PhD Defense - Luiz Ricardo

A PhD dissertation defense by

LUIZ RICARDO KABBACH DE CASTRO

Co-Advisors:

Prof. Ruth V. Aguilera

Prof. Rafel Crespí i Cladera

Kabbach-Castro, PHD Dissertation Defense – Barcelona 18 June 2012

ACKNOWLEDGMENTS

Co-Advisors Prof. Ruth V. Aguilera Prof. Rafel Crespí i Cladera

Committee Prof. Pascual Berrone Prof. Michel Goyer Prof. Juan Santaló (Chair)

Scholarship Ministerio de Educación, Cultura y Deporte de España

Family Mariana Ana Catarina Maria Vitoria Mom (& Dad p.) Fernando . Fabiane In-laws Cousins, aunts & uncles

Friends DEMO Community UIUC. UIB Brazil . US . Spain . Portugal

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IN MEMORY TO …

ADALBERTO

VELÁZQUEZ

MÉNDEZ

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AGENDA

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1

Outline

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Chapter 1

3

Chapter 2

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Chapter 3

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Questions &

Answers


OUTLINE

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Ownership Structure

Governance Practices

Corporate Governance

Codes

Antecendents of

Ownership

Dual-class Shares

Uncertainty

Chapter 2

Chapter 1 Chapter 3


CHAPTER 1 CORPORATE OWNERSHIP IN LATIN AMERICAN FIRMS

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Motivation

Research question

Empirical Analysis

1

2

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CORPORATE OWNERSHIP LARGEST SHAREHOLDER OWN. CONCENTRATION

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Latin America 53.9%*

U.S. 26%

U.K. 20.5%

Continental Europe 44.2%

Eastern Asia. 30.1%

*(2004-2009)


CORPORATE OWNERSHIP DUAL-CLASS SHARES

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Latin America 52.3%

U.S. 6% Continental Europe 19.9%

Eastern Asia. 4.1%

U.K. 23.9%

• Claessens, Djankov and Lang, 2000 – East Asia • Faccio & Lang, 2002 - Europe


WHY LATIN AMERICA?

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RESEARCH QUESTIONS

Who are the owners of significant voting rights across Latin American countries?

Do largest shareholders use the dual-class mechanism to enhance their voting power?

Does the type of the largest shareholder matter?

Does the origin of the largest shareholder matter?

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1

2


FIRMS BY TYPE AND VOTING RIGHTS LARGEST SHAREHOLDER

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Voting rights Bank Govern

Individual/ families

Industrial firms

Instit. investors

Private equity funds

Free-float

Number of firms

Percentage of firms Europe2

0-10 % 9 - 11 10 31 - 61 61 4.6% 16.3%

10-20 % 4 1 19 37 30 1 92 92 7.0% 9.0%

20-50 % 51 2 58 227 79 5 422 422 31.9% 29.4%

50-75 % 35 15 17 276 60 5 408 408 30.9% 22.8%

75-100 % 48 16 20 204 50 1 339 339 25.6% 22.5%

Number of firms 147 34 125 754 250 12 1,322 1,322 100.0% 100.0%

Percentage of firms 11.1% 2.6% 9.5% 57.0% 18.9% 0.9% 100.0% 100.0%

Percentage of firms, Europe3

6.4% 17.0% 24.8% 35.2% 16.6% - - 100.0%

2,3 Thomsen & Pedersen (2000)


FIRMS BY ORIGIN AND VOTING RIGHTS LARGEST SHAREHOLDER

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Voting rights Domestic Caribe Latin

America North

America Europe Miscellaneous Number of

firms Percentage

of firms 0-10 % 45 - 1 3 12 - 61 4.6% 10-20 % 77 1 5 6 3 - 92 7.0% 20-50 % 342 6 19 22 31 2 422 31.9% 50-75 % 332 7 18 11 37 3 408 30.9% 75-100 % 271 7 12 14 34 1 339 25.6% Number of firms 1,067 21 55 56 117 6 1,322 100.0%

Percentage of firms 80.7% 1.6% 4.2% 4.2% 8.9% 0.5% 100.0%

Average ownership of the largest shareholder (%)

54.3% 62.9% 55.5% 46.1% 55.8% 44.7% 54.2%


EMPIRICAL ANALYSES SAMPLE & DEPENDENT VARIABLE

Sample Multiple data sources (2004-2009) - Economatica, Thomson One Banker, Osiris, Compustat Global, Brazilian SEC, Annual Reports

4,952 firm-year observations in 7 largest Latin American economies

Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

Dependent Variable Wedge Ratio (1-cash flow rights/ voting rights)

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EMPIRICAL ANALYSES INDEPENDENT VARIABLES & METHODOLOGY

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Hypotheses Variables Description

H1 Type of owner

Banks: Measures the amount of shares owned by banks. Industrial firms: Measures the amount of shares owned by industrial firms. Individual/families: Measures the amount of shares owned by families (or individuals). Private equity funds: Measures the amount of shares owned by PEF. Governments: Measures the amount of shares owned by PEF. Institutional investors: Measures the amount of shares owned by institutional investors.

H2 Origin of owner

Domestic, Caribe, Latin American, North America, Europe, Miscellaneous

Maximum likelihood estimator - MLE (Kennedy, 2008) Self-selection in the first stage


RESULTS DEPENDENT VARIABLE - WEDGE RATIO

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Explanatory variables Model 1 Model 2 Model 3

OLS Selection Model Outcome Model

Bank 0.027* 0.403* 0.081**

-3.573 -2.111 -2.997

Industrial firms 0.016+ 0.330+ 0.059*

-2.337 -1.905 -2.179

Individuals/families 0.004 0.22 0.049+

-0.394 -1.359 -1.924

Private equity funds -0.064 0.623*** 0.053

(-0.670) -5.483 -0.527

Governments 0.01 0.191 0.018

-0.745 -0.828 -0.528

Caribe -0.011 -0.101 -0.011

(-1.424) (-0.445) (-0.314)

Latin America 0.002 0.037 0.03

-0.12 -0.16 -0.403

North America -0.044** 0.354 0.061

(-5.852) -1.109 -0.862

Europe -0.066 -1.083*** -0.252***

(-1.729) (-6.602) (-12.422)

Miscellaneous 0.022 -0.061 0.035

-0.677 (-0.368) -0.482

Observations 593 593 593

Controls Size

Performance

Leverage

Age

Free-float

Law & Order

Exclusion Restrictions Capital Market Development

Country Wealth

Largest Shar. Voting Shares

Cross-list in the U.S.


CONCLUSIONS

The absence of dual-class shares restriction is a necessary but not sucient condition for firms to leverage voting rights. Type and origin of the largest shareholder are important predictors of wedge behavior. Policy implications

Countries are in a dierent pace of development, which requires dierent governance policies. For example, Brazilian “Novo Mercado.”

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CHAPTER 2 CORPORATE OWNERSHIP AND UNCERTAINTY

Motivation

Research question

Theoretical framework

Empirical Analysis

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1

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2

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CORPORATE OWNERSHIP LARGEST SHAREHOLDER OWN. CONCENTRATION

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Latin America 53.75%*

U.S. 26%

U.K. 20.5%

Continental Europe 44.2%

• Politics (Gourevitch, & Shinn, 2005; Roe, 1994 • Law (Gilson, 2006; Hansmann, 1996) • Economics (Demsetz & Lehn, 1985) • Finance (La Porta et al., 1999; Shleifer & Vishny,

1997) • Strategy (Folta, 1998; Pedersen & Thomsen, 1997)

Eastern Asia. 30.1%

*(2004-2008)


THE OBJECTIVE OF THIS CHAPTER IS …

To develop a theoretical framework that accounts for the eect of dierent sources of uncertainty on the level of the largest shareholders’ ownership concentration

Research questions What are the sources of uncertainty for the largest shareholders?

How these uncertainties may influence their decisions toward the accumulation of more or less shares?

1

2


THEORETICAL FRAMEWORK

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Firm-Level Uncertainties

Country-Level Uncertainties

H3a(+) H3b(+)

H1(+) H2a(-)/b(Ø) Largest Shareholder Ownership

Type of the Largest

Shareholder

Formal Institutions

Informal Institutions

Country Controls

Industry Controls

Firm Controls

Origin of the Largest

Shareholder


EMPIRICAL ANALYSES SAMPLE & DEPENDENT VARIABLE

Sample Multiple data sources (2004-2008) - Economatica, Thomson One Banker, Osiris, Compustat Global, Brazilian SEC, Annual Reports 4,952 firm-year observations in 7 largest Latin American economies Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

Dependent Variable Percentage of the Largest Shareholder, C1 (logit transformation)

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H1 Type of owner

Institutional Investors: Mutual, Pension and Hedge Funds, Insurance Firms Strategic Block-holders: Banks, Industrial Firms, and Government Private Investors: Individuals or Families, Private Equity

H2a/b Origin of owner

Domestic, Latin American, Anglo-Saxon, Continental Europe, and Others

H3a Formal Inst. International Country Risk Guide (ICRG), Factor of (a) Bureaucracy, (b) Corruption, (c) Law and Order, (d) Contract Viability

H3b Informal Inst. World Value Survey (2004), Questions about Trust, on three waves of WVS Survey

Generalized least squares (GLS) Asymptotic standard errors, adjusting for autocorrelation and heteroscedasticity

(Beck & Katz, 1995; Bergh & Holbein 1997, Greene 2000)


RESULTS DEPENDENT VARIABLE – LOGIT C1

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Independent variables Hypotheses (1) (2) (3) (4)

Strategic blockholders H1 1.073*** 0.899*** 1.007***

Private investors H1 0.670*** 0.365*** 0.539***

Anglo-Saxon H2a -1.326*** -1.035*** -0.990***

Continental Europe H2b 0.257*** 0.304*** 0.296***

Formal institutions H3a 0.066*** 0.070*** 0.066***

Informal institutions H3b 0.051*** 0.044*** 0.044***

Firm uncertainty 0.374* 0.24 2.807*** Firm uncertainty# Strategic Bloc. -2.616*** Firm uncertainty# Private Inv. -4.434***

Controls: Firm-control: Firm uncertainty, Size, Performance, Leverage; Shareholder-Control: Diversification; Country-controls: GDP/capita, Market capitalization/GDP; Industry fixed eects.


