Separation of control rights and cash-flow rights in emerging economies: theory and Mexican evidence

Abstract

Researchers have identified that corporate ownership structures appear to be quite different in developed and developing economies. For instance, Castañeda Ramos (1999) provides evidence of considerable separation of cash-flow rights and control rights accruing to inside and outside equityholders in publicly listed firms in Mexico. Insiders use mechanisms such as dual voting rights, majority rules and pyramids to maximise their control rights while holding minimal cash-flow rights. In contrast, there is a much closer alignment of cash-flow rights and control rights in developed countries such as UK or US. The purpose of this paper is to develop a game-theoretic model that explains these features. We argue that factors in emerging markets, such as large private benefits of control, extreme risk, low investor protection, inefficient capital markets, and governments sympathetic to incumbent management at the expense of outside investors, all contribute to insiders’ incentives to create a separation of cash flow and control rights. We present evidence from Mexico that supports our results