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RAF 5,2

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Traditionally business financing in France has been the preserve of a closed and highly nationally oriented community: many industries used to be financed by government or through cozy relationships with local banks. This is principally because the small and medium enterprises which form the backbone of the French economy have often developed from cottage industries or small family businesses. Independence and security are their two primary management objectives, so the capital of their enterprise comes largely from family financing and profit reinvestment (Redis, 1994). A second reason is that guaranteeing shareholder stability and the longevity of enterprises has always been part of the French government’s economic policies, and cross-investment between large companies is also encouraged by the state. This explains why, in comparison with the UK or US, France has a less developed financial market (see Table I). Ball et al. (2000) considered this credit based financial system as politicization at the firm level, which leads to stakeholder governance involving agents for major groups contracting with the firm. The problem of information asymmetry between managers and stakeholders is solved by insider communication. Since stakeholders prefer the stability of payouts, managers try to reduce income volatility, and consequently the timeliness and conservatism of accounting income are relatively low in the stakeholder governance model.

Managers and auditors in these circumstances encounter a comparatively low incentive for transparency, due to a reduced market demand for accounting information, and a correspondingly higher political influence on what is reported and on the mechanisms for enforcing accounting standards (Ball et al., 2003).

As discussed, however, the institutional context in France has changed, at least for large companies, over the last ten years. The Paris Bourse has become more international: an average 35 per cent share of the top 40 companies on the Paris stock exchange is now held by US and UK institutional investors and pension funds. Overall, 15 per cent of the French population now owns stock, increased from just 1 per cent a decade ago (Tagliabue, 2000). Furthermore, cross-border mergers and acquisitions involving French firms have increased rapidly in recent years. Some of France’s leading companies are emerging from years of restructuring at home to pursue global objectives. With globalization driving consolidation in a host of industries, executives realized their firms either had to become larger and more powerful, or risk being acquired. This suggests it is no coincidence that French companies, since early 2000, have instigated six major takeovers with a combined value of more than $125 billion, plus many smaller deals (Woodruff and Delaney, 2001).

The greater importance of institutional investors reinforces the pressure for disclosure, since institutional investors hold larger blocks of shares and may be better organized than private shareholders. We expect that financial reporting by French listed companies will include increasingly fuller disclosures (Nobes, 2000).

France

991,484

69.5

40.1

UK

2,374,273

174.9

86.0

USA

13,451,352

163.4

159.8

Value traded (% of GDP in 1998)

Table I. Stock markets in France, the UK and the USA

Source: 5.2 Stock markets (World Bank, 2000)

Countries

Market capitalization ($ millions in 1999)

Market capitalization (% of GDP in 1998)

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