CONCLUSIONS

Ownership concentration varies across firms, industries, and countries

Largest shareholders are ubiquitous in Latin America (i.e., families, Grupos – Business Groups)

Ownership concentration is an uncertainty mitigation mechanism at both firm and country levels

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CHAPTER 3 STRONG OR WEAK OWNERS?

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Motivation

Research question

Theoretical framework

Empirical Analysis

1

4

2

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SOME DEFINITIONS

Corporate Governance Codes A corporate governance code is a set of norms on good practices [e.g., recommendations, standards, or best practices] issued by a collective body [e.g., exchange commissions, government] designed to address deficiencies in corporate governance systems within a country

- Aguilera and Cuervo-Cazurra, 2004

Compliance “Comply-or-explain” Principle = “one size does not fit all”

Comply or give an explanation for deviation

Soft-regulation: not enforceable

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CORPORATE GOVERNANCE CODES IMPLEMENTATION AROUND THE WORLD

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RESEARCH QUESTIONS

Which are the determinants of non-compliance with the Corporate Governance Codes?

Why do some firms do not comply more than others?

Does corporate ownership structure matter?

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1

2


OWNERSHIP AND ORGANIZATIONAL CONTEXT EFFECT ON NON-COMPLIANCE

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Country-level

Firm-level

H2 (+/-)

H1(+)

Non-compliance with


Codes


System

Ownership Concentration

Type of Dominant

Shareholder

FirmIndustry Controls


EMPIRICAL ANALYSES SAMPLE, SOURCES, & DEPENDENT VARIABLE

Sample 3 European countries: UK, Germany and Spain

FTSE 100 + first 30 of FTSE 250

DAX, MDAX, SDAX

Top 130 market capitalization firms in Spanish market

277 non-financial firms, year-end 2007

Sources Thomson Financial + Compustat global+ Amadeus + Annual reports + Declarations of compliance

Dependent Variable Count of recommendations non-complied

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H1 Ownership concentration

TOP 5: Measures the percentage of shares controlled by the 5 largest shareholders

H2a/b/c Type of owner

Family: Measures the amount of shares owned by families (or individuals) Active institutional investors: Measures the amount of shares owned by investment advisors, mutual, hedge and pension funds. Passive institutional investors: Measures the amount of shares owned by banks and insurance companies. (Almazan t al., 2005; Brickley et al. 1988; Chen et al. 2008) Corporate shareholders: Measures the amount of shares owned by industrial firms.

Zero-inflated negative binomial (ZINB) estimators


RESULTS DEPENDENT VARIABLE - NON-COMPLIANCE (#)

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Model 1 Model 2 Model 3 Model 4 Model 5

Independent Variables Controls H1 H2 H1+H2 H1+H2

Top 5 (%) 0.767*** 0.349*** 0.265***

Family Ownership 0.030*** 0.028*** 0.028***

Active Institutional Investor Ownership -0.036*** -0.036** -0.039**

Passive Institutional Investor Ownership -0.015+ -0.012 -0.012

Corporate Ownership 0.028*** 0.022*** 0.023***

Top 5 * Anglo-American CG System 1.796***

Anglo-American Corporate Governance System

-1.985*** -1.815*** -1.907*** -1.842*** -2.525***

Number of Observations 277 277 277 277 277

Controls: Cash-holdings, size, performance (ROA), leverage, analyst coverage, cross-list in the U.S., industry fixed eects.


TYPES OF AGENCY PROBLEMS

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CONCLUSIONS

Codes are oriented to serve dispersed ownership firms (i.e. Type I agency problem) Family firms and Corporate owners incorporate the “spirit” of the “comply-or-explain” principle and adapt the recommendations to their contexts Active institutional shareholders push firms to comply with CG Codes CG systems drive to dierent non compliance levels.

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OVERALL CONTRIBUTIONS

Theoretical New lens to the role of corporate ownership in Corporate Governance studies

Empirical New data both in Europe and Latin America

Policy Implications Policy should go beyond “rule of the game” and include “play of the game”

1.  MILA: Integrated Latin American Market, Chile-Colombia-Peru 2.  Brazilian “Novo Mercado”

Role of institutional investors Managerial Implications

Role of institutional investors, and strong owners such as families and corporations Institutions matter - watch out the host country institutions!

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Kabbach-Castro, PHD Dissertation Defense – Barcelona 18 June 2012 36

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QUESTIONS

Kabbach-Castro, PHD Dissertation Defense – Barcelona 18 June 2012 37

THANK YOU!

PhD Defense - Luiz Ricardo

Education

hypotheses

industry fixed

brazilian

private equity

results dependent

largest shareholder

corporate

dependent