legal rights to board-level representation in private firms. Austria, Denmark, Germany, Norway, Sweden

6 6 Possible Explanations Industrial relations factors –Union strength –Union centralization Corporate governance factors –Stock market activity –Investor protection –Ownership concentration, bank influence Political factors –Consensus oriented political systems –Left-wing government Legal origin –Civil law vs. common law

7 7 Steps in the Analysis Code conventional statistical indicators as 7-point fuzzy sets Analysis of necessary conditions Analysis of sufficient conditions using truth table approach Back to cases!

8 8 Table 4 Results of Fuzzy-set Tests: Necessary Conditions for Board-level Employee Representation ========================================== N Cause Observed Binomial Variable >= Outcome Proportion p ========================================== cg-market CG-MARKET cg-legal CG-LEGAL concentration CONCENTRATION bank BANK union UNION coordination COORDINATION centre-left CENTRE-LEFT electproportion ELECTPROPORTION parties PARTIES Consensus CONSENSUS commonlaw * COMMONLAW =============================================== Number of Cases Tested (Outcome > 0): 14 ( 63.6% of Total) Test Proportion: 0.70 *p < 0.10

9 9 Both no Outcome but no cause (no necessity) Cause but no outcome (no sufficiency) Both yes

10 10 Analysis of Sufficient Conditions Test various combinations of the nine variables –But no more than 6 at a time (A.Marx 2004)! Using truth tables proposed in Ragin (2004) –Coverage: the sum of consistent Xi divided by the sum of Yi. "unique" coverage is the calculation of non-overlapping coverage for each solution term. –Consistency: the sum of consistent Xi minus the sum of inconsistent Xi divided by the Xi. This rewards near misses, but penalizes big misses

11 11 The only significant result was coordinated collective bargaining. Coverage is strong (7 out of 8 cases coverage score of 0.865) and high consistency of 79.4%. Only France is unexplained. Thus, coordinated collective bargaining passes the test as a sufficient condition.

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13 13 Cases as Configurations Model: EMPBOARD = UNION + COORDINATION + CENTRE-LEFT + CONSENSUS + CG-LEGAL + CONCENTRATION Solutions: –UNION*COORDINATION*CENTRE-LEFT*CONSENSUS*CONCENTRATION –(coverage: unique coverage: consistency: 0.891) –COORDINATION*CONSENSUS*cg-legal*CONCENTRATION + –(coverage: unique coverage: consistency: 0.812) – EMPBOARD –solution coverage: –solution consistency: 0.861

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16 16 Robustness Do the thresholds for being in a category influence the results? –A lower threshold for ownership concentration or coordinated bargaining might make these factors necessary –But both factors are common to the two configurations meeting condition of sufficiency Missing cases –eight variables yield 2*8 = 256 possible configurations, of which only 20 configurations have empirical cases. –results become less robust because cases are not sufficiently similar to falsify a particular configuration –Experiments with random data suggest robustness as long as a certain ratio of variables to cases (5-6 variables are ok for 22 cases) (Marx 2005) Parsimony vs. Complexity? –Best solution can cover the most cases consistently – 7 out of 8 cases explained, and the unexplained French case is much weaker

17 17 Conclusions Back to the cases! The results confirmed importance of numerous factors from variable-based studies, but rejects their sweeping conclusions Underlines strong potential of fuzzy sets

18 18 Application 2: Determinants of Ownership Structure Corporate Ownership Blockholders (families, state, inter-corporate, banks) vs. dispersed investors (individuals, institutional investors, speculators) Comparative Explanations Legal origins (LLSV) Political systems (Roe) Employee power (Roe) Role of banks vs. markets as alternative source of finance Salience of M&A (Mayer, Franks and Rossi)

19 19 Model: DISPERSEDGJ = EMPBOARD + CG-MARKET + CG-LEGAL + UNION + COORDINATION + CENTRE-LEFT + CONSENSUS + COMMONLAW + PRIVPENSION + GINI Cases Read: 22 *** NECESSARY CAUSE ANALYSIS *** Number of Cases Tested (Outcome > 0): 17 ( 77.3% of Total) Method: Probabilistic Test Proportion: 0.70 *p < 0.05 N Cause Observed Binomial Variable >= Outcome Proportion p ========================================== empboard EMPBOARD cg-market CG-MARKET cg-legal CG-LEGAL union UNION coordination COORDINATION centre-left CENTRE-LEFT consensus CONSENSUS commonlaw COMMONLAW privpension PRIVPENSION gini GINI =============================================== No conditions are necessary for dispersion. In particular, neither common law nor investor protection are necessary.

20 20 Pathways to dispersion? ********************** *TRUTH TABLE ANALYSIS* ********************** Model: DISPERSEDGJ = EMPBOARD + CG-LEGAL + COORDINATION + CONSENSUS + GINI ** TRUTH TABLE SOLUTION ** raw unique coverage coverage consistency CG-LEGAL*coordination*consensus*gini empboard*CG-LEGAL*coordination*GINI EMPBOARD*CG-LEGAL*COORDINATION*CONSENSUS*gini solution coverage: solution consistency: Legal protection plus weak labour and high inequality (Anglo-Saxon case) Legal protection plus strong labour, low inequality, and consensus politics (Nordic case).

21 21 Table 3 Fuzzy Membership Scores: 22 OECD Countries country empboar d cg- marketcg-legalconcentrationbankunioncoordination centre- left consensu s commonla w Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Netherlands New Zealand Norway Portugal South Korea Spain Sweden Switzerland United Kingdom United States

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