Socio-Economic Review Advance Access originally published online on June 22, 2007
Socio-Economic Review 2007 5(3):389-436; doi:10.1093/ser/mwm005
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Acting out institutional change: understanding the recent transformation of the French financial system
The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6370, USA
Correspondence: mosulliv{at}wharton.upenn.edu
For the purposes of understanding the causes and implications of the growth of financial markets around the world, I focus on a crucial aspect of the dramatic transformation of French capitalism over the last quarter of a century: the shift from a government-based financial system to a market-based one. I examine the causes and implications of the increasing role of financial markets in French capitalism on the basis of an analysis of the actors who issued securities on the country's financial markets. I show that the government's role as an issuer, and the deficits that drove its need for external funds, largely account for the development of these markets in the 1980s and early 1990s. In contrast, the dramatic growth of these markets from the late 1990s was primarily attributable to their use by French enterprises in pursuit of strategies of external growth, especially cross-border mergers and acquisitions. On the basis of my analysis, I challenge the argument that French corporate capitalism is now subject to the dictates of the financial markets but I also highlight the limits of the state's capacity to systematically shape the future of the French corporate economy. Instead, I argue that the existing French system can be better understood as one of managerial control in which senior corporate executives exercise considerable discretion in shaping the future of the companies they run.
Key Words: capitalist systems • financial markets • financialization • firms • France
JEL classification: P12 capitalist enterprises, P16 political economy, G10 general financial markets
In the last quarter-century, financial markets have assumed a highly prominent role in global capitalism. Questions about the causes of this development and its political and economic implications have preoccupied scholars and pundits alike. Countries in continental Europe have figured at the center of these debates since, at least in the post-war period, they were largely strangers to active financial markets. By the beginning of the 21st century, however, that had changed.
The transformation of French capitalism, notably the shift from a government-based financial system to a market-based one, has been particularly dramatic, and in this article, I analyse its causes and implications. Dramatic reforms in financial regulation took place in France during the 1980s but, as I show, they did not automatically prompt this transformation. The behaviour of the actors that used the financial system also had to change and an analysis of their characteristics and strategies helps us to understand when and why this occurred.
Initially, leading French enterprises responded to regulatory reform by reducing their dependence on external funds. As a result, they did not take advantage of the new options for external financing that financial liberalization created in France. For most of the 1980s and the early 1990s, it was the French government, rather than private enterprises, that drove the expansion of the financial markets. Its privatization programme gave an important fillip to the expansion of the stock market, with the proceeds from privatizations largely earmarked for government coffers. The state was also the main issuer on the country's bond and commercial paper markets as it struggled to generate enough funds to finance ever-increasing deficits.
These patterns changed dramatically in the late 1990s when French enterprises' pursuit of aggressive strategies of external growth induced them to rely heavily on the financial markets for funding. Therefore, the participation by French companies in the globalization of product markets, and more precisely in the processes of domestic, regional and global consolidation that have resulted, is a central part of the explanation for the growth of financial markets. The transmission mechanism for the impact of this type of globalization on the French financial system was managerial behaviour, notably the strategies for external growth that corporate managers designed and implemented. This explanation can be contrasted with the standard account of the role of globalization in prompting change in financial systems that focuses on the global integration of financial markets as the crucial development and locates the transmission mechanism in portfolio investors' financial strategies.
My analysis sheds light not only on the causes but also on the implications of changes in the financial system for the French corporate economy. I challenge the commonly made argument that French corporate capitalism is now subject to the dictates of the financial markets. However, I also highlight the limits of the state's capacity to systematically shape the future of the French corporate economy. Instead, I argue that the existing French system can be better understood as one of managerial control in which senior corporate executives exercise considerable discretion in shaping the future of the companies they run.
In Section 1, I discuss the role of financial systems in comparative institutional analysis and highlight the growing emphasis on institutional change and the role of different types of actors in mediating the relationship between institutions and behaviour. In Section 2, I analyse the changes that have taken place in the French financial system and I identify the standard explanations of these changes and their implications as well as their limits for explaining what actually happened in France. In Section 3, I present an analysis of financial change that focuses on the actors that used the financial markets to conduct securities issues, and I analyse their reasons for so doing. In Sections 4 and 5, I use the evidence from this analysis as the basis for discussing the micro-foundations of institutional change and for re-evaluating the causes and the implications of that process. I conclude briefly in Section 6.
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1. Financial systems in comparative institutional analysis |
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 TOP 1. Financial systems in... 2. What happened to...3. A focus on...4. Re-evaluating the causes...5. Debating the implications...6. ConclusionNotesReferences |
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The academic literature on comparative institutions of capitalism has experienced a marked expansion in recent years with contributions from scholars working in various disciplines including political science, sociology, economics and history. Contemporary discussions of capitalist institutions have been largely preoccupied with variety and similarity in the institutions that influence economic activity in different countries and the implications of institutional patterns for economic and social outcomes. The concept of an ‘institution’ is used in somewhat different ways by contributors to this literature, reflecting their diverse disciplinary origins. However, the following definition seems sufficiently expansive to capture what most scholars mean when they speak of institutions: ‘the laws, informal rules, and conventions that give a durable structure to social interactions among the members of a population’ (Bowles, 2004, pp. 47–8).
Scholars who have contributed to this research stream have studied the characteristics and influence of a wide range of institutions. The institutionalized role of financial capital in economic activity features prominently in many of these analyses, and distinctions among financial systems based on institutionalized patterns of corporate finance and ownership are particularly common. With respect to the funding of corporate activity, it has become standard to distinguish between market-based, bank-based and government-based financial systems (Zysman, 1983, p. 55; Berglöf, 1990; Allen and Gale, 2000). As far as the ownership of corporate stock is concerned, the most common comparison is between dispersed and concentrated corporate ownership. Within the category of concentrated ownership further distinctions are often made on the basis of the identity of large owners and specifically whether they are banks, families or governments (LaPorta et al., 1999; Becht and Mayer, 2001; Faccio and Lang, 2002).
Distinctions among financial systems have been used as elements in broader typologies of capitalism incorporating other institutions such as industrial relations and legal systems, which aim to capture the most important institutional differences and similarities as well as the complementarities among them that make them cohere systemically (Lopez-de-Silanes et al., 1998; Hall and Soskice, 2001; Roe, 2003). These typologies have proven useful for addressing a variety of questions about the political economy of capitalism but, as their influence has increased, they have also drawn criticism. One concern that is commonly expressed is that the reliance on typologies for understanding capitalist economies has downplayed the importance of, and possibly even obscured, the process of change within them. A second concern relates to the assumptions that underpin typologies of capitalism about the relationship between the characteristics of different institutions and economic behaviour and the related neglect of agency especially in institutional transformation.
1.1 Change in the institutions of capitalism
The project of constructing typologies as a basis for comparing financial systems, and capitalisms more generally, has led to an emphasis on the institutional characteristics of these systems when they are stable as well as the mechanisms that reproduce these institutional patterns over time. Until recently, institutional change has received much less attention in the literature and, when recognized, its significance for altering the systemic logic of institutions is often denied.
The structural approaches that dominate the analysis of financial and other institutions are certainly capable of recognizing change over time. By comparing the structural characteristics of institutions at different times, such an approach can be used to identify similarity and difference over time just as it can across countries. While, at least in principle, this ‘comparative static’ approach allows us to pinpoint the extent to which change in institutions has occurred, it is less useful for explaining change; specifically, it tells us little about the causes of that change. Given the traditional emphasis on the stability and coherence of institutions in the literature, it is particularly difficult to understand how the origins of change might be located in an extant system of capitalism. As a result, when institutional scholars contemplate the possibility of substantial institutional change, they have tended to characterize it as a response to exogenous shocks (Thelen, 2003, p. 209; Streeck and Thelen, 2005, p. 1).
There is no question that exogenous shocks have historically played a role in prompting institutional change in different countries. As far as financial institutions are concerned, some scholars understand the global integration of financial markets as an exogenous force and argue that it is putting pressure on countries to deregulate their financial systems. However, this perspective is contested by scholars who have adduced evidence which suggests that, when financial deregulation and liberalization occur, the momentum for the change comes, to a substantial degree, from within the country undertaking the reforms (for a discussion, see Reiter, 2003).
Recently, the topic of institutional change has attracted a great deal of attention from institutionalists of various stripes. Much of their effort has been devoted to conceptualizing the process of institutional change. So far, however, detailed analyses of how that process occurs are rather thin on the ground and the studies that have appeared focus primarily on changes in labour and welfare institutions. As yet, our knowledge of recent changes in comparative financial institutions is limited (for some exceptions, see Reiter, 2003; Deeg, 2005) despite the fact that they have undergone some of the most dramatic developments that have occurred in the institutional foundations of the global economy.
1.2 Institutions and actors
During times of institutional change, it is particularly difficult to know what will happen to behaviour. As a result, as they tried to explain the causes and implications of change, scholars began to pay greater attention to the way in which actors behaved. In doing so, they drew attention to another neglected area in the analysis of comparative institutions: the importance of the characteristics and strategies of actors in mediating the relationship between institutions and behaviour.
Katznelson (2003) has argued that the tendency in institutional analysis to emphasize structural analyses to the detriment of the behaviour of individual actors is particularly problematic in times of institutional change: ‘[t]he very character of critical junctures as relatively open times produced by concatenations of structural processes invite elucidations of the preferences and choices of actors – grand to ordinary – placed inside such situations when the potentiality of alternatives explodes as previous constraints on belief and action erode’ (p. 277). Under such circumstances, ‘many constraints on agency are broken or relaxed and opportunities expand so that purposive action may be especially consequential’ (p. 283).
In cases such as these, predicting actors' behaviour solely on the the basis of structural characteristics of institutions becomes highly problematic. Instead, the actors themselves need to be scrutinized since their ‘preferences – whether fundamental or strategic – matter quite a lot because they operate to help shape particular institutional outcomes. This plasticity and openness, moreover, characterizes both preferences about goals, purposes, and values (ends) and preferences about strategies and tactics (means), as well as their relationship. Indeed, at such moments, familiar links between ends and means themselves may break down, promoting and deepening uncertainty’ (Katznelson, 2003, p. 283).
The growing preoccupation with understanding actors' behaviour in times of institutional change, as well as a more general concern with the downplaying of human agency in institutional analysis, has led scholars to call for an ‘actor-centered’ approach to the study of institutions (Scharpf, 1997; for an early focus on these issues, see North, 1990). Crucial to animating this renewed focus on actors in empirical research, however, is determining which actors matter in the process of institutional change. Streeck and Thelen (2005) make a useful distinction in this regard between rule makers and rule takers, ‘the former setting and modifying, often in conflict and competition, the rules with which the latter are expected to comply’ (p. 13). As they point out, the actions of both types of players are important in the processes of rule generation and enactment that, for them, constitute the essence of institutional change, with opportunities for strategic action for both categories of actors along the way.
