EMCC European Monitoring Centre on Change

Financial markets as drivers of change at company level: Five case studies

These five case studies illustrate from a company perspective to what extent financial market developments and innovations in the 1990s played a role in driving change. One key characteristic of these changes is the rapid growth in the availability of equity financing. Also key was the emergence of institutional investors as major direct equity owners. While these changes in financial markets enlarged the pool of savings available for productive investments, some observers consider that, through the 1990s, shareholders have increasingly focused on short-term financial and business performance.

Financial markets experienced rapid change in the 1990s. Stock markets became an increasingly important, or a new, source of external finance for many European corporations, especially in the high-technology sector. The advent of the Neuer Markt type stock exchange extended the reach of equity financing to many smaller companies that previously would have found it difficult to tap into the pool of European equities. New stock exchanges, the modernisation of existing stock exchanges and their products, freer financial markets and a wider investor base gave rise to a new equity culture.

Financial market developments and innovations

The many legislative, regulatory and institutional changes and product innovations of the late 1980s and 1990s facilitated access to external equity finance. At the same time, high stock market valuations, especially during the second half of the 1990s, significantly lowered the cost of equity capital. Thus, the stock market valuations rendered external equity a financially very attractive source of capital.

Moreover, a market for euro-denominated non-financial European corporate bonds emerged in the second half of the 1990s as a result of European Monetary Union. This eased access to non-bank debt finance for larger European non-financial corporations.

Investors followed and the share of equity investments in households’ portfolios quickly grew, particularly during the latter part of the last decade while stock prices were rising rapidly.

Altogether, the 1990s were marked by dramatic changes in European financial capital markets. These developments encouraged businesses to move away from the traditional European model of bank finance as the key source of capital. Instead, businesses relied more on capital markets, both equity and debt markets: the so-called US capitalism model.

Many consider that the growing importance of capital markets as a source of business finance has also led to significant changes in business operations. Planning with a reduced time horizon with the aim of exploiting short-term growth in financial markets and with expectations of rapid financial returns are thought to have driven businesses to focus mainly on short-term objectives at the expense of the longer-term sustainability of the business. In this context, business decisions were biased towards short-term financial bottom line improvements. Yet, little in-depth research exists that would substantiate this point of view.

The case study firms

The five company cases document how various businesses have reacted to financial market innovations and developments in the 1990s. There is relatively little commonality across the case studies, except for the fact that, on balance, financial markets developments and innovations through the 1990s benefited the companies rather than harmed them.

That being said, one should avoid extrapolating this conclusion to the whole business community as the sample size of the case studies is very small. Moreover, the sample may suffer from self-selection bias as only those companies that fared well may have accepted the opportunity to participate in this research.

The sample includes two small Italian companies, a Danish multinational, a UK mid-size company and a French multinational. These businesses are active in very different sectors and provide widely different experiences of how changes in the financial market were felt at company level.

All five case studies can be downloaded individually as pdf files by clicking on the company names below.

Grantifiandre S.p.A. (pdf 62 kb) is an Italian manufacturer of vitrified porcelain stoneware. The company aims at being the market-leading provider of alternatives to quarried marble, stone and granite. Granitifiandre listed for the first time on a stock exchange during the 1990s, taking advantage of a new source of funds to support its expansion strategy. The listing on the stock exchange resulted in corporate governance changes and facilitated the use of a performance-based remuneration system for senior managers.

Cembre S.p.A. (pdf 57 kb) is a leading European manufacturer of electrical connectors and related installation tools, railway products, cable glands and terminal blocks. The company pursues an aggressive growth strategy, which, so far, has proved very successful in terms of turnover growth and profits. The proceeds of the company's IPO helped sustain this growth strategy. The increased disclosure and transparency requirements of the listing have led to organisational changes, but always for the better as management also benefited from access to better business information.

Danisco A/S (pdf 64 kb) is the fourth largest Danish company offering a wide range of food ingredients made from natural raw materials. While Danisco's business mix and strategy have considerably changed since the early 1990s, it is difficult to conclude that developments in the financial markets were the key driver of change at company level. Globalisation and international competition were seen as more important drivers in this case since the business was less affected by financial market changes.

Pubmaster (pdf 50 kb) is the third largest operator of tenanted public houses in the United Kingdom. This company decided to remain private, but fully exploited financial market product innovations in raising new funds. It underwent fundamental change and restructuring through the 1990s and relied substantially on external funding to support its business growth strategy.

Eramet (pdf 85 kb) is an integrated mining and metallurgy group producing non-ferrous metals and their chemical derivatives, high performance special steels, nickel alloys and high performance parts for the industry. Financial market developments have enabled Eramet to implement its business strategy of diversification and broadening its activity base. External funds were easily raised and a stock market valuation assisted in the acquisition of existing companies through exchange of equity.

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