The Ultimate Controlling Owner and Corporate Governance in Brazil

Abstract

High ownership concentration makes controlling blockholders powerful enough to use private benefits of control and able to shape the corporate governance system to favor their own interests. This work aims to examine whether the nature of the ultimate firm owner affects the quality of corporate governance in Brazil. Econometric models are estimated to assess the effect of the nature of the ultimate controlling shareholder on the quality of the corporate governance system. Models are estimated using panel data methodology with coefficients estimated by the Generalized Method of Moments (GMM) system estimator. Results show that the absence of a controlling shareholder has a positive effect on corporate governance whereas the presence of a controlling blockholder, or a shareholder agreement among a few large shareholders, has a negative effect. This adverse effect holds when the controlling blockholder is a family, or another firm. The findings are in line with the expropriation effect given that weaker corporate governance system facilitates controlling shareholders ability to extract private benefits of control. The findings also give support to the substitution effect since powerful blockholders take on the management monitoring function by weakening the board. The work provides additional evidence on the effect of the nature of large controlling shareholders on the quality of the corporate governance system in Brazil, taking into account the main kinds of controlling blockholders present in that market. The findings give support to both the expropriation and substitution hypotheses highlighting the presence of the principal–principal agency model in an important emerging market, Brazil.