1.3 A focus on the actors that use the financial system
In the empirical literature on change in financial systems, not only for France as we shall see, but also for other countries, scholars have paid particular attention to the regulatory reforms that have fostered changes in the rules that govern these systems. Initially, much of this literature adopted a state-centric approach. However, there has been a recent tendency to pursue a more disaggregated approach that focuses on a wider variety of actors, from policy-makers to rating agencies, in the formulation of these rules (see, for example, Sinclair, 2005; Jabko, 2006; Abdelal, 2007).
In this article, however, I shift the focus from the actors that generate the rules governing the financial system to those who, as users of the financial system, play a crucial role in enacting these rules. The importance of enterprises for enacting the rules that govern the financial system seems especially significant given that our characterizations of financial institutions are so heavily influenced by patterns of corporate finance and ownership.1 Moreover, predicting enterprise behaviour solely on the basis of the structural characteristics of financing or ownership has proven to be highly problematic. There seems to be good reason, therefore, for the direct analysis of the characteristics and strategies of enterprises and their consequences for the way in which enterprises use the financial system.
For some time, there has been a debate about the relationship between characteristics of national financial systems and patterns of corporate finance. It was stimulated by the findings from a set of comparative studies that suggested that the standard typologies of financial systems were not reflected in patterns of corporate finance. As Mayer (1988) put it, these findings showed: ‘the insignificance of stock markets as sources of finance for industry, including countries such as the UK and US with large well developed stock markets’. Moreover, as far as bank finance was concerned, these studies suggested that companies in Germany were no more reliant on bank finance than their British counterparts despite the fact that the former inhabited a bank-based financial system while the others operated in a market-based one (Edwards and Fischer, 1994; Mayer, 1988).
Although these findings were initially regarded as counter-intuitive, they soon became part of conventional wisdom when they were replicated in other studies. For a time, they co-existed in an uneasy relationship with traditional characterizations of financial systems as market- or bank-based, which were still widely used by institutionalists. However, recent empirical research has generated findings that help to explain the apparent contradiction between conventional classifications of financial systems and comparative studies of corporate finance.
The heterogeneity of firm characteristics proved to be the critical link between institutions and firm behaviour. Specifically, the data which form the basis for most comparative studies of corporate finance measure net flows of funds between the financial system and the corporate sector and obscure the financing behaviour of companies raising funds by subtracting the retirements of stock and debt by companies with surplus funds. Recent studies which measure gross flows of funds provide evidence which is closer to the traditional designations of financial systems (Hackethal and Schmidt, 2004).
On the one hand, these findings go some way towards restoring the merits of distinctions among financial systems based on patterns of corporate finance. However, in highlighting the heterogeneity in the financing behaviour of enterprises that are subject to similar institutional possibilities and constraints, they raise new challenges for institutional analysis. It is no longer plausible to analyse the role of financial institutions in capitalist economies by looking only at the structural characteristics of these institutions. The conditions that lead some firms to rely on financial institutions for external funds, while other firms do not, must also be considered if the relationship between institutions and behaviour is to be understood.
What is it about firms that make them more or less likely to turn to the financial system for funds? In the literature on corporate finance, several characteristics of enterprises have been emphasized as important for determining their reliance on the financial system for external finance. The scale of internal resources that firms have at their disposal is likely to be an important factor. Firms also display differences in their demand for finance as a result of the strategies that they pursue.
To understand the relationship between financial institutions and financing behaviour, therefore, there is a need to take seriously the characteristics and strategies of firms in the analysis of institutions. The government is also an important actor that needs to be considered as a user of the financial system and especially of the financial markets which are the main focus of this paper. In other words, its role, not only as a maker of the rules that govern the financial system, but also as an enactor of these rules, is crucial to understanding the transformation of financial institutions.
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2. What happened to France's financial system? |
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TOP1. Financial systems in...2. What happened to...3. A focus on...4. Re-evaluating the causes...5. Debating the implications...6. ConclusionNotesReferences |
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Given the relatively early stage of theorizing on both institutional change and the relationship between institutions and behaviour, it is difficult to define clear theoretical alternatives that readily lend themselves to empirical testing. Therefore, at this stage, empirical research seems more useful for confirming the importance of certain theoretical directions and generating new ideas for further theoretical development. In this context, case studies are a particularly appropriate empirical methodology to employ (for a discussion of the possibilities of case-study analysis, see Rueschemeyer, 2003).
In this paper, I present a case study of the transformation of the French financial system over the last 25 years from a government-dominated system to one in which financial markets have grown to unprecedented proportions. The expansion in the French financial markets is especially notable given their small scale in the post-war period. In this regard, the development echoes what has happened in other parts of continental Europe. Therefore, focusing on the case of France should shed light on important questions about what Rajan and Zingales (2003) describe as the causes and implications of ‘the changing character of European finance’.
The French financial system has changed in terms of patterns of both corporate ownership and financing. As far as ownership is concerned, the highlights of change are the decline in state ownership, the establishment of cross-shareholding networks in newly-privatized firms, their unwinding from the late 1990s and, finally, the recent incursion of foreign shareholders. These trends have already been well documented in the literature (Morin, 2000; Bloch and Kremp, 2001; Faccio and Lang, 2002).
In the discussion that follows, I focus on changes in the role of the French financial system in supplying funds to the economy. I begin by comparing the structural characteristics of the French financial system in the 1970s and 2001 to identify what has changed as well as the extent of change. I then discuss the standard explanations that scholars have provided for the causes and implications of these developments. Although they provide important insights into what has occurred, I raise concerns about their capacity to fully account for the timing and extent of change in the French financial system and I suggest some additional factors which shed light on these issues.
2.1 Characterizing institutional change in French finance
In the literature on comparative institutions of capitalism, the French financial system of the 1970s was seen as highly distinctive (see, for example, Zysman, 1983).2 In particular, the extensive involvement of the French state in the financing of economic activity is typically regarded as one of the defining features of French post-war capitalism. The government's control over the allocation of credit by financial institutions was one of the most important tools that it used to influence the evolution of the French economy.
On the face of it, as Table 1 suggests, the French financial system came closest to its German and Japanese counterparts in the late 1970s in terms of the economic importance of banks. However, and in contrast to Germany and Japan, the government dominated the allocation of bank credit in France through the framework or encadrement system that controlled the direction of credit allocation. It placed restrictions on the overall expansion of credit in the economy, thus limiting the lending autonomy of the banks. In cases where the government wanted to encourage particular activities, it did so by making an exception to these credit restrictions for the relevant borrowers. In the early 1970s, unrestricted credit, monies allocated without government involvement, amounted to less than 20% of total credit allocation. The state also established a number of public and semi-public agencies that could make subsidized loans to specific sectors and businesses to meet what were seen as their special needs; in the 1970s, these agencies lent funds that amounted to approximately 60% of the medium and long-term funds allocated by the banking sector to French firms (Loriaux, 1991, p. 49).
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In contrast to the scale of government lending, both through and beyond the banking system, France's financial markets were small in the mid-1970s. As Table 1 shows, the value of stocks and bonds as a share of gross domestic product was 27% in 1975. That was much lower than the comparable figures of 102% for the US and 84% for Great Britain, but France also ranked behind other major continental European economies in this regard.
The characteristics of the French financial system at the time were reflected in the patterns of financing by French corporate enterprises. These companies were major users of external funds and they depended heavily on debt finance—supplied to them through the banking system as well as directly by the government—for these monies. Among their counterparts in other advanced industrial countries, only Japanese enterprises came close to the French in terms of their reliance on bank debt for funding (Bertero, 1994).
By the late 20th century, the role of the French financial system in financing economic activity had been transformed along several crucial dimensions. First, there was a drastic contraction in the role of the state from a position of dominance over the allocation of funds to one of modest importance (Loriaux, 1991; Plihon, 1995). Second, the role of financial markets in the funding of economic activity experienced a marked expansion. As Table 1 shows, the French financial markets grew from 27% of GDP in 1975 to 186% by 2001. The expansion of the French stock market was especially dramatic; by the end of 2001, its market capitalization was 100% of GDP, up from a mere 11% in 1975. The country's bond market also expanded over the period, with its capitalization growing from 16% to 86% of GDP.
Finally, the importance of the banking sector, relative to other sources of external funds, declined. The intermediation ratio measures the importance of loans from French financial intermediaries in the total amount of financing obtained by non-financial agents in the French economy, and it fell from 71% in 1978 to 42% in 2000. However, this trend represents a relative rather an absolute disintermediation; while markets have soaked up most of the expansion in corporations' use of external funds, banks have also participated in it to some degree. As a result, as Table 1 shows, the banking system's importance relative to the scale of economic activity has actually increased over the last 20 years, underlining its continued importance for funding French economic activity.
The developments that have taken place in the French financial system over the last quarter of a century are reflected in patterns of corporate finance. As Figure 1 shows, there was an initial sharp decline in the mid-1980s in the high levels of dependence by French non-financial companies3 on external finance, which were largely from intermediated sources at the time. The importance of external finance rose again in the late 1980s, with market sources taking on a somewhat expanded role relative to bank debt, but another decline ensued coming into the 1990s. The final and most important phase in the importance of external finance for French companies began in the mid-1990s and accelerated sharply from the late 1990s. It was characterized by the clear dominance of market sources of finance—issues of stock, bonds and commercial paper—although bank finance also enjoyed an expansion during this phase (Banque de France, 2002).
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The growing importance of market sources of finance in France was a lumpy process rather than a smooth one. Stock issues, for example, grew from a very low level of less than 1% of the value added of non-financial enterprises in the late 1970s and early 1980s to somewhere between 1 and 2% from 1985 to 1996. In 1995, stock market capitalization was still quite small, at only 33% of GDP. The really dramatic increase in the importance of stock issues as a source of finance occurred from the mid-1990s on when they rose to 5.5% of value added in 1997, then to 8% in 1999 and as high as 14.5% in 2000 before declining to 6.7% in 2001, still a relatively high level (Banque de France, 2002).
2.2 The causes of change in the French financial system
Several explanations of the changes that occurred in the French financial system focus on the determinants of the dramatic liberalization or deregulation of the financial system that occurred in France from the early 1980s. Financial deregulation had been discussed in France through the 1970s and several policy changes in that direction were undertaken at that time. However, a systematic process of financial liberalization began only in 1984. It was initiated by a socialist government and sustained thereafter by French governments of various political stripes.4
There has been considerable academic debate about the causes of these regulatory reforms. Some scholars favour explanations in terms of exogenous factors, notably developments in international financial markets (Loriaux, 1991). The specifics of these arguments differ but the basic contention is that France's financial liberalization was a policy response to the growing integration of global financial markets. The process began with the abandonment in the early 1970s of the fixed exchange rate regime that governed international monetary relations since Bretton Woods and gained momentum in the 1980s and 1990s. For France, moreover, as for all Eurozone countries, the move to a single currency and the tighter integration of monetary policy and financial markets is also emphasized as an additional exogenous source of pressure for financial deregulation (Loriaux, 1991).
