Corporate Governance and Pyramidal Ownership: The Role of Novo Mercado/Governanca Corporativa e Propriedade Piramidal: O Papel do Novo Mercado.

AutorAldrighi, Dante Mendes

JEL Codes: D22, G32, C23.

  1. Introduction

    For Berle and Means (1932), the distinguishing feature of the modern corporation lies in the separation of control from ownership, which gives rise to potential conflicts of interests between management and the dispersed shareholders. Some decades later, La Porta, Lopez-de-Silanes and Shleifer (1999) brought evidence that the great majority of a sample comprising the 20 largest companies from each of 27 OECD countries did not fit Berle and Means' characterization: firms controlled by a few shareholders were prevalent around the world, except in a couple of countries with strong legal protection of outside shareholders' rights. As they pointed out, these controlling shareholders generally have disproportionate power over the firm vis-a-vis their capital stake because they rely on enhancing-control devices, such as dual-class shares, pyramidal ownership structures, and cross-shareholding. Besides power, the separation of control rights from cash-flow rights provides them with incentives to expropriate minority shareholders, as their low capital investment in the firm allows them to externalize most of the costs of corporate value-destroying decisions, such as tunneling, which yield however high private benefits. La Porta, Lopez-de-Silanes and Shleifer (1999) triggered a copious theoretical and empirical literature on the motivations and implications of firms' capital ownership and control structures, notably of pyramidal ownership structures.

    A firm has a pyramidal ownership structure if it is ultimately owned by a shareholder through at least one intermediate publicly traded firm. The literature on business groups in the 1970s did not discriminate between horizontal and pyramidal ownership structures and, as a rule, assigned the predominance of this type of organization in developing countries to shortcomings in financial and/or labor market, coordination problems, and/or high transaction costs. (1) Starting a new strand of empirical research that would predominate in the literature over the following years, La Porta, Lopez-de-Silanes and Shleifer (1999) focus on pyramidal business groups, whose main motivation for them resides in expropriating minority shareholders. They argue that pyramidal ownership schemes allow the separation of controlling shareholders' control rights from capital stake, implying that most of the burden of value-destroying decisions is externalized to outside shareholders. In a similar vein, Bebchuk, Kraakman and Triantis (2000) claim that "controlling minority structures" (such as pyramidal ownership, dual-class shares and cross-ownership) create strong incentives for self-dealing and tunneling, as the shareholder who manages to gain control by holding a small fraction of the firm's cash flow rights is likely to profit more by extracting private benefits from the firm at the expense of minority shareholders rather than maximizing its value. (2)

    Indeed, a great number of empirical studies find evidence consistent with the expropriation view. As a rule, these findings result from regressing firms' performance, measured either by profitability rates or market-to-book value ratio or other proxies for marginal Tobin's Q, on ownership and control variables. Three studies are representative of the methodological approach prevailing in the literature at the beginning of the 2000s. With data of Asian companies, Claessens, Djankov, Fan and Lang (2002) documented that companies' valuation increases with the largest ultimate shareholder's fraction of cash flow rights and decreases with her fraction of voting rights and the difference between voting rights and cash flow rights. La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002) show that the Tobin's Q of a sample of companies from OECD countries grow with the participation of the controlling shareholder in the company's capital and decrease with the difference between control rights and cash flow rights. Attig, Fischer and Gadhoum (2004) provide evidence that the likelihood of a firm being owned through a pyramidal arrangement increases with its largest ultimate shareholder's voting rights, free cash flow, capital expenditure, size and when it is controlled by a family. Also, they find that pyramidal firms tend to have lower Tobin's Q. (3)

    In the mid-2000s, some studies on pyramidal ownership resumed the interpretation that assigned the rationale for business groups to their ability of overcoming financial market failures. By allowing intra-group fund transfers, a pyramidal scheme could ensure the funding of new ventures that would not take place should they depend on external funding. In a seminal paper, Almeida and Wolfenzon (2006) develop a theoretical model whereby pyramidal business groups are an efficient response to financial market failures. In countries with weak legal protection of investors, so they contend, families controlling such type of groups could use the cash flows of firms they already control to finance new firms with low asset pledgeability or whose investment requirements far exceed the expected cash flows. Hence, there prevails a selection effect, as firms with those characteristics are added to the group through a pyramidal ownership arrangement. Unlike the expropriation view, according to which pyramids lead to tunneling and consequently to low or negative profitability, the financing advantage hypothesis claims that the firm's prior or expected performance determines how it is incorporated into the group.

    The paper of Almeida and Wolfenzon (2006) set in motion an extensive literature about the motivations for and effects from pyramidal arrangements, most of which confirming their thesis. Almeida, Park, Subrahmanyam and Wolfenzon (2011) show that families in a sample of Korean stand-alone and chaebol-affiliated firms tended to own low pledgeability firms through pyramidal arrangements, evidence which is consistent with both the expropriation and the financing advantage hypotheses. Nonetheless, they also find that, among firms acquired by chaebols over the sample period, those with low past profitability were more likely to be incorporated lower down the pyramidal structure. Moreover, in disagreement with the expropriation view, theu do not observe downward trend in the profitability of firms acquired by chaebols that subsequently are owned through pyramidal structures. Jin and Park (2015) also bring supportive evidence of the financing advantage hypothesis for Korean business groups by documenting that their affiliated firms' accounting performance increases with the separation between controlling shareholders' cash flow and voting rights. They assign this positive effect to the business groups' minority stake controlling families' trans generational succession purpose, which inhibits them from opportunistic behavior.

    Relying on a large dataset comprising more than 28 thousand listed firms across 45 countries, Masulis, Pham, and Zein (2014) endorse empirically the view that family pyramidal business groups provide financing advantages to specific types of their affiliated firms. They find that firms at the bottom of a pyramid, which in their sample tend to be younger and to have higher idiosyncratic risk, present nonetheless higher investment intensity, valuation, internal-equity and debt funding, and larger size than firms at the same pyramid's apex and those owned through a horizontal structure. Hence, they conclude that pyramidal arrangements are driven not only by control perpetuation but also by financing motivations, that is, these ownership schemes exploit internal capital markets to reallocate funds to high-risk, capital-intensive affiliates, which otherwise would face financial constraints from external capital markets. However, these findings are not observed in non-family groups, such as those controlled by financial institutions, governments, or widely-held corporations, suggesting that a family controlling a business group is crucial for its financing advantage, possibly because a group's controlling family has, while controlling non-families have not, enough incentives to control and monitor the "internal capital market", bearing the costs of raising external funding and benefiting from the ownership group structure. The authors also show that pyramidal business groups' firms using other control-enhancing devices without delivering financing advantages, such as dual-class shares, undergo a valuation discount.

    Many other studies provide similar findings for different countries and time periods. Using data from nearly 57 thousand newly created private manufacturing firms in 19 European countries, Bena and Ortiz-Molina (2013) show that pyramidal ownership was widespread among the sample firms and that they self-selected their ownership structure according to their financing needs. Fan, Jin, and Zheng (2016) produce evidence for Chinese firms consistent with the view of the higher efficiency of business groups' internal financing transfers, provided their firms' financial constraint is strong and the potential for conflicts of interest between controlling and outside shareholders is limited. There is also evidence of pyramidal business group affiliation related: to lower negative impact of the discrepancy between control and ownership on firms' value, as shown by Torres, Bertina, and Lopez-Iturriaga (2017), who analyse Chilean non-financial quoted firms controlled by families; to higher fraction in capital-intensive industries in countries where financial markets are less developed, notably for young and small firms and for affiliates of large and diversified groups, as documented by Belenzon, Berkovitz, and Rios (2013) with data of a sample of firms from 15 developed European countries; and to investment opportunities financed by other affiliates' dividends, as presented by Gopalan, Nanda and Seru (2007), who explore exogenous variations in firms'...

Para continuar a ler

PEÇA SUA AVALIAÇÃO

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT