Abstract
This study aims to identify whether a relationship exists between the controlling shareholders’ voting power and outside directors’ effectiveness in maximizing firms’ financial performance. We analyze a panel data with 3057 observations for the 2000–2012 period using a random effects model, logit and probit regressions, and the two-stage model of Heckman in the Brazilian stock market. Our findings show that firms whose controlling shareholders use dual class shares to leverage their voting power have less independence from the board and worse financial performance and market value. Further, the percentage of outside directors tends to be ineffective in increasing the firm’s value, and in changing the firm’s chief executive officer (CEO) when (1) the controlling shareholder’s voting power is leveraged, or (2) when the CEO assumes a position on the board of directors simultaneously. We interpreted that these results are in line with the arguments in favor of the existence of a new agency cost, which is related to the undue obedience of board members to authority, such as the largest controlling shareholder or the CEO in Brazilian listed firms.
This is a preview of subscription content, log in via an institution to check access.
Source: Developed by authors using research data. sum of ceo_chairman is the sum of firms whose CEO assumes simultaneously the chairman position, sum of ceob is the sum of firms whose CEO assumes simultaneously any position in the board of directors
Similar content being viewed by others
Notes
Silveira et al. (2003) found a positive relationship only in 1999 by using a databse during the 1998–2002 period.
Gompers et al. (2010) uses five instruments in their study; however, they suggest that the presence of the name of an individual in the firm’s name is the most significant instrument. The other four possible instruments were not checked in this study due to the limitations in accessing the similar data for Brazilian firms in our sample.
As highlighted in Sect. 2.1, the segment of “Novo Mercado” requires that firms issue only voting shares; the number of firms listed in this segment has increased substantially over the period analyzed in this study, in accordance with the works developed by Andrade et al. (2014) and by Black et al. (2014).
See the graphs results considering both linear and quadratic relation between the percentage of outside directors and Tobin’s Q ratio in Figs. 3 and 4, in Appendix 2.
The results of other firms’ financial performance metrics as dependent variables are available upon request.
As shown in Sect. 2, from 2011, the CEOs of firms listed on the New Market cannot hold the chairman position as well, although there is a grace period of three years for these firms to adopt this requirement after their decision to have shares listed on the New Market. Conversely, there are no restrictions for the CEO to assume a regular position on the board of directors.
References
Adams, R., & Ferreira, D. (2008). One share-one vote: The empirical evidence. Review of Finance, 12(12), 51–91.
Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 48, 58–107.
Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31, 377–397.
Aguilera, R. V., Filatotchev, I., Gospel, H., & Jackson, G. (2008). An organizational approach to comparative corporate governance: Costs, contingencies, and complementarities. Organization science, 19(3), 475–492.
Aguilera, R. V., Desender, K., & Kabbach-Castro, L. R. (2011). A configuration perspective on comparative corporate governance. SAGE handbook of corporate governance. New York, NY: Sage Publications.
Anderson, R., & Reeb, D. (2004). Board composition: Balancing family influence in S&P 500 firms. Administrative Science Quarterly, 49, 209–237.
Andrade, L. P., Bressan, A. A., & Iquiapaza, R. A. (2014). Pyramidal ownership structure, dual class shares and firms’ financial performance in Brazilian market. Brazilian Review of Finance (RBFIN), 12(4), 555–595.
Andrade, L. P., Bressan, A. A., Iquiapaza, R. A., & Mendes-Da-Silva, W. (2016). Reasons for and implications of the presence of institutional investors in the ownership structure of Brazilian companies. Corporate Ownership & Control, 13(4), 598–608.
Andrade, L. P., Salazar, G. T., Calegário, C. L. L., & Silva, S. S. (2009). Governança corporativa: uma análise da relação do conselho de administração com o valor de mercado e desempenho das empresas brasileiras. Revista de Administração Mackenzie, 10(4), 4–31.
Bebchuk, L. A., Kraakman, R. H., & Triantis, G. G. (2000). Stock pyramids, cross-ownership, and dual class equity: The creation and agency costs of separating control from cash flow rights. In R. Morck (Ed.), Concentrated corporate ownership (pp. 295–315). Chicago: University of Chicago Press.