Other scholars have focused to a greater extent on pressures for reform that were endogenous to the French economy and, indeed, the French financial system itself. They have emphasized that the interventionism of the French state, whatever its accomplishments in the 1950s and 1960s, ran into structural limits in the 1970s. Since a crucial aspect of that interventionism was the state's central role in the allocation of financial resources in the French economy, it was here that the pressure was felt most strongly. In particular, inflationary pressures built up as the banking system made more and more money available to the economy on terms that did not reflect its real economic cost (Hall, 1986; Hayward, 1986; Schmidt, 1996).
It is hard to imagine that one could tell the story of the change in French's financial system without according a prominent role to these profound regulatory changes. However, a simple story that predicts institutional change from the transformation of the formal rules and regulations that governed the French financial system does not adequately account for the timing of the changes that took place. Most of the expansion that has taken place in the financial markets was highly concentrated in the late 1990s and early 2000s. There were no major changes in the formal regulations that governed the French financial markets that could explain this concentrated expansion or the fact that it did not occur earlier.
In seeking better explanations of these developments, some scholars have focused on global flows of portfolio capital and have emphasized the growing importance and influence of foreign institutional investors in France in the 1990s. Foreign ownership of French companies grew from 10% of listed shares in 1985 to 25% in 1994, largely as a result of the privatization process. It increased to 30% by 1997, then jumped to nearly 35% by 1999, to 40% by 2000 and then to 42% by 2002 (Banque de France, 2004). Foreign participation in the shareholding structures of the largest listed French companies tended to be even higher than these averages (Morin, 2000).
Goyer (2001) emphasizes the growing influence of foreign investors, ‘composed primarily of Anglo-American mutual and pension funds’, on the behaviour of French enterprises. He argues that ‘[o]n some critical indicators of corporate governance – related to the internal decision-making process and business strategy – French corporations have gone to great lengths to meet the preferences of Anglo-Saxon institutional investors’. Of particular importance, he argues, is French companies' shift from conglomerate strategies to a focus on their core competences. In a similar vein, Morin (2000) argues that France's leading companies are forced to obey the diktat of financial markets which makes the pursuit of ‘shareholder value’ a necessity rather than a choice; they are, as he puts it: ‘subject to Anglo-Saxon management and return on capital norms’.
In this argument, the growing pressures for financial returns from institutional investors are seen as emanating from outside of the French economy.5 From this perspective, global financial markets penalize companies that do not conform to their demands but they also reward those that do comply by supplying them with capital at a relatively low cost. This argument therefore provides a possible explanation for the increased use of the financial markets by leading French enterprises in the late 1990s as they conformed more and more to the demands of global investors.
However, these claims warrant further consideration when we consider how foreign investors managed to make such significant and rapid incursions into the shareholding structures of leading French companies. After all, until the mid-1990s, the French corporate economy was characterized by an extensive system of cross-shareholding that was designed to protect French enterprises from the unwanted attentions of foreign investors. This system came undone in the late 1990s and the pressures to unwind it came, in the first instance, from the heart of the French corporate economy.
The process was initiated in the wake of the merger, in early 1997, of Axa, the French insurance company, with its leading domestic competitor, UAP. The transaction created a veritable financial powerhouse with shareholding links to many of France's most important companies. Shortly after the merger, however, Claude Bébéar, the CEO of Axa, who assumed the mantle of the newly created company, announced that it would sell off its holdings in a number of important French corporations including Crédit National (12.4%), Schneider (7.1%), and Suez (6%). Only the holdings that Axa-UAP regarded as strategic to its core business, namely, BNP (12%) and Paribas (9.76%), were to be maintained. Shortly afterwards, other large French companies followed Axa's lead in unwinding their cross-shareholdings and, by the end of the 1990s, many of the ownership ties that had been put in place to protect French corporations from unwelcome scrutiny by outsiders had come undone (Morin, 1998).
This sequence of events has led some scholars to suggest a much greater emphasis on endogenous changes in interpreting the cause of recent developments in the French financial system. In a recent article, Culpepper (2005, p. 176) attributes the transformation of French financial institutions to a mechanism called ‘joint belief shift’, which is ‘the process by which actors use triggering events to coordinate their future expectations around the new rules of the games, that is, around new institutions. He interprets Bébéar's announcement as a triggering event that ‘sent a signal that a central member of the network no longer perceived a strategic value in holding shares of other companies in the hard-core network’ (p. 196). This event prompted ‘a set of discussions among other managers in the hard-core networks about the effectiveness of cross-shareholdings’ (p. 195) that led to a shift in their joint beliefs about the advantages of these mechanisms which ultimately induced a dismantling of cross-shareholding networks.
As Culpepper emphasizes, change came from the heart of the French enterprise sector, not from its edges. As such, it seems more plausible to characterize that process as one that was generated by strong enterprises rather than forced on weak ones by external forces. As to why the Axa-UAP takeover proved to be the triggering event, Culpepper claims that ‘[w]hat caused UAP to shift its strategy was its takeover by Axa, not any shift in general material conditions’ and he goes on to note that Axa was unusual among French companies in that Bébéar ‘had professed an unwillingness to engage in long-term strategic shareholding since at least 1993’ (Culpepper, 2005, p. 195).
2.3 The implications of change in the French financial system
There is debate among students of the French financial system not only about the causes of institutional change but also about the implications of that process. The idea that the French financial system in the early 21st century has undergone a systemic shift towards an outsider or market-oriented system is one that is often found in academic and popular discourse. Goyer (2001), for example, argues that ‘[t]he transformation of the French system of corporate governance is nothing short of impressive: in less than a decade, France shifted from an insider to an outsider model’. Morin (2000) also speaks of a revolution in French corporate governance: ‘[d]irectly inspired by the American "shareholder value"’ model, the largest French groups are going through a managerial revolution'.
From this perspective, the control of state bureaucrats has been diluted and the dictates of financial markets, especially the demands of foreign institutional investors, now strongly influence the actions of French corporations. Therefore, it would seem, France has developed a financial system that matches the ideal type of a liberal market economy. If this interpretation is correct, the question that naturally arises is whether the rest of French capitalism is in tune with this shift. Goyer, for example, raises serious concerns about the tensions inherent in what he sees as a mismatch between the country's newly transformed financial institutions and its long-standing social and political norms.
Schmidt (2003), in contrast, rejects the notion that French capitalism has become systemically incoherent as a result of the transformation of its financial institutions. The title of a recent article, ‘French capitalism transformed, yet still a third variety of capitalism’, suggests the spirit of her argument: ‘[w]hile France's state capitalism has been transformed through market-oriented reforms, it has become neither market capitalist nor managed capitalist. Rather, it has moved from "state-led" capitalism to a kind of "state-enhanced" capitalism, in which the state still plays an active albeit much reduced role’ (p. 526).
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3. A focus on the actors who used the French financial markets |
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TOP1. Financial systems in...2. What happened to...3. A focus on...4. Re-evaluating the causes...5. Debating the implications...6. ConclusionNotesReferences |
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In this section, I seek to shed more light on the causes and implications of change in the French financial system by focusing on the characteristics and strategies of the actors that turned to the country's financial markets to raise funds. I show that share issues undertaken in association with the French government's privatization programme were crucial to the development of the country's stock market in the 1980s and early 1990s. The government played an even more important role in the development of the bond market, dominating the market for issues until the mid-1990s and using the proceeds to fund its growing financial needs. In contrast, French enterprises initially responded to financial reform by turning inward, to retentions, thus becoming largely autonomous of external funds. However, this pattern changed dramatically in the late 1990s as issues of stock and debt by French companies to finance acquisitions, especially foreign acquisitions, played a central role in the expansion of the French financial markets.
3.1 The financial demands of French enterprises
In seeking to explain the patterns in French enterprises' dependence on the financial system for funds, a good place to start is with a long-standing and widely accepted proposition in corporate finance: that firms seek external funds only when they have exhausted their internal resources (Myers and Majluf, 1984). It suggests that firms' financing deficits and surpluses—the shortfall or excess of their internal funds or retentions with respect to their investments—will be the key determinant of their financial dependence or autonomy.
In Figure 2, I show the financing deficits generated by French non-financial enterprises from the late 1970s until the end of the 20th century. These trends in French companies' financing deficits and surpluses do not readily predict the patterns in their dependence on external finance that I have described earlier and that are shown in Figure 1. They suggest that French companies ought to have been most heavily reliant on external sources of funds during the period 1978–85. The strengthening of their self-financing capacity from then on should have made them relatively autonomous of the financial system for funds. Only for the short periods from 1989 to 1992 and again in 2000 and 2001, when they ran deficits, would one expect to observe significant levels of external financing. Therefore, the trends in French companies' self-financing capacity do not explain their unprecedented and sustained reliance on external sources of funds from the late 1990s through 2001 (Banque de France, 2002).
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There are a range of possible reasons as to why the relationship between French companies' internal sources of funds and their capital expenditures does not predict their patterns of external finance. One possibility is that the surpluses of French companies which did not need external finance obscure the deficits of those which were dependent on it. It is also conceivable that companies which raised external funds allocated them to uses other than the funding of real investment. There are several other possibilities too and there is no way to distinguish among them using aggregate data. Instead, the most direct and systematic way to identify what happened is to collect and analyse data on the issuers who raised external finance, especially market sources of finance, since it is here that the most dramatic changes occurred.
As I show, many of the security issues that took place on France's financial markets were used for purposes that are not captured as part of real investment or gross fixed capital formation in the aggregate data for non-financial enterprises. For example, acquisitions, since they involve transfers of ownership over existing assets rather than the formation of new assets, are not included in economy-wide measures of gross fixed capital formation. In addition, the proceeds from privatization transactions were largely channeled to fund government needs and, therefore, had no direct impact on the investment programmes of the corporations whose shares were sold. It is because of the importance of these types of transactions that we do not find evidence of any strong general relationship between the deficits and surpluses of the enterprise sector and the volume of external financing on the financial markets at the aggregate level.
3.2 Issuers on the French stock market
On the basis of firm-level data, compiled from the annual yearbooks issued by the Societé des Bourses Françaises (SBF), the total cash proceeds raised by French listed companies through public share issues on the French stock market are plotted in Figure 3 for the period 1978–2001.6 These data show that the French stock market reached an important turning point in 1985, with all subsequent years registering higher levels of public share issues than had been seen until then. However, the annual figures are volatile; only from 1996 to 2001 do we observe sustained high levels of stock issuance by listed companies, although rising from a low point in activity in the mid-1990s.
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Public share offerings for cash by listed companies in France can be divided into a number of major types of issues: privatizations of state-owned companies; initial public offerings (IPOs) by privately held companies; offerings by already-listed companies (seasoned offerings) of shares and share-like instruments (mostly convertible bonds); public sales of listed shares and a residual category described as ‘other’ that includes shares issued as payment for dividends. In the discussion that follows, I focus on the three most important types of transactions in terms of the volume of financing—privatizations, IPOs as well as issues of shares and convertible debt by already-listed companies—to identify the most important issuers involved in the growing activity on the French stock market as well as the purposes of their issuance activity.
Privatizations
From the launch of France's privatization programme in 1986, the sale of state-owned companies played an important role in driving the total proceeds from share issues on the stock market. As Figure 4 shows, the proceeds from privatization issues peaked in 1986 and 1987 as a percentage of GDP but, in total, more money was raised from these transactions in the 1990s than in the 1980s. Overall, for the 15-year period from 1986 to 2000, privatizations accounted for 18% of the total proceeds of public share issues by French listed companies. They reached their highest level of importance in 1986 and 1987 when they represented nearly half of the total proceeds raised through public stock issues by domestic companies, as well as in 1993 and 1994 and from 1997 to 1999 when they represented more than 30% of these proceeds.
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An analysis of the uses of the monies raised through the sale of enterprises by the state to the private sector makes it clear that the primary purpose of these privatization transactions was to shore up state finances. Of the
10.8 billion received from privatizations from 1986 to 1988, 7.0 billion (65%) was used to pay off the state debt and 3.8 billion (35%) was paid in subsidies to enterprises that remained in government ownership. Of the 16.6 billion raised from 1993 to 1995, 12.2 billion (74%) was used to finance the current expenses of the state and 4.3 billion (26%) was paid in subsidies to state-owned enterprises (Juvin, 1995). The receipts from privatizations conducted since 1996 were used primarily to finance equity loans, grants and contributions to public enterprises (Les Echos, 11 February, 1999, p. 18). In short, the vast majority of the money raised through privatization-related public share offerings in France was raised by and for the French government rather than for the enterprises that were privatized. Even when some money went to other enterprises, in the form of subsidies, it was directed to them by the government rather than the financial markets. As Juvin noted in his analysis of the financial repercussions of privatization in France:
The most compelling reason for the privatisations was the state's budget deficit. In one way or another, every privatization resulted in a flow of capital from the private sector into the coffers of the state. The primary motivation for the privatisations was financial – the need to fund the current financial requirements of the government and to pay off the state debt – rather than ideological (Juvin, 1995, translated from the original French by the author).
The money raised through the issue of corporate shares in privatization transactions flowed out of the enterprise sector to the government sector. As a result, the privatization transactions left the liquidity positions of the corporations whose shares were sold largely unchanged. Therefore, we should not expect them to have had any direct impact on the investment behaviour of the privatized enterprises.
Stock offerings other than privatizations
As Figure 4 shows, at the beginning of the period, the proceeds from stock offerings were very low, at only 0.1% of GDP in 1982. They were volatile for the decade or so that followed with alternating peaks and troughs in the scale of issuance activity. The deepest trough was recorded in 1995 when these stock issues collapsed to a mere 0.2% of GDP. From then on, there was a steady rise in their importance to reach all-time highs for the period of 1.1% of GDP in 1998, 1.2% in 1999, 1.7% in 2000 and 1.7% in 2001. Stock offerings other than privatizations consist largely of seasoned offerings of stock and convertible debt and IPOs, and these two categories of issue are discussed in greater detail subsequently.
Seasoned offerings of shares and convertible debt
Until the mid-1980s, issues of shares and share-like instruments by already-listed companies dominated the limited capital-raising activity by French companies. They amounted to 95% of all cash raised through share issues from 1976 to 1980 and 88% from 1981 to 1985. As share issuance activity picked up, their share declined to 62% from 1986 to 1990 and about 40% in the 1990s. Nevertheless, they still remained the most important category of public share issue in France.
In absolute terms, the proceeds from seasoned share offerings on the French stock market have increased substantially since the early 1980s but they have been very volatile. Only in the late 1990s was there a steady increase in the proceeds that they raised. Issues of convertible bonds also steadily increased from the mid-1990s, although from the very low level that they attained in 1995. For 1996–2001, French companies raised almost 60 billion from seasoned offerings, of which 24 billion was raised through seasoned stock offerings and a further 36.2 billion through convertible debt issues. These totals compare with proceeds of 30.2 billion from IPOs over the same period and 19.5 billion from privatizations.
When companies sell shares on the French stock market,7 they can issue them on any one of the country's three regulated stock markets: the Premier Marché (PM), the Second Marché (SM) and the Nouveau Marché (NM).8 The vast majority of the proceeds of seasoned issues benefited large companies listed on the PM. Their seasoned offerings of stock and convertible debt amounted to more than 91% of the proceeds of all such offerings from 1991 to 2000. In contrast, the SM accounted for about 6% of the total and the NM for just over 2%.9
An analysis of the uses of the proceeds of seasoned issues of shares and convertible debt shows that they served two major purposes: the reduction of debt and, especially in the late 1990s, the funding of acquisitions. Information on the stated uses of the proceeds of the largest 15 seasoned issues of shares from 1991 to 2000 and the largest 15 issues of convertible debt from 1993 to 2000 is shown in Table 2. These issues accounted for more than 50% of all seasoned issues of stock and 48% of all convertible issues for the periods in question. Particularly notable is the fact that acquisitions overwhelmingly dominated as an intended use of the proceeds of these issues from the mid-1990s on when seasoned issues reached particularly high levels. Moreover, to the extent that these issues in the second half of the 1990s were used to re-finance debt, it tended to be acquisition-related debt.
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These patterns beg the question of why French companies were raising cash to fund their acquisitions. In principle, companies can issue shares in exchange for the shares of other companies. In fact, French companies did this in the late 1990s as the extent of their merger and acquisition (M&A) activity soared to unprecedented heights. However, the trend towards the use of shares as the preferred medium of exchange in acquisitions by French companies was stronger for domestic than for foreign transactions (based on an analysis of data from Thomson Financial). These companies paid for many of their largest foreign acquisitions in cash, a fact that explains their recourse to the share or convertible debt markets to finance these purchases. The main reasons for the lesser reliance on shares in foreign acquisitions seem to be the reluctance on the part of shareholders of foreign companies, and the inability of some US and British institutional investors, to accept shares of French companies as payment for M&A transactions.10
Initial public offerings
Although the IPO is the capital-raising transaction most readily associated with the stock market, IPOs have never dominated the proceeds from French share issues. In the years prior to 1986, they accounted for at most 15% of the total proceeds of public share issues. During 1986–95, they were never higher than 5% of overall proceeds, and they usually amounted to less than that. From the mid-1990s on, however, their relative importance increased, and during 1996–2000, they accounted for 15% of the proceeds raised through public share offerings.
The growth in IPO activity from the middle of the 1990s was even more dramatic in absolute terms, with the value of IPO proceeds reaching unprecedented levels in the last five years of the century. From 1996 to 2000, they amounted to an average annual total of 3.47 billion compared with an average of 385 million for 1991–1995.11 There was also a dramatic growth in the number of companies going public in the late 1990s. From 1996 to 2000, an average of 72 companies completed IPOs each year in France compared to an average of 14 companies in the first half of the 1990s.12
Most of the companies that went public in the late 1990s listed their shares on the SM and the NM, markets that the French stock exchange created in 1983 and 1996, respectively, to facilitate listings by smaller, less-established companies. However, in terms of the amount of money raised in IPOs, large firms listing on the PM continued to dominate. From 1974–2000, transactions on the PM accounted for 59% of the total cash raised in IPOs compared with 27% and 14% for the SM and NM, respectively. The dominance of the PM was actually greater in the late 1990s, the period of peak IPO activity, than earlier; IPOs on the PM accounted for 68% of all IPO proceeds for 1996–2000 compared with 14% for the SM and 18% for the NM.13
A list of all the IPO transactions on the PM in which cash was raised14 is provided in Table 3. Although they are few in number, they account for 100% of all cash raised in IPOs on the PM and 77% of money raised in all IPOs on the French stock market (PM, SM and NM) for 1991–2000. An analysis of each of the transactions conducted during the 1990s shows that the raising of capital for the listing company was not the primary motivation for any of these transactions. In some cases, all of the proceeds of the IPO were paid, not to the company going public, but to the previous owners of the businesses. In other cases, such as Neopost and Business Objects, even when the listing company did raise capital for its own purposes, it represented only a minority of the proceeds of the public offering; once again the primary motivation for these IPOs was to liquidate the stakes held by existing shareholders in the listing company.
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There were signs of a change in the character of IPO activity in the year 2000. Even if some IPOs still served the purposes of liquidating shareholders, in most transactions that year a much higher proportion of the IPO proceeds went to the listing companies. However, closer inspection of the largest transaction that year, the IPO by Vivendi Environnement, shows that even these transactions were designed to serve the financial needs of the parent rather than the subsidiary. Vivendi transferred a huge amount of the debts of the Vivendi group to Vivendi Environnement, and the IPO did little to help the newly listed company meet the enormous financial burden that it inherited.
The year 2001 saw the return of spin-offs undertaken for the direct benefit of the parent company rather than the newly listed entity. The sale of shares in Orange by France Telecom dominated the year's activity, raising a massive but disappointing 6.9 billion for the beleaguered parent. Alcatel also spun off its cable business in the IPO of Nexans and absorbed all of the proceeds for its own purposes.
The identity of the companies using IPOs to spin off parts of their businesses suggests an important connection between transactions to retrench and extend corporate boundaries. Alcatel, France Telecom, Vivendi and Rhône-Poulenc (re-named Aventis subsequent to its merger with Hoechst) were all engaged in, or recovering from, major acquisition programmes at the time of their spin-offs. In some cases, there was an even more direct relationship between IPO and acquisition activity. JC Decaux went public in 2001 and retained most of the proceeds of the transaction to re-finance the debt it had assumed in pursuing an aggressive strategy of external growth and to fund future acquisitions. This relationship was even more marked for companies going public on the NM. For them, the use of the proceeds of their IPO to fund external growth was a common strategy.
3.3 Issuers on the French debt markets15
Turning now to the development of the French debt markets—the bond and commercial paper markets—I find that the government played an even more influential role in their expansion than it did for the stock market through its privatization activity. Indeed, until recently, the French state—the central government as well as public and semi-public agencies—dominated the growth of the bond market. The state's share of French bond issues rose from negligible levels in the mid-1970s to about 25% in the mid-1980s and 40% by the beginning of the 1990s. It then rose sharply to more than 70% of total bond issues by 1993 and remained at levels of between 60 and 70% through 1998.
The second most important category of issuers on the French bond markets were financial institutions, including banks and specialized financial institutions, which used bond issues primarily in the management of their businesses. They accounted for about 50% of the market capitalization of the French bond market in the 1980s. Their share declined in the early 1990s but they still remained the second most important category of bond issuers.
Non-financial enterprises came third in importance as issuers on the French bond markets. They accounted for only 16% of the capitalization of the French bond markets in 1985 and their share declined to about 13% by the mid-1990s. This category included large state-owned enterprises—the so-called grandes enterprises nationales (GENs) including La Poste—which accounted for 10% of bond market capitalization in 1985 and between 8 and 9% in the early 1990s. Therefore, the share of private non-financial enterprises in bond market capitalization was only about 5% through 1995.
Similar patterns can also be observed in the French commercial paper market. It grew rapidly from its establishment in 1985 and, by the early 1990s, it was the largest domestic market for commercial paper in Europe. At that time, issuance was highly concentrated with state and financial institutions accounting for more than 90% of total issues (Icard and Drumetz, 1994).
Given these characteristics of the French debt markets, it seemed reasonable to conclude in the mid-1990s, as Juvin did, that: ‘[t]he modernization and development of the French financial markets served the dual role of financing the public debt and facilitating the sale of public enterprises much more than the purpose of financing the private sector’ (Juvin, 1995, translated from the original French by the author). However, that changed in the second half of the 1990s as non-financial enterprises became more important to the development of the bond and commercial paper markets, a trend that once again was driven by their acquisition-related financing needs.
The state's share of French bond issues declined from 70% in 1998 to 44% in 1999 and 43% in 2000, although it ticked up again to 59% in 2001. The share of financial institutions also declined rather sharply in the 1990s and amounted to only 15% by 2001. In parallel, the share of non-financial enterprises in total bond issues increased to reach 30% by 2001. Issues by GENs accounted for about one-third of these issues, with private non-financial enterprises contributing the other two-thirds.
The growing volume of bond issues by the largest listed French companies and, more generally, their rising debt levels was strongly associated with their growing propensity to expand, especially internationally, through external growth. On the basis of firm-level data for the 98 non-financial companies in the SBF 120 index, Picart (2003) showed that companies that internationalized most in the late 1990s were those that experienced the most rapid increase in indebtedness. Rising indebtedness was not confined to two or three large corporations; in fact, 39 of these 98 groups more than doubled their debt levels from the late 1990s.
Similar forces were at work in the market for commercial paper in the late 1990s. Between 1995 and 2000, there was an increase in commercial paper outstanding, from 22 billion to 80 billion,16 with most of the increase occurring from mid-1998 on (Sahatdjian, 2001). The market remained highly concentrated—the top 21 issuers, each with more than 1 billion outstanding, accounted for 66% of the total market—but by 2000, large corporations dominated the list of the major issuers (Sahatdjian, 2001).17 The market for commercial paper proved to be a highly flexible source of short-term finance for the acquisitions of the leading French enterprises that were its major users (Rahmouni, 2000; Sahatdjian, 2001).
For the first time, therefore, French companies really took advantage of the debt markets. It was the largest companies in France, the listed companies included in the SBF 120 index, as well as state-owned enterprises, that did so. Only they experienced a major increase in overall debt levels in the late 1990s. In contrast, there was a gradual reduction in the indebtedness of other types of non-financial enterprises in the late 1990s. As a result, by 2000, SBF 120 companies and state-owned enterprises accounted for 52% of the indebtedness of non-financial enterprises compared with only 30% of their aggregate value added (Picart, 2003, p. 213).
Issues by medium and small listed companies accounted for a negligible share of total issues of bonds and commercial paper. For most French SMEs, the standard source of external debt remained the banking system. Their continued use of bank credit is an important factor in explaining the ongoing importance of the banking sector in the French economy. Although the rate of intermediation, as measured by the importance of bank finance relative to other external sources of funds, declined throughout the French enterprise sector, it did so at a slower rate and remained at a higher level for SMEs than for larger companies.
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4. Re-evaluating the causes of change in French finance |
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TOP1. Financial systems in...2. What happened to...3. A focus on...4. Re-evaluating the causes...5. Debating the implications...6. ConclusionNotesReferences |
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My analysis of the behaviour of the actors who used the French financial markets in recent decades provides a basis for filling out, qualifying and confronting some of the standard explanations that scholars have provided for the transformation of the French financial system and, in particular, for the growth in the importance of financial markets. As I noted earlier, several scholars have suggested that reforms in the formal rules and regulations that governed the French financial system largely explain its transformation. However, this is, at best, an incomplete explanation, and an analysis of the behaviour of the actors that used the financial system to raise funds is necessary to fully understand when and how important changes in the financial system, notably the expansion of financial markets, occurred.18
4.1 A focus on rule enactment as well as rule making
Developments in the rules that governed the French financial system were not, in and of themselves, sufficient to bring about an expansion in the scale of financial markets. Financial reform certainly brought about important changes in the financing options available to French companies by eliminating the favourable credit terms to which they historically had access and making market-driven financing options more readily available. These developments did stimulate important changes in the financial behaviour of enterprises but not the ones that one might expect without taking explicit account of enterprise characteristics and strategies. In particular, although they were effective in prohibiting French enterprises from relying on traditional sources of external finance, they did not necessarily induce them to take full advantage of the new options that were, in principle, available.
Leading French enterprises responded by increasing their internal funds, thus weaning themselves off external financing. Crucial to that effort was their success in raising their profitability, which they did in part by improving their competitive performance and also by reducing the returns paid to employees in the form of wages and salaries.19 Both of these outcomes were achieved through a massive process of restructuring undertaken by these enterprises in the 1980s, in many cases with the direct assistance of the French state (Amable and Hancké, 2001). It was also facilitated by changes in government policy, notably, the removal of wage indexation. In addition to raising their profits, these enterprises also increased their retention rate from a low point of 39% of profits in 1981 to 58% in 1988.
These changes made France's leading enterprises much less dependent on external funds than they had been before. Since these enterprises were the ones which, in principle, had the readiest access to financial markets,20 it is not surprising that issuance activity by private enterprises was rather subdued for most of the 1980s through the mid-1990s. Although there was a substantial increase in stock issues in the mid-1980s—with levels of issuance thereafter attaining higher levels than had been previously attained, if we exclude the government's privatization programme—stock issues remained relatively low, amounting to not more than 1% of GDP and usually considerably less than that. A similar observation can also be made with respect to the country's bond markets, although here French financial institutions were also significant users.
The growth in French financial markets that did occur, therefore, was largely in response to changing government demands for finance. The French public administration was the other major deficit-generating sector in the French economy from the late 1970s until 2001. Its deficits grew from 1.3% of GDP in 1978 to 2.9% in 1982 and then to 3.2% in 1986. The government managed to bring them under control, to 2.5% of GDP or less, from 1987 to 1991. However, in the early 1990s, they soared to unprecedented heights of 6% in 1993 and remained high until 1997, before declining to less than 2% in 1999, 2000 and 2001.
The state's growing financial deficits provide important context for understanding the growing commitment, across party lines, to privatization. They also explain the government's increasing importance as an issuer on the country's debt markets. Government bond issues moved closely in line with the scale of its deficits reaching all-time highs, in absolute and relative terms, in the early to mid-1990s, but declining from the late 1990s as the state's financing deficits contracted.
There was a temporary change in this picture from 1989 to 1991 when a deterioration in the overall financial condition of the non-financial enterprise sector led to a corresponding increase in their demand for external finance. There was also a significant increase in external funding by large French enterprises, mostly from the financial markets, in connection with an upsurge in their acquisition activity at the time. A much more important and sustained change in French enterprises' reliance on the financial markets was induced by a subsequent, and more dramatic, wave of acquisitions.
4.2 M&A and domestic, European and global product markets
M&As involving French companies over the last 25 years have occurred in two important waves. There was an initial boom in the number and value of these transactions from the mid-1980s through the early 1990s and then a much larger boom, in the numbers, but especially in the value, of M&A transactions, from the mid-1990s through 2003. French companies completed 7521 acquisitions for a recorded value of $872.2 billion during 1986–2003 compared with 5799 completed transactions for a much smaller total value of $237.4 billion during 1986–1995.21
A strengthening of French companies' positions in their domestic market was an important motivation for both waves of merger transactions, although it was somewhat more important in the earlier period than in the later period. In both periods, the majority of the acquisitions undertaken by French companies concerned domestic targets, accounting for 72% of all targets during 1986–1995 and 65% during 1996–2003. Domestic acquisitions were, however, less important as a share of the value of French acquisitions, representing 54% of the recorded value of all French acquisitions during 1986–1995 and 48% during 1996–2003. This difference reflected the larger average size of foreign, compared with domestic, transactions. If we focus on the very largest acquisitions undertaken by French companies, since it was these transactions that tended to be funded through security issues on the financial markets, we find that domestic targets remain significant but less so, accounting for 40% of the number and 44% of the value of the largest 100 French acquisitions during 1996–2003.
An analysis of the geographical breakdown of the foreign targets of all French acquisitions reveals that the strengthening of their positions in the EU market was also an important objective for French companies' external growth strategies. In the first wave of acquisitions from 1986 to 1995, EU member states accounted for as many as 64% of all foreign targets. That proportion declined during the second and much larger wave of acquisitions but it remained very important at 51% of the total number of foreign transactions.
As for domestic transactions, so for foreign transactions, the ones that tended to be financed through security issues on the financial markets were the very largest acquisitions. An analysis of the geographical breakdown of the 100 largest foreign acquisitions by French companies during 1996–2003 is shown in Table 4. It underlines the importance of the EU countries in the distribution of foreign targets since they represented 57 and 53%, respectively, of the number and value of all foreign acquisitions.
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However, Table 4 also reveals that among the EU countries it was the UK that dominated in terms of the number (16%) and, especially, the value (22%) of all foreign acquisitions by French companies. Moreover, these data also show that the North American region, with 32% of the number, and as much as 41% of the value, of the largest foreign acquisitions by French companies, was crucially important as a target for French companies. Taken together, indeed, the UK and North America accounted for 48% of the number and 63% of the value of the largest 100 foreign acquisitions undertaken by French companies.
This discussion highlights the fact that the external growth strategies of French companies were designed to strengthen their positions in a number of geographic regions with the home country, the EU region and especially the UK, as well as the North America region, featuring as particularly important in the distribution of the very largest targets acquired by French companies during 1996–2003. A comparison of the two-digit SIC codes of acquirer and target firms reveals that most acquisitions by French companies—60% of their largest 100 domestic acquisitions and 66% of their largest foreign acquisitions—took place within the same industry. Therefore, consolidation within product markets, rather than diversification across product markets, predominated as a motive for both types of transaction.
An analysis of the industrial classifications of the largest French domestic and foreign acquisitions by two-digit SIC codes shows that the financial, communications and transportation equipment sectors were particularly important in both cases; these three sectors together accounted for 46% of the largest 100 domestic acquisitions and 37% of the largest 100 foreign acquisitions by French companies during 1996–2003. However, there were also sectors in which there was little overlap; for example, real estate and construction companies were important targets of domestic, but not of foreign, acquisitions, whereas companies in electric, gas and sanitary services as well as in stone, clay, glass and cement were important among foreign, but not domestic, acquisitions. More generally, acquisition activity by French companies, both at home and abroad, was spread across 30 different two-digit SIC codes. This suggests that the external growth of French companies cannot be construed as a strategic response to the dynamics of a small number of industries. Instead, it seems to have been motivated by a more general perception of a need for French companies to consolidate their competitive positions in their domestic market, the EU and in North America in the face of the integration of product markets brought on by globalization.
What is important about my explanation is that, in emphasizing the role of globalization in inducing change in financial institutions, it suggests that changes in product markets, or more precisely, managerial perceptions of these changes, were the crucial development. The transmission mechanism for the impact of this type of globalization on the French financial system was managerial behaviour, notably the strategies for external growth that corporate managers designed and implemented. Here my argument joins forces with that of Culpepper's in emphasizing the importance of actors at the heart of the French corporate economy in bringing about change. However, my analysis focuses on these actors' strategies, whereas Culpepper's argument focuses on their cognitive perspectives.
Ideally, these approaches should be complementary rather than alternatives, at least if we assume that there is a relationship between thought and action! And the importance of external growth in the strategies of French companies provides an important context for thinking more concretely about French executives' beliefs and their influence on the actions that they undertook. The example of Axa, a crucial player in the process of change, suggests that there may be something useful to be gained by thinking about the relationship between managerial thought and action in these terms.
Bébéar took the helm of the company in 1982 when it was still a medium-sized enterprise. For the rest of the 1980s, he expanded the company's business in France largely through acquisition. In 1991, following a reorganization of its French insurance activities, the company embarked on a strategy to geographically expand and diversify its business. Axa made several large acquisitions in the US and Australasia in the first half of the 1990s. Its merger with UAP marked a continuation and acceleration of its global ambitions. In explaining the logic of the deal, Bébéar said the two companies each had to make the same decision in the face of global competition: ‘Either find a niche or get big and fight’ (International Herald Tribune, 13 November 1996).
To fund a strategy of getting big and fighting, Axa needed all the resources it could muster. In its 1996 annual report, it explained its investment and financing policy in the following terms: ‘[t]he Company plans to finance future acquisitions and strategic investments from funds retained from operations, from the issue of bonds and shares and from the sale of non-strategic assets’. It was the strategic imperative of its global expansion that explains why Axa was so eager to liquidate UAP's holdings in other French companies, especially as their stock prices rose in the late 1990s. Culpepper's alternative hypothesis, that Bébéar's distaste for ‘long-term strategic shareholding’ was the key issue, seems much less plausible given that he was willing to live with Mutuelles Axa as Axa's principal shareholder throughout his tenure; in 2002, the mutual company still held more than 30% of the voting rights in Axa.
Moreover, the growing importance of external growth for other leading French companies from the mid-1990s helps explain why they followed suit when Axa led the way. Faced with similar incentives to those which confronted Axa, other large French companies also liquidated their holdings of shares in privatized enterprises to contribute to the funding of their mergers and acquisitions. Therefore, if we want to further advance our understanding of the causes of change, what needs to be explored is why French corporate executives felt compelled to embark on particularly aggressive strategies of external growth from the 1990s on.
Certainly, one can point to changes in certain objective conditions, notably the growing integration of product markets around the world, which may have induced French managers to collectively attach such great importance to external growth. Nevertheless, the cognitive aspect of what occurred is important in its own right and cannot be understood as, or reduced to, a mechanical response to objective material conditions. As Ghemawat and Ghadar (2000, p. 66) pointed out, although many managers pursued mega-mergers in the belief that a globalizing world necessitated large scale, ‘there's no evidence to support this premise’ and ‘[t]he theoretical links between the globalization of an industry and the concentration of that industry are weak’.
4.3 Foreign investors and global financial markets
My explanation can be contrasted with another standard account of the role of globalization in prompting change in financial systems which focuses on the global integration of financial markets as the crucial development and locates the transmission mechanism in foreign institutional investors' financial strategies. There is no question that French companies' use of financial markets to fund their external growth has brought them into much closer contact with portfolio shareholders, including foreign institutional shareholders, than was previously the case. They developed an interest in courting financial markets to persuade them to underwrite their strategies of external growth. As a result, French corporate executives were often willing to countenance ‘investor-friendly’ changes in corporate governance of the type that Goyer (2001) identifies (see also Goyer, 2003). More generally, many leading French companies shared an interest in common with portfolio investors in rising stock valuations.
However, that is not the same as corporate managers being subject to the control of portfolio investors. During the period of the rapid expansion of the French financial markets, there is little direct evidence that portfolio shareholders gained such control. A recent study, carried out under the supervision of Yves Mansion on behalf of L'Autorité des Marchés Financiers (AMF),22 reported that in the late 1990s only 40% of the share capital of leading French companies was represented at their annual general meetings. This rate of participation was lower than that reported for Germany (47% for DAX companies) as well as the UK (57% for FTSE 250 companies) and was far behind the rates of 80% and 83%, respectively, for the US and Japan (Mansion, 2005, p. 7). The Mansion report also noted that levels of participation by foreign investors were particularly low on the basis of an estimate that only 19% of the shares that they held were represented at French annual general meetings in 2004 (Mansion, 2005, p. 10).
In fact, French rates of shareholder participation at shareholders' meetings were sufficiently low to create problems for French companies in attaining the quora at annual general meetings which were required by law. These quora are higher for the first convocation of the meeting but decline substantially23 if the meeting has to be called for a second time. The report noted that, in 2005, 51% of the CAC40 companies surveyed held their general meetings on the second convocation, which allowed them to achieve their quora on the basis of extremely low standards of shareholder participation (Mansion, 2005, p. 8).
Even when shareholders participated in general meetings, moreover, they tended to vote with management. As a result, in 2001, only 1.23% of all resolutions at French annual shareholders' meetings were contested (Mansion, 2005, p. 9). In short, it seems that shareholders in French listed companies have historically proven extremely reluctant to exercise their influence through the ‘voice’ that their voting rights accord them. In the wake of the major decline in financial markets from 2001, the French government has taken steps to increase shareholder participation and oversight at annual shareholder meetings.24 There are signs that these efforts have induced higher participation by shareholders at annual meetings as well as greater contestation of management proposals25 but these developments are responses to, rather than the causes of, the developments in financial markets and M&A activity that I have described herein.
It is, of course, possible that shareholders could exercise an influence over French listed companies by registering their disapproval of corporate managers through the sale of their shares, in other words, through ‘exit’ rather than ‘voice’. It is very difficult to generate measures of the extent and impact of this type of behaviour, and few of the analysts who believe that it is an important influence on French corporations rely on systematic measures of its importance. Instead, they invoke particular instances in which foreign institutional investors are believed to have disciplined French corporations for behaviour that conflicts with the norms of the global and, more specifically, the Anglo-American, investment community.
The case of Alcatel and Fidelity has become the canonical example of this type of behaviour in France, and commentators on recent changes in French corporate governance frequently invoke it to underscore the extent of influence that foreign institutional investors can potentially wield over French corporations. On September 18 1998, Alcatel's share price plummeted by an extraordinary 38%. The collapse came in the wake of an announcement by the company that it was adjusting its profit forecast downwards to reflect a sharp decline in orders in the market for telecommunication equipment in Europe. The company was accused by analysts of withholding this information for several weeks and releasing it only after it had concluded its acquisition of DSC, an American company, in a deal in which its shares were used as consideration.
In the days that followed, commentators pointed their finger at the foreign institutional investors who had become more and more visible as shareholders in French companies. As Les Echos put it: ‘this slaughter raises the question of the influence of foreign investment funds on the Paris Bourse and, as a result, the vulnerability of French groups’. The paper quoted Serge Tchuruk, the Alcatel CEO, as saying that the company's share price collapse had been provoked by the speculative withdrawal of funds by pension funds and arbitrageurs (Les Echos, 22 September 1998, p. 32). In particular, a rumour spread that Fidelity, the American mutual fund, had led the charge to punish Alcatel. Fidelity was reportedly Alcatel's largest shareholder at the time. It had held more than 10% of the company's shares in 1997 and, although its stake had fallen below that threshold in early 1998, Alcatel reported that it still held about 7.6% of the company's share capital before the debacle (Les Echos, 22 September 1998, p. 32).
In fact, it is not at all obvious that Fidelity led a charge to drive down Alcatel's share price to punish the company. An analysis of data provided to the Conseil des Marchés Financiers on the purchase and sale of significant stakes in the capital of French listed companies suggests problems with this view. Fidelity's stake in Alcatel fell below the 10% threshold on March 9, 1998, long before the dramatic decline in the share price in September 1998 (COB, 1998, various issues). The next major change in Fidelity's holdings in Alcatel was recorded in October 1998 when its stake in the company fell below 5%. This development was reported as being, in part, a result of the sale of Alcatel shares by Fidelity on September 25, 1998 (COB, 1998, various issues; La Tribune, 6 October 1998, p. 32), an action it took one day after Tchuruk announced a major stock repurchase programme, which immediately drove the company's share price up by 10%.
Therefore, although it is certainly possible that Fidelity sold some of its Alcatel shares in response to the September 1998 announcement, it seems that it still retained the majority of its stake, a share of more than 5% of the company's share capital, until one week later. Between September 16, 1998 and September 25, 1998, Alcatel's share price fell from FF 985 to FF 570, a decline of 42%, which represented a major loss for Fidelity on the stake that it retained in Alcatel until after the decline. Given this fact, it is hard to understand the rationality of Fidelity's purported involvement in an attempt by foreign investors to punish the French company by driving its price down. If that had been its intention, one would have expected it to exit entirely from Alcatel's shareholding structure rather than bearing the brunt of the share price decline on the substantial stake that it retained.
Absent other evidence, therefore, it is difficult to understand why Fidelity would have done what many commentators claim it to have done. Moreover, many other foreign investors hold much smaller stakes in Alcatel and in other French corporations and they thus have a much more limited capacity, even in theory, to use these stakes to punish companies for failing to conform to what they believe are high standards of corporate governance. In the end, the possibility that foreign investors simultaneously arrived at the same conclusion, that Alcatel needed to be taught a lesson by the financial markets, and bailed out of the company's shares to drive its stock price down cannot be ruled out on the basis of the limited public data that exist on the sale and purchase of shares by particular investors. Yet, it must also be admitted that there is no evidence that shows that this occurred even in this canonical case. As a result, an alternative explanation remains plausible: the precipitous decline in Alcatel's share price in September 1998 may have reflected a sharp reverse of the investor hubris that had surrounded Alcatel stock until then given concerns about its fortunes in its most important market (Carpenter et al., 2003).
