Ownership, Control and Corporate Valuation of Brazilian Companies

1
Ownership, Control and Corporate Valuation of
Brazilian Companies

• Ricardo Leal (COPPEAD/UFRJ)
• André Carvalhal (COPPEAD/UFRJ)
• Sílvia Valadares (Min. Planejamento)
• Jairo Procianoy (PPGA/UFRGS)

2
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

3
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.

4
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.

5
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

6
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

7
Control Groups
Is there a majority shareholder
No. Stop.
Is there a pyramid?
No. Stop.
Does shareholder keep control?
No. Stop.
Increase
Same
Decrease
8
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.

9
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

10
Direct Shareholder Composition
11
Indirect Control

• If controlling shareholders make full utilization
  of the 21 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

12
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

13
Indirect Shareholder Composition
14
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

15
Indirect Majority Shareholders
16
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

17
Measuring Value

• Tobins Q and industry adjusted Tobins 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

18
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

19
Measuring Expropriation (1996)
20
Measuring Expropriation (1996)
21
Measuring Expropriation (1998)
22
Measuring Expropriation (1998)
23
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