Bhagat, S., & Black, B. (1999). The uncertain relationship between board composition and firm performance. Business Lawyer, 54, 921–963.
Black, B. S., Carvalho, A. G., & Sampaio, J. O. (2014). The evolution of corporate governance in Brazil. Emerging Markets Review, 20, 176–195.
BMF&Bovespa. (2016). Superior levels of corporate governance in the Brazilian stock market. http://www.bmfbovespa.com.br/pt_br/listagem/acoes/segmentos-de-listagem/sobre-segmentos-de-listagem. Accessed on September 15, 2016.
Bortolon, P. M., & Leal, R. P. C. (2014). Dual-class unifications and corporate governance in Brazil. Emerging Markets Review, 20, 89–108.
Brickley, J. A., & Zimmerman, J. L. (2010). Corporate governance myths: Comments on Armstrong, Guay, and Weber. Journal of Accounting and Economics, 50, 235–245.
Caixe, D. F., & Krauter, E. (2013). The influence of the ownership and control structure on corporate market value in Brazil. Accounting & Finance Review—USP, 24(62), 142–153.
Carvalhal, A. (2012). Do shareholder agreements affect market valuation? Evidence from Brazilian listed firms. Journal of Corporate Finance, 18(4), 919–933.
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1–33.
Cronqvist, H., & Nilsson, M. (2003). Agency costs of controlling minority shareholders. Journal of Financial and Quantitative Analysis, 38, 695–719.
Dahya, J., Dimitrov, O., & McConnell, J. J. (2008). Dominant shareholders, corporate boards, and corporate value: A cross-country analysis. Journal of Financial Economics, 87, 73–100.
Dalton, D. R., Daily, C. M., Certo, S. T., & Roengpitya, R. (2003). Meta-analyses of financial performance and equity: fusion or confusion? Academy of Management Journal, 46(1), 13–26.
DeAngelo, H., & DeAngelo, L. (1985). Managerial ownership of voting rights. Journal of Financial Economics, 14, 33–69.
Faccio, M., & Lang, L. (2002). The ultimate ownership of Western European corporations. Journal of Financial Economics, 65, 365–695.
Gompers, P. A., Ishii, J., & Metrick, A. (2010). Extreme governance: An analysis of dual-class firms in the United States. The Review of Financial Studies, 23(3), 1051–1088.
Gondrige, E. O., Clemente, A., & Espejo, M. M. S. B. (2012). Estrutura do conselho de administração e valor das companhias brasileiras. Brazilian Business Review, 9(3), 72–95.
Gorga, E. (2009). Changing the paradigm of stock ownership from concentrated towards dispersed ownership? Evidence from Brazil and consequences for emerging countries. Northwestern Journal of International Law & Business, 29, 439–554.
Harris, M., & Raviv, A. A. (2008). Theory of board control and size. Review of Financial Studies, 21(4), 1797–1832.
Hausman, J. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271.
Heckman, J. (1979). Sample selection bias as specification error. Econometrica, 47(1), 153–161.
Huse, M., Hoskisson, R., Zattoni, A., & Viganò, R. (2011). New perspectives on board research: Changing the research agenda. Journal of Management and Governance, 15(1), 5–28.
Jameson, M., Prevost, A., & Puthenpurackal, J. (2014). Controlling shareholders, board structure, and firm performance: Evidence from India. Journal of Corporate Finance, 27, 1–20.
Jensen, M. C. (1993). The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48(3), 831–880.
Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Kim, K. A., Kitsabunnarat-Chatjuthamard, P., & Nofsinger, J. R. (2007). Large shareholders, board independence, and minority shareholder rights: Evidence from Europe. Journal of Corporate Finance, 3, 859–880.
Klein, A. (1998). Firm performance and board committee structure. Journal of Law and Economics, 41, 275–303.
La Porta, R., Shleifer, A., & Lopez-de-Silanes, F. (1999). Corporate ownership around the world. The Journal of Finance, 54, 471–517.
La Porta, R., Shleifer, A., Lopez-de-Silanes, F., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58, 3–27.
Mendes-da-Silva, W. (2011). Small worlds and board interlocking in Brazil: A longitudinal study of corporate networks 1997–2007. Brazilian Review of Finance, 9, 521–548.
Meyer, M., Milgrom, P., & Roberts, J. (1992). Organizational prospects, influence costs, and ownership changes. Journal of Economics & Management Strategy, 1(1), 9–35.
Milgram, S. (1963). Behavioral study of obedience. Journal of Abnormal and Social Psychology, 67, 371–378.
Milgram, S. (1974). Obedience to authority. New York: Harper and Row.
Misangyi, V. F., & Acharya, A. G. (2014). Substitutes or complements? A configurational examination of corporate governance mechanisms. Academy of Management Journal, 57(6), 1681–1705.
Morck, R. (2008). Behavioral finance in corporate governance: Economics and ethics of devil’s advocate. Journal of Management and Governance, 12, 179–200.
Morck, R., Shleifer, A., & Visny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.
Morck, R., Wolfenzon, D., & Yeung, B. (2005). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, XLIII, 655–720.
Okimura, R. T., Silveira, A. D. M., & Rocha, K. C. (2007). Estrutura de propriedade e desempenho corporativo no Brasil. Revista de Administração Contemporânea, 1(1), 119–135.
Pfeffer, J., & Salancik, R. G. (1978). The external control of organizations: A resource dependence perspective. New York: Harper and Row.
Rediker, K. J., & Seth, A. (1995). Boards of directors and substitution effects of alternative governance mechanisms. Strategic Management Journal, 16, 85–99.
Schaffer, M. E., & Stillman, S. (2010). xtoverid: Stata module to calculate tests of overidentifying restrictions after xtreg, xtivreg, xtivreg2 and xthtaylor. http://ideas.repec.org/c/boc/bocode/s456779.html. Accessed February 20, 2014.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. The Journal of Finance, 52, 737–783.
Silva, A. C., & Subrahmanyam, A. (2007). Dual-class premium, corporate governance, and the mandatory bid rule: Evidence from the Brazilian stock market. Journal of Corporate Finance, 13, 1–24.
Silveira, A. M., Barros, L. A. B. C., & Famá, R. (2003). Estrutura de governança e valor das companhias abertas brasileiras. Revista de Administração de Empresas, 43(3), 50–64.
Smart, S., Thirumalai, R., & Zutter, C. (2008). What’s in a vote? The short- and long-run impact of dual-class equity on IPO firm values. Journal of Accounting and Economics, 45, 94–115.
Smart, S., & Zutter, C. (2003). Control as a motivation for underpricing: A comparison of dual- and single-class IPOs. Journal of Financial Economics, 69, 85–110.
Sur, S., Lvina, E., & Magnan, M. (2013). Why do boards differ? Because owners do: Assessing ownership impact on board composition. Corporate Governance: An International Review, 21(4), 373–389.
Tosi, H. L. (2008). Quo vadis? Suggestions for future corporate governance research. Journal of Management & Governance, 12(2), 153–169.
Villalonga, B., & Amit, R. (2009). How are US family firms controlled? Review of Financial Studies, 22, 3047–3091.
Ward, A. J., Brown, J. A., & Rodriguez, D. (2009). Governance bundles, firm performance, and the substitutability and complementarity of governance mechanisms. Corporate Governance: An International Review, 17(5), 646–660.
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–830.
Yoshikawa, T., Zhu, H., & Wang, P. (2014). National governance system, corporate ownership, and roles of outside directors: A corporate governance bundle perspective. Corporate Governance: An International Review, 22(3), 252–265.
Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15, 291–334.
Acknowledgements
Funding was provided by Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES), Fapemig and from the Pró-Reitoria de Pesquisa of the Universidade Federal de Minas Gerais/Brazil.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
The authors declare that they have no conflict of interest.