In summary, on the basis of the previous discussion of the evidence that exists on the exercise of voice and exit by shareholders in diffusely held French corporations, there seems little basis for concluding that portfolio shareholders played a crucial role in driving their behaviour in the late 1990s and early 2000s. In corporations with more concentrated ownership structures, where insiders maintained substantial stakes, it seems even less likely that foreign portfolio shareholders exercised an decisive influence on the strategies that managers pursued. Most listed French companies had such shareholding structures in the late 1990s and early 2000s (Faccio and Lang, 2002; Sraer and Thesmar, 2006). In light of this fact, it is hardly surprising that some of France's most acquisitive companies did not have diffuse shareholding structures at least when they embarked on their aggressive strategies of external growth in the 1990s. France's most acquisitive companies at this time represented a heterogeneous mix that included widely held companies like Alcatel, Danone and Vivendi and also state-owned enterprises such as France Telecom and closely held corporations like LVMH and PPR. Most of them, companies such as Aventis, Axa, Cap Gemini, Carrefour, Suez and Valeo, stood somewhere in between, with at least one shareholder holding more than 10%, but less than 40%, of the voting rights.
Not only does it seem implausible that pressures from portfolio investors were the crucial causal mechanism in the growth of the French financial markets, it appears that the growing role of these investors, including foreign institutions, in the ownership structures of French corporations may have been more of an outcome, than a cause, of that transformation. French corporations' overseas acquisitions were recently pinpointed by the Banque de France as an important reason for the rise in the foreign ownership, especially by US and British institutional investors, of French companies (Banque de France, 2004).
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These days, as I noted earlier, the idea that French capitalism in the early 21st century has undergone a systemic shift from a government- to a market-dominated system largely because of the transformation of its financial system is a view that is often expressed in academic and popular circles. From this perspective, the French state now lacks the means to exert a substantial influence on the decisions of French corporations. In its stead, the financial markets, and especially foreign institutional investors, now strongly influence corporate actions.
There has been an important and clear-cut change in the distribution of corporate control in France as a result of the marked reduction in the capacity of the state to directly influence the French corporate sector. That change occurred in part as a result of the systemic change in the financing of French enterprises that led to a decline in the role of the state in the allocation of financial resources to business enterprises. It also resulted from the massive transfer of ownership of corporate enterprises from the public to the private sector through successive privatization programmes.
The intention behind this transformation was to replace the old system with a new, constrained system of market finance in which enterprises used markets to finance their activities but were protected from market or outsider control through the system of cross-shareholding. However, until the mid-1990s, it was the government rather than firms that benefited most from the expansion of the financial markets. French companies did turn to the financial markets in a major way from the late 1990s but, in parallel, the mechanisms that had been instituted to protect them from outside investors unraveled, largely as a result of corporate initiatives.
I have argued until now that insiders, corporate managers who were largely insulated from the pressure of financial markets, initially by networks of cross-shareholdings, and then by concentrated stakes and the passivity of portfolio shareholders, precipitated the crucial changes that made financial investors more prominent in the French system of capitalism. However, that is not to say that these insiders could control what happened once they initiated these changes. In principle, it is possible that an unintended consequence of their actions was that they ceded control of the corporations that they managed to outsiders, notably portfolio, and especially foreign, investors.
However, as a general proposition, this position is hard to sustain. Rather, the likelihood of a contest for corporate control between insiders and outsiders depends on more specific circumstances, when at least one of two types of conditions is satisfied. First, to the extent that a company is subject to serious constraints in financing its operations, financial markets may be able to exert considerable influence in defining the terms and conditions on which new funds are made available. Second, pressures from financial markets may be exerted on companies through the market for ownership, rather than the market for finance, if their ownership structures make them vulnerable to hostile takeovers. Both of these conditions, separately and sometimes together, have characterized several leading companies in France in recent years, and in those cases they have indeed tended to precipitate a contest for the control of the company in question.
A number of major French companies have found themselves in vulnerable financial positions as a result of their heavy reliance on aggressive strategies of external growth. Sustained losses and high debt levels have forced companies such as Alcatel, EDF, France Telecom, Infogrames, Suez and Vivendi to turn to the financial markets when they are weak to get access to additional resources. They have typically undertaken extensive asset sales as part of major restructuring processes to increase profits and reduce their financial needs. In the process, some senior executives have lost their jobs to take responsibility for the strategic decisions that plunged these companies into financial crisis.
The other way in which outsiders have gained influence over French companies is by bidding for their ownership in takeover battles. The greater diffusion of share ownership that characterizes some of France's leading companies today has certainly made them more vulnerable to takeover threats.26 For example, in July 2003, the Canadian company, Alcan, launched a successful hostile bid to secure control of Péchiney, its French competitor in the aluminium industry (Financial Times, 29 January 2004, p. 21). Shortly afterwards, in January 2004, Sanofi-Synthélabo, the French pharmaceuticals company, announced a hostile bid to acquire Aventis, its much larger counterpart. The bidder was reportedly stimulated to action by fears of its own vulnerability to takeover given the decisions by its two main shareholders, Total and L'Oréal, not to renew their shareholding pact when it expired later in 2004. Jean-Francois Dehecq, Sanofi-Synthélabo's chairman, was a board member of Péchiney when it was acquired by Alcan and ‘[t]he lessons he apparently learnt were that these days you must grow not to be gobbled up and a hostile bid was possible even in France’ (Financial Times,27 29 January 2004, p. 21).
However, we cannot conclude from these and similar examples that French corporations are systematically vulnerable to the pressures of financial markets as a result of their financial and/or ownership characteristics. If we analyse the financial condition of French listed companies, for example, there is little evidence of a general increase in their financial fragility. Although their internal sources of funds have declined recently, non-financial enterprises continued to generate internal resources on a scale that is almost sufficient to fund their ongoing capital investments. As I have emphasized, in resorting to financial markets on a massive scale in the 1990s, French corporations did so largely to fund acquisitions. These large-ticket expenditures are a more discretionary form of investment than ongoing commitments to existing operations and, therefore, easier to defer in the face of financial constraints.
Similarly, although some leading French companies have diffuse shareholding structures today, and are therefore as vulnerable to takeover threats as Péchiney and Aventis were, many French companies, as I have already noted, maintain concentrated shareholding structures. Some leading acquirers, such as LVMH and PPR, have worked hard to limit the dilution of their ownership structures, even as they pursued aggressive strategies of external growth, with the major shareholders participating in the equity issues to finance external growth in proportion to their existing shareholdings. Large shareholders have also protected their voting power even as the percentage of shares that they held declined. In the case of Valéo, for example, its major shareholder, Wendel Investissement, maintained its share of voting rights at 15.96% in 2002 compared with 18.65% in 1997, a decline of only 14% compared with a much sharper drop of 53% in the percentage of shares that it held.
Moreover, even when the specific financial and/or ownership conditions have been in place to allow outsiders to contest the control of insiders, they have not necessarily been successful in getting their way. Vivendi is a particularly interesting example given the severity of its financial problems which reportedly brought the company to the brink of bankruptcy. Jean-Marie Messier was pressured out of office in late 2000. The Bronfman family, the company's largest shareholder subsequent to its acquisition of Seagram, had tried to remove Messier earlier but it was unable to get the approval of the board to do so. The momentum to remove and replace Messier ultimately came from quintessential insiders to the French system who ‘persuaded’ him to resign. Claude Bébéar, often described as the godfather of French capitalism, was a particularly important player even though he initially had no formal relationship to Vivendi Universal. He apparently recommended that Jean-René Fourtou, the former CEO of Rhône-Poulenc and a personal friend, replace Messier and then provided his assistance in securing the co-operation of the financial community in re-capitalizing Vivendi (Le Figaro, 27 September 2002).
In short, the French elite closed ranks to ensure that Vivendi's restructuring was undertaken by one of their own. Vivendi's experience was not unique. There have been other, even more controversial, attempts by the French elite, not just executives but also politicians, to protect French companies from the influence of outsiders. For example, Aventis initially reacted to Sanofi's bid by asking Novartis to act as a white knight. In response, the French Prime Minister, Jean-Pierre Raffarin, rebuked the Swiss company for getting involved in matters that affected France's national interest. Novartis initially announced that it would not make a bid for Aventis unless the French government remained neutral but, when the government hardened its position, Novartis opened formal merger talks with Aventis. However, the Swiss company quickly withdrew from negotiations claiming that its conditions for these talks had not been met. Shortly afterwards, Aventis agreed to merge with Sanofi to create a new French pharmaceuticals giant.
The deal's successful conclusion is widely believed to have resulted from the intervention of Raffarin and Nicolas Sarkozy, the then French Minister of Finance. The apparent justification for their involvement was the risk of ceding control over technology sectors in which France is an important player. The French government was widely criticized for its actions. However, around the same time, the French government also acted as an obstacle to Siemens' reported interest in the French engineering company, Alstom, which was in serious financial trouble. Later that year the government also supported the merger of Sagem, the French electrical equipment company, and Snecma, the state-owned aircraft engine maker, in a move widely criticized by investors. Sarkozy defended the deal, in a joint statement with the defence minister, arguing that ‘[t]he consolidation between these two French high-tech groups will pave the way for the creation of a major European industrial player’ (New York Times, 30 October 2004).
In summary, the contention that financial markets, and especially global investors, now call the shots in French capitalism seems implausible as a general claim. First, although there are specific financing and/or ownership conditions that have allowed and will continue to allow outsiders to challenge insiders for the control of French companies, these conditions are not generally representative of the French corporate sector. Second, even when these conditions have prevailed and outsiders have sought to wrest control from insiders, they have often failed to do so, as powerful members of the French elite, business executives as well as politicians, have closed ranks to prevent them from doing so.
If the financial markets do not dominate, can we then conclude, as Schmidt (2003) does, that French capitalism remains distinctive for the continuing role that the state plays in the corporate economy? Certainly, there is new talk of old ideas such as ‘national champions’ and ‘strategic sectors’ by French political and business elites. However, there is no denying that the formal mechanisms that the government has at its disposal to protect French corporations are much weaker than they were 10 years ago. That explains why other commentators are so skeptical of the broader significance of the recent efforts by the French state to intervene to protect French companies from outside interests. As Elie Cohen put it: ‘[t]he French elite still speaks as if it is in charge of industrial affairs, but it no longer has the tools’. In a similar vein, Robert Boyer argues that ‘[y]ou have a desperate effort by senior civil servants to maintain some control, but they no longer have the power’ (New York Times, 28 January 2004, p. 1).
Perhaps the only formal mechanism that the French state retains for influencing the corporate economy is the Caisse des Dépôts et Consignations which manages 220 billion in state pensions and is the largest institutional investor in the French stock market (Financial Times, 29 January 2004, p. 21). Yet, even in this case, there is ambiguity about the extent to which the government can actually influence the investment strategy of the CDC. On the one hand, the CDC facilitated the recent acquisition by Accor, the French hotel and leisure group, of a large stake in Club Med in a move interpreted as an attempt to protect the troubled tour operator from foreign takeover (La Vie Financière, 18 June 2004, p. 5). The CDC owns 6% of Ubisoft and there have been suggestions that it should increase its stake to protect the French company from foreign takeover; but as yet it has not done so. On the other hand, the chief executive of CDC is on record as saying that its role is not to perform ‘industrial meccano’ (Les Echos, 10 January 2005, p. 23).
