Corporate Governance and Value in Brazil (and in Chile)

Abstract

We construct a corporate governance practices index (CGI) from a set of 24 questions that can be objectively answered from publicly available information. Our goal was to measure the overall quality of corporate governance practices of the largest possible number of firms without the biases and low response ratios typical of qualitative surveys. CGI levels have improved over time in Brazil. CGI components demonstrate that Brazilian firms perform much better in disclosure than in other aspects of corporate governance. We find very high concentration levels of voting rights leveraged by the widespread use of indirect control structures and non-voting shares. Control has concentrated between 1998 and 2002. We do not find evidence for either entrenchment or incentives in Brazil using ownership percentages but find that the separation of control from cash flow rights destroys value. The CGI maintains a positive, significant, and robust relationship with corporate value. A worst-to-best improvement in the CGI in 2002 would lead to a .38 increase in Tobin's q. This represents a 95% rise in the stock value of a company with the average leverage and Tobin's q ratios. Considering our lowest CGI coefficient, a one point increase in the CGI score would lead to a 6.8% rise in the stock price of the average firm in 2002. We found no significant relationship between governance and the dividend payout but there are indications that dividend payments are greater when control and cash flow rights concentration are greater. We place our results in context by offering a comparative analysis with Chile. We would offer a sound "yes" if asked whether good corporate governance practices increase corporate value in Brazil.

Keywords: Corporate Governance, Latin American Equity Markets, Shareholder Rights, Ownership, Value

JEL Classification: G32, G34