Abstract
In 1980, Chile privatized its social security system, and currently there are five private pension funds managing approximately US$83 billion worth of retirement investments. The regulations provide for pension funds to appoint a member to the board of directors, and influence the appointment of auditors. Thus, institutions are playing a major role in Chile's transition a market-based financial system. The study uses data from 70 firms from 1995-2005 to test the impact of these institutional changes on firm value, transparency levels and earnings quality. The study finds that insider ownership levels and institutional ownership positively affects firm value but these factors, and the pension fund representation on firm boards negatively affects the transparency index. Further, institutional ownership levels also encourage the entrenched owners to use positive discretionary accrual to manage earnings. Using agency theory, we suggest that high insider ownership levels are an equilibrium that helps managers co-opt institutions by providing access to information, which bestows private benefits control to stakeholders aligned with entrenched insiders' interests.
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