Changing the Paradigm of Stock Ownership: From Concentrated Towards Dispersed Ownership? Evidence from Brazil and Consequences for Emerging Countries

Abstract

This paper analyzes micro-level dynamics of changes in ownership structures. It investigates an unique event: changes in ownership patterns currently taking place in Brazil. It contributes to the corporate governance literature, building on this empirical evidence to further advance theoretical understanding on how and why concentrated ownership structures can change towards dispersed ownership. Commentators have been arguing that the Brazilian capital markets are finally taking off. The number of listed companies and IPOs in the Sao Paulo Stock Exchange (Bovespa) has greatly increased. Firms are adhering to higher standards of corporate governance through migration to Bovespa's special listing segments. Companies have sold control in the market and the stock market has recently seen an attempt of a hostile takeover. This paper discusses these current developments. It analyzes ownership structures of companies listed in Bovespa's listing segments based on data from 2006 and 2007. It provides the first evidence on the decline of ownership concentration in the structure of Brazilian corporations. There is, however, an important caveat: ownership has become more dispersed in Novo Mercado, the listing segment that requires firms to comply with the one-share-one-vote rule. This paper, then, analyzes firms that have listed in Novo Mercado, Level 2 and Level 1. It investigates firms' migration patterns. It finds that 85% of Novo Mercado's are new entrants firms. Traditional firms have mostly migrated to Level 1, the least stringent segment regarding corporate governance practices. This suggests that we can identify two very different corporate worlds in Brazilian capital markets: the new fashion corporations who adopt better corporate governance patterns, and the old fashion corporations, who still have not changed their main patterns of corporate governance or corporate ownership. The paper additionally explores the main consequences of increased dispersion of ownership in private contracting, such as shareholders' agreements and bylaws. I present evidence on the increasing reliance on shareholders' agreements to coordinate joint control and to bind directors' votes. I also discuss the new and growing adoption of poison pills in bylaws. This paper also supplements recent literature on controlling shareholders. Examining the conditions that have lead Brazilian concentrated ownership to become significantly more dispersed helps to shed light on the incentives that may alter preferences of controlling shareholders. This discussion allows us to understand why controlling shareholders opted for a greater diversity of ownership structures. The analysis enables us to draw comparisons and extract conclusions that contribute to the comparative corporate governance debate and advance our knowledge of corporate structures in other emerging countries.

Keywords: corporate governance in emerging countries, Brazil, private rule-making, special listing rules, ownership change, shareholders agreements, poison pills

JEL Classification: G30, G32, G39,K22,K29