Analysis of Changing Institutional Environments, New Accounting Policies, and Corporate Governance Practices in Germany
In approaching the task of investigating latest developments in fi nancial reporting and corporate governance (CG) in Germany, a closer look has to be made at the German fi nancial system in general. Traditionally in Germany, stock markets play a comparatively smaller role than, for instance, in Anglo-Saxon countries (Schmidt 2004). Only a relatively small number of companies in Germany are publicly traded on capital markets and ownership is very concentrated. The bulk of German business entities, in particular the small ones, are held privately. As far as fi nancing of companies is concerned, equity fi nancing plays a minor role whereas bank fi nancing is still predominant. Indicators for this fact are a relatively low rate of private share ownership and a relatively low equity ratio of German enterprises of around 18 percent on average (although it has to be said that parts of this low ratio are due to differing accounting standards; Working Group on External Financial Reporting of the Schmalenbach-Gesellschaft-Deutsche Gesellschaft für Betriebswirtschaft 1995). On the other hand, a distinctive instrument of fi nancing for German corporations are accrued liabilities, provisions, and deferred credits, whereupon the majority are allotted to pensions that have to be capitalized under German generally accepted accounting principles (GAAP). Apart from that, banks are often creditors and at the same time investors in large stock corporations because deposits are often used to acquire extensive holdings. Also, they exert infl uence by using proxy rights assigned by individual shareholders who are not interested in attending the general meetings. To sum up, the German fi nancial system can be characterized as typically relationship-based or as an insider system in contrast to an outsider or arm’s-length system as, for example, in the US (Vitols 2005).