Appendices
Appendix 1: Variable definitions
N | Variable | Measure | Period |
|---|---|---|---|
1 | Tobin’s Q | Ratio between the market value of firm’s assets and its book value | [2000–2012] |
2 | ROE | Return on equity. Ratio between the net profit and the total equity at the ending of the year [(Net profit/Total equity) × 100] | [2000–2012] |
3 | ROA | Return on assets. Ratio between the operating return and the total assets at the ending of the year [(EBIT/Assets) × 100] | [2000–2012] |
4 | Vot1; Vot5 | Percentage of control rights. This variable was measured to largest shareholder (Vot1) and top five largest shareholders (Vot5) | [2000–2012] |
5 | Tot1; Tot5 | Percentage of cash flow rights. This variable was measured to largest shareholder (Tot1) and top 5 largest shareholders (Tot5) | [2000–2012] |
6 | Wedge1; Wedge5 | Ratio between control rights (Vot) over cash flow rights (Tot). We used the following equation to figure out the wedge: [(Vot/Tot) − 1]. This ratio is measured to largest shareholder (Wedge1) and to top five largest shareholders (Wedge5) | [2000–2012] |
7 | DW1 | Dummy variable equals 1 if the wedge to the top largest controlling shareholder is a positive value and 0 otherwise | [2000–2012] |
8 | DW5 | Dummy variable equals 1 if the wedge to the top five largest controlling shareholders is a positive value and 0 otherwise | [2000–2012] |
9 | Dual | Equals 1 when there is a dual class shares on ownership structure, and 0 otherwise | [2000–2012] |
10 | Name | It is a binary variable that takes value 1 if the firm’s name is associated with the largest controlling shareholder’s name, and 0 otherwise | [2000–2012] |
11 | Fam | Equals 1 when the lowest one of the top five controlling shareholders is an individual, and 0 otherwise | [2000–2012] |
12 | BSize | Board size is defined as the total number of directors on the board | [2000–2012] |
13 | Outsiders | Percentage of outside directors | [2000–2012] |
14 | Elect | Percentage of board members elected by the dominant shareholder | [2000–2008] |
15 | CEOdu | Duality equals 1 when the CEO is also Chairman and 0, otherwise | [2000–2012] |
16 | CEOb | Equals 1 when the CEO is also a board director and 0 otherwise | [2000–2012] |
17 | CEO-turnover | Equals 1 when the CEO’s name in year t is different than CEO’s name in year t − 1 | [2000–2012] |
18 | LnAt | Firm size. Natural logarithm of total assets | [2000–2012] |
19 | Liab | Total liabilities’ value divided by total assets | [2000–2012] |
20 | Debt | Total firm’s debt. Short term and long term debt by total asset | [2000–2012] |
21 | Short-term-debt | Short term debt by total debt | [2000–2012] |
22 | CGI | Dummy variable equals 1 if the firm is listed in the Corporate Governance Index, either at level 1, or at level 2, or at new market, and 0 if the firm belongs only to the traditional market | [2000–2012] |
23 | Tang | Tangibility. It is equals the ratio between fixed assets and total assets | [2000–2012] |
24 | TangR | Tangibility. It is equals the ratio between fixed assets and total sales | [2000–2012] |
25 | Industry | Firm’s industry using the BM&FBOVESPA criterion | [2000–2012] |
26 | Nature | Firm’s controlling shareholder nature, using the Securities and Exchange Commission of Brazil (CVM) criterion | [2000–2012] |
Appendix 2: Descriptive statistics
Measure | Mean | Min. | Max. | Median | Skewness | Kurtosis | CV | N |
|---|---|---|---|---|---|---|---|---|
Tobin’s Q | 1.33 | 0.55 | 5.72 | 1.08 | 2.84 | 13.39 | 0.595 | 3057 |
ROA | 7.92 | −28.75 | 30.39 | 7.66 | −0.17 | 4.88 | 1.09 | 3056 |
ROE | 6.11 | −101.1 | 54.4 | 8.8 | −2.08 | 9.76 | 4.24 | 3048 |
Mebit | 12.58 | −48.8 | 56.1 | 11.9 | −0.45 | 5.35 | 1.54 | 3047 |
ΔSales | 4.35 | −90.19 | 52.15 | 5.80 | −1.39 | 7.59 | 5.32 | 2538 |
Vot1 | 52.37 | 0 | 100 | 51.64 | 0.23 | 1.94 | 0.52 | 3022 |
Vot5 | 82.12 | 0.04 | 100 | 88.23 | −1.25 | 4.17 | 0.22 | 3057 |
Tot1 | 43.54 | 0 | 100 | 38.99 | 0.56 | 2.39 | 0.57 | 2997 |
Tot5 | 69.29 | 0.04 | 100 | 72.21 | −0.47 | 2.45 | 0.31 | 3057 |
Wedge1 | 0.37 | −0.69 | 2 | 0.03 | 1.04 | 3.19 | 1.82 | 2997 |
Wedge5 | 0.26 | −0.02 | 1.62 | 0.049 | 1.79 | 5.44 | 1.55 | 3057 |
BSize | 7.06 | 1 | 17 | 7 | 0.64 | 3.38 | 0.38 | 2804 |
Out | 0.85 | 0 | 1 | 0.85 | −0.65 | 3.12 | 0.16 | 2804 |
Elected | 0.77 | 0 | 1 | 0.88 | −1.60 | 4.45 | 0.39 | 1353 |
Liab | 56.09 | 16.1 | 111.3 | 57 | −0.78 | 2.48 | 0.34 | 3057 |
Debt | 25.84 | 0 | 94 | 25.5 | −0.34 | 2.63 | 0.66 | 3056 |
Short-term debt | 43.61 | 2.2 | 100 | 37.7 | 0.58 | 2.24 | 0.66 | 2919 |
Ln assets | 14.51 | 10.44 | 17.69 | 14.56 | −0.11 | 2.64 | 0.11 | 3057 |
ΔAssets | 3.911 | −41.65 | 46.73 | 2.62 | 0.16 | 3.90 | 4.20 | 2538 |
Tangibility/sales | 95.37 | 0.87 | 1010.77 | 46.05 | 3.97 | 20.31 | 1.74 | 3056 |
Tangibility/assets | 34.16 | 0 | 96.23 | 33.32 | 0.29 | 2.33 | 0.66 | 3056 |
Binary variable | N | (%) |
|---|---|---|
(Dual)—dual class shares | 2085 | 68.20 |
(CEOdu)—CEO’s duality leadership (CEO and chairman positions) | 823 | 26.92 |
(CEOb)—CEO’s participation in the board of directors | 1644 | 53.78 |
Chairman elected by the dominant controlling shareholder | 2015 | 65.91 |
(CEOTurnover)—CEO turnover | 390 | 12.76 |
Traditional market | 2062 | 67.45 |
(Level 1)—level 1 of corporate governance | 265 | 8.67 |
(Level 2)—level 2 of corporate governance | 108 | 3.53 |
New market | 626 | 20.48 |
(CGI)—corporate governance index | 995 | 32.55 |
(Fam)—familiar nature of the firm’s control | 1008 | 32.97 |
(Name)—firm’s name associated with the dominant shareholder’s name | 461 | 15.08 |
(DW1)—it equals 1 if the wedge to the largest controlling shareholder is a positive value and 0 otherwise | 1698 | 55.54 |
(DW5)—it is equals 1 if the wedge to the top five largest controlling shareholders is a positive value and 0 otherwise | 1855 | 60.68 |
See Figs. 2, 3, 4 and Tables 10, 11.
Source: Developed by authors using research data
Number of firms using dual class shares over time in the Brazilian stock market.
Source: Developed by authors using research data. DW1 = dummy variable equals (1) if the wedge of the largest shareholder is a positive value, and (0) otherwise [although no reported, the descriptive statistics for the percentage of outside directors (Out) indicate that its minimum value is equal to 40%, when there is no dual class shares (DualClass = 0)]
Linear relation between the Tobin’s Q ratio and the outside directors percentage.
Quadractic relation between the Tobin’s Q ratio and the outside directors percentage
Rights and permissions
About this article
Cite this article
de Andrade, L.P., Bressan, A.A. & Iquiapaza, R.A. Dual class shares, board of directors’ effectiveness and firm’s market value: an empirical study. J Manag Gov 21, 1053–1092 (2017). https://doi.org/10.1007/s10997-017-9375-7
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10997-017-9375-7