Cross-Shares, Board Interlocks and Firm Value in Latin America: Evidence from Colombia

Abstract

This study examines the relations among large shareholders, board interlocks, outside directors and firm value in an Latin American emerging market, in whichthere is no restriction on cross-share ownership structures and voting power is leveraged through business group affiliation.We base our working hypothesis about the effect of board interlocks and directors’ independent behavior on firm performance on a model of collusive behavior between the largest shareholder/CEO and the remaining top blockholders with seats on the board. In this context, outsider board members, and insider directors with multiple appointments within the business group, might exert full control on management investment decisions and therefore induce blockholder control contestability behavior. The empirical analysis relies on data from a sample of 75 equity-issuing corporations in Colombia during 1998-2004. Forty-seven of these are holding firms belonging to the two largest local conglomerates in the country. Measurement results show that the fraction of outside directors is lower than those reported both for mature capital markets and for the largest economies in the region (e.g., Brazil and Mexico). Regarding board interlocks, the study finds that one quarter of boards in the sample has at least one member who is the CEO of another firm. Econometric results show that board interlocks, women’s participation, multiple blockholders’ contestability and affiliation with a business group have a positive effect on firm value, while CEOs who sit on their own firms’ boards have a negative effect on firm value; they also increase potential tunneling and rent diversion, and this can be exacerbated by the separation between ownership and control rights of the largest stakeholder.