Therefore, there do not seem to be grounds to conclude that the French state currently has the tools at its disposal to systematically exercise a direct influence over the French corporate sector. However, there are signs that it is committed to creating these tools. Already, De Villepin's government has made an important effort in this direction by issuing a national decree that allows France to veto, or impose conditions on, foreign takeovers in certain industrial sectors, which are deemed to be strategic for the country. There also seems to be a willingness among other leading politicians to move in a similar direction. Nicolas Sarkozy, the then presidential candidate for De Villepin's party, who had already shown himself willing to intervene to protect French companies from outsiders, horrified those enamoured of his supposedly liberal economic views when he lamented the loss of the control of Arcelor to Mittal Steel and declared that if he were president, then France would have a ‘real industrial policy’ (Financial Times, 30 March 2007).
However, whatever their intentions, we cannot take for granted that French politicians will be successful in their efforts to build up the tools that they seek to resist outside control of French companies. Already De Villepin's decree faces opposition from the European Commission, which has taken steps to block it, which may well culminate in the case being brought before the European Court of Justice. In a sign of Brussels' resolve not to allow a new French government to continue in this direction, Neelie Kroes, the EU's competition commissioner, took the unusual step of criticizing Sarkozy's campaign promise of a ‘real industrial policy’. Her spokesman denied she was intervening in the French election but noted that ‘[t]he commissioner does not accept any kind of artificial obstacles to cross-border investment and takeovers and we have demonstrated on numerous occasions that we will intervene’ (Financial Times, 31 March, 2007, p. 2).
If French corporate capitalism cannot be characterized as market- or as government-dominated today, then how should we think about the current institution and exercise of corporate control in France? The analysis in this paper leads to the conclusion that the French system is now characterized by managerial control, a type of corporate control that is distinguished by the autonomy of senior executives at leading French corporations to set and execute strategy with few direct constraints imposed upon them by market or government actors. There are limits to their autonomy, of course, and I have highlighted specific financial and ownership conditions that may operate to constrain them at certain times. However, in general, as I have argued, these constraints do not apply across the board. As a result, French executives have been able to exercise, and continue to exercise, considerable discretion over the direction of the corporations that they run.
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In this article, I have explored the causes and implications of the recent transformation of French financial institutions with particular attention to the enhanced role of financial markets in the economy. Based on an analysis of the actors who issued securities on the country's financial markets, I argued that the government's role as an issuer and the deficits that drove it to rely heavily on stock, bond and commercial paper issues for funds largely account for the development of the French financial markets in the 1980s and early 1990s.
However, from the middle of the 1990s, a new dynamic emerged. Leading French enterprises, in pursuit of aggressive strategies of external expansion, turned to the financial markets for funds to pay for their mergers and acquisitions and drove a major expansion in their role. From this perspective, it was the globalization of product markets that mattered to the development of French financial institutions at this time, with the key transmission mechanism for change being the strategies that French corporate managers devised and executed. This contrasts with the standard account where the focus is on the impact of financial globalization refracted through the strategies of portfolio investors.
As far as the impact of recent changes is concerned, I challenge the notion that they have created a situation in which French corporate managers are subject to the control of the financial markets. Although there are identifiable conditions, related to the financing and ownership of particular corporations, where portfolio investors can contest the control of French corporations, these conditions are not generally characteristic of the French corporate economy. Moreover, even when portfolio investors have been able to contest the control of French corporations, they have not always won because French business and political elites have been able to mount an effective defence.
However, despite the efforts by political elites to intervene to protect French companies from outside investors, I argued that the French state does not currently have the formal means at its disposal to directly influence the direction of the French corporate economy in a systematic way. Moreover, although there are efforts afoot to change that situation, the European Commission is likely to present a formidable barrier to their success. Therefore, it would be premature to conclude that the state is likely to be a central participant in shaping the direction of French corporations.
Instead, I have argued, the French corporate economy is under the control of a powerful managerial elite which operates, except under certain conditions, with considerable autonomy to shape the direction of leading French corporations. This should not be thought of as a hybrid system that represents some inchoate mix of elements of market control and government control. Rather, it is a distinct form of capitalism in which managers exercise considerable discretion, for better or worse, over the companies that they run.
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1 Some scholars have emphasized the general importance of firms as actors in analyses of institutional change (Hall and Soskice, 2001, p. 6; see also Chandler, 1990; Kogut, 1991; Lazonick, 1991; Whitley, 1992, 1999; Guillen, 2001; Aguilera and Jackson, 2003; Murmann, 2003).
2 In his influential work on financial systems, Zysman (1983) characterized the French system as an exemplar of a government-based financial system which he contrasted with the market-based systems of the US and the UK and Germany's bank-based system.
3 Financial enterprises issue securities as part of the management of their ongoing businesses, so including their financing activities in discussions of patterns of corporate finance confuses the analysis.
4 Among the most important changes that were introduced were the removal of the post-war division of labour in the financial system as banks, insurance companies and other financial companies were permitted to compete directly with each other through the 1984 Banking Act; the removal of subsidized credits in 1984 and the subsequent elimination of quantitative credit restrictions; as well as the reform and reorganization of the French stock exchanges (for detailed discussions, see Loriaux, 1991; Bertero, 1994).
5 In the US and UK economies, in contrast, these pressures have tended to come from within as domestic institutional investors have become powerful corporate shareholders on the strength of the large accumulations of pension assets that they manage. France does not have large, homegrown accumulations of pension funds that could serve as an endogenous source of pressures for financial returns.
6 The Societé des Bourses Françaises (SBF), also known by its commercial name, Paris BourseSBF SA, was responsible for the organization and operation of the French stock market. On September 22, 2000, the SBF merged with the Amsterdam and Brussels Exchanges to form Euronext, a European stock and derivatives market. Euronext operates three subsidiary holding companies in each of the three member countries but centralizes certain functions. In 2006, Euronext announced that it would merge with the New York Stock Exchange.
7 French companies can also issue stock on foreign exchanges. Given my focus on the development of the French financial system, I do not deal with these issues herein.
8 Companies quoted on the PM had to have a minimum market capitalization of 750–800 million and upon listing, they were required to sell at least 25% of their total equity to the public. Companies listing on the SM were required to have a minimum market capitalization of only 12–15 million and a public float of 10% of their equity. Issuers on the NM could list if they had a minimum capital of 1.5 million and at least 20% of that capital had to be held by the public on listing. Moreover, 100 000 shares of the capital, or shares with a total value of 4.5 million, had to be offered to the public when the company listed, of which 50% had to represent a capital increase.
9 Despite the fact that security issues were skewed towards the largest listed companies, those listed on the PM, there are significant examples of companies of medium and small size that relied heavily on stock issues to fund their external growth. In this regard, the country's game software industry merits special mention. The industry was originally dominated by the US and Japanese publishing companies which perform functions similar to music publishers in financing and marketing the development of games. However, in the 1990s, a number of medium-sized French companies, including Infogrames, Ubi Soft and Titus, propelled themselves into the top 20 global publishing companies on the basis of aggressive strategies of external growth which they funded by issuing large quantities of stock and convertible debt (Larrue et al., 2003).
10 Some French companies with listings on foreign exchanges, especially the US exchanges, were able to avoid this problem. Alcatel was perhaps the French company that made greatest use of its relative advantage in this regard to conclude share-for-share exchanges in acquisitions of North American companies (Carpenter et al., 2003).
11 The comparable figures for 1986–90, 1981–85 and 1976–80 were 378, 208 and a mere 25 million, respectively.
12 The comparable figures for 1986–1990 and 1981–1985 were 40 and 20, respectively.
13 If we analyse the relative importance of the three different markets in terms of the numbers of companies going public, we get a different impression; for 1974–2000, the PM accounted for only 7% of the 758 French companies that went public during this time compared with 72% for the SM and 21% for the NM.
14 These details relate to new listings of private companies on the PM in which capital is raised. It should be noted that many companies that list for the first time on the PM do not raise capital. These companies can be split into two groups: those that have already been listed on the SM and transfer from that market to the PM and those that formed from companies that were already listed on the PM.
15 The data underlying the following analysis were taken from the SBF Yearbooks unless otherwise stated.
16 Compared with 26.9 billion for the UK, 18.5 billion for Sweden and 13.8 billion for Germany in September 2000 (Sahatdjian, 2001, p. 64).
17 GE Capital Corporation was actually the largest issuer on the French commercial paper market in 2000 and other non-resident companies featured among the major issuers. Nevertheless, most of the largest issuers of commercial paper were large French corporations.
18 It is also useful for explaining some of the impetus for the formal reforms of the financial system. The limited and declining capacity of French companies to fund their investment from internal sources, especially from the late 1970s into the early 1980s, was important in creating pressure for financial reform. The financing deficits of the non-financial enterprise sector were running at an average of 4.5% of GDP from 1978 to 1982. As a result, they were more of a burden on the French financial system than government deficits which averaged 1.3% of GDP during the same period (Loriaux, 1991, pp. 232–240).
19 The compensation of employees represented 70.8% of the value added of French non-financial enterprises in 1978 and increased from there to a peak of 72.5% in 1982. It declined precipitously thereafter to reach 64.1% by 1989 and hovered between 63 and 65% from then until 2001 when it was 63.8% (data from www.banque-france.fr).
20 French banks responded to the transformation of their competitive environment by flooding enterprises with new money. Given the increased financial autonomy of leading French enterprises, the banking sector increasingly relied on making loans to poor credit risks and SMEs.
21 All of the following estimates are based on the author's analysis of data on mergers and acquisitions from Thomson Financial. One must be cautious in using data on the value of acquisitions from the Thomson Financial database since, in a majority of cases, these values were not disclosed. They are disproportionately available for the largest transactions and, therefore, the analysis below of the value of the largest transactions undertaken by French companies is arguably a better guide to what actually occurred.
22 The AMF supervises the operation of France's financial markets.
23 To 25% or zero for an extraordinary and ordinary meeting, respectively.
24 In particular, the ‘loi de sécurité financière’ introduced in 2003 required domestic management funds to exercise the votes which attach to the shares that they manage or explain their abstention (Les Echos, 9 February 2006, p. 29).
25 By 2005, the rate of shareholder participation in the annual general meetings of CAC40 companies had increased to 47.5% and the share of their resolutions which were contested had increased to 6.43% (Les Echos, 9 February 2006, p. 29).
26 In some cases, as for the aforementioned Cap Gemini, this diffusion was a direct result of their use of stock issues to fund external growth.
27 Quoting Jerome Calvet, the head of European M&A at Societe Generale.
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