ownership, control and corporate valuation of brazilian companies ricardo leal (coppead/ufrj) andré...
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Ownership, Control and Corporate Valuation of Brazilian Companies
Ricardo Leal (COPPEAD/UFRJ)
André Carvalhal (COPPEAD/UFRJ)
Sílvia Valadares (Min. Planejamento)
Jairo Procianoy (PPGA/UFRGS)
Introduction
Objectives: analyze the control structure of Brazilian companies and its effect on corporate valuation
Presentation structure: Data and methodology Direct shareholding composition Indirect shareholding composition Control & Value Conclusion
Hypotheses
Higher concentration of voting rights is associated with more expropriation
Higher expropriation is associated with lower corporate valuation
Therefore: Higher concentration of voting rights is associated with lower corporate valuation.
Data
Companies listed on the São Paulo Stock Exchange (Bovespa) that are not controlled by the Government
Year-end 1998 Sample: 225 firms, representing 70% of the
Bovespa market capitalization including government-controlled companies, and more than 90% of the Bovespa market capitalization excluding government-controlled companies.
Methodology
Two forms of shareholding composition: direct and indirect
We consider all shareholders with 5% or more of the voting capital
Information on the shareholding structure collected from the Infoinvest database
All 225 companies were divided into two groups: firms with a majority shareholder (more than 50% of the voting capital) and firms without a majority shareholder
Control Groups
For the companies with one majority shareholder: If there is an indirect control structure (pyramid):
– shareholder does not maintain control indirectly
– shareholder maintains control indirectly: by increasing its share of the voting capital by maintaining the same interest by decreasing its share in the voting capital
there is no indirect control structure
Control Groups
Is there a majority shareholder
Is there a pyramid?
No. Stop.
No. Stop.
Does shareholder keep control?
No. Stop.
Increase Same Decrease
Direct and Indirect Control
Firms with a controlling shareholder: largest has 74% of the voting capital
directly and 55% indirectly, on average 3 largest have 87% of the voting capital
directly and75% indirectly In firms without a controlling shareholder
the difference between direct and indirect control is minimal.
Direct Shareholder Composition
Large degree of concentration of voting capital Reasonable difference between the percentage of
voting and total capital held by large shareholders, voting rights are not the same as cash flow rights
The issuance of non-voting shares appears to be used by large shareholders to maintain control of the firm without having to hold 50% of the total capital
Indirect Control
If controlling shareholders make full utilization of the 2:1 non-voting to voting shares proportion to minimize their investment then, indirectly, we should expect to see these shareholders with a proportion of 17% or less of the voting capital
Computing Share of Capital
If a shareholder has 50% of a company that has 50% of another, then his or her indirect share of the total capital is 50% times 50% or 25%.
The same criteria is used to compute the share of the total capital owned by controlling shareholders
Comments on Indirect Control
Total capital participation of major shareholders is much higher than 17%
This suggests that the utilization of pyramids as a mechanism to maintain control with less investment is not very common in Brazil
Therefore, there may exist private benefits of control, potentially by the expropriation of minority shareholders
Indirect Control
Of the 121 companies where there is a majority direct shareholder and where pyramids are used, in 53 the major shareholder does not maintain control indirectly, while they do in 68
In the 68 firms where they maintain control indirectly, in 15 cases they concentrate their voting power, in 17 they keep it and in 36 they diversify
Measuring Value
Tobin’s Q and industry adjusted Tobin’s Q Price-to-book value (P-B) and industry adjusted
P-B Beta and industry adjusted beta to account for
risk We conduct an ANOVA and a differences in
means test in order to compare the expropriation measures among the six groups of companies
Value and Control
Value seems to be lower for firms where control is kept indirectly
Value seems to be lower for firms where control is not only kept but increases indirectly compared to the greater value of firms where the share of control is kept but decreases indirectly
Lower valuation for indirect concentration of the voting share is consistent with potential minority shareholder expropriation
Conclusion
Large degree of concentration of the voting capital in Brazilian companies in 1998
Reasonable difference between the percentage of voting and total capital held by large shareholders
The utilization of a pyramid structure does not appear to be an effort to avoid the one share-one vote rule in Brazilian companies.
Lower valuation for companies where private benefits of control are needed the most