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Journal of Economics and Business 59 (2007) 430442

Ownership structure and minority rights:


A Latin American view
Marisela Santiago-Castro a,1 , Cynthia J. Brown b,
a University of Puerto Rico, PO Box 23332, San Juan, PR 00931-3332, Puerto Rico
b University of Texas Pan American, 1201 West University Drive,

Edinburg, TX 78541-2999, United States

Abstract
Latin America provides a unique scenario to expand current research on corporate governance. First,
agency problems in the region may stem from the misalignment of goals and objectives between the major-
ity and minority shareholders rather than from the diverse interests of management and owners. Second,
corporate governance mechanisms available to mitigate agency problems may be inefficient or non-existent.
Third, the lack of institutional protection for minority shareholders rights may enhance the potential for
agency problems, especially for the expropriation of minority shareholders rights. Empirical analysis of data
from 97 companies from Chile, Brazil, and Mexico from 2000 through 2002 indicates that a higher degree
of family ownership increases the potential for expropriation of minority shareholders rights. Furthermore,
companies affiliated with grupos appear to be less likely to expropriate their shareholders rights, possibly
signaling changes in market environments in Latin America.
Published by Elsevier Inc.

JEL classication: G32; F37

Keywords: Expropriation; Minority shareholder rights; Ownership structure; Latin America

1. Introduction

Latin America provides a unique scenario to expand current research on corporate gover-
nance. First, the source of agency problems in the region may stem from the misalignment of
goals and objectives between the majority and minority shareholders rather from the diverse
interests of management and owners. Second, corporate governance mechanisms available to

Corresponding author. Tel.: +1 956 381 2825; fax: +1 956 384 5020.
E-mail addresses: marsantiago@uprrp.edu (M. Santiago-Castro), cjbrown@panam.edu (C.J. Brown).
1 This paper was part of this authors dissertation to fulfill the PhD degree at the University of Texas Pan American.

Tel.: +787 764 0000x3330/3326; fax: +787 773 1716.

0148-6195/$ see front matter. Published by Elsevier Inc.


doi:10.1016/j.jeconbus.2007.04.005
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 431

mitigate agency problems may be inefficient or non-existent. Third, the lack of institutional pro-
tection for minority shareholders rights enhances the potential for agency problems, especially
for the expropriation of minority shareholders rights. Thus, this study empirically examines
whether the ownership structure of firms represented in Latin American (LA) equity markets
leads to the expropriation of minority shareholders rights in light of these distinctive character-
istics.
Classic agency theory framework and corporate mechanisms may not apply to the circum-
stances of LA countries. Agency problems in Latin America do not appear to arise from the
separation of owners and managers; instead, agency problems may stem from the misalignment
of interests between majority and minority shareholders (refer to Appendix A). Moreover, corpo-
rate governance mechanisms in Latin America differ from those in developed economies: (a) it
seems that board of directors in Latin America are under the influence of controlling shareholders
and may not perform their fiduciary duty to safeguard minority shareholders interests; (b) own-
ership structure is concentrated in the hands of family; and (c) formal institutional protection is
often lacking, corrupted, or not enforced.
Given these differences in corporate governance mechanisms, it is of interest to examine the
link between the ownership structure and the expropriation of minority shareholders rights of
firms in LA equity markets. Specifically, this study seeks to answer the following question: is
there a relationship between the ownership structure of LA firms and the expropriation of minority
shareholders rights?
Data from 97 companies from Brazil, Chile, and Mexico was collected for fiscal years
ending 20002002. Univariate analysis examined the difference in means for the ownership
variables and found that the ownership structure of Mexican companies appears to be differ-
ent from Brazilian and Chilean companies. Although the three countries are similar in that
they are from the same region, their political and economic development has been different.
Such differences may affect the ownership structure of companies from the region. Next, a
panel analysis employing the firms ownership structure as well as a proxy for expropriation
of minority shareholders rights was employed to test the specific research questions. The
results provide empirical evidence that in Latin America minority shareholders rights may
be usurped in the presence of an ownership structure based on a family as a large control-
ling shareholder. However, contrary to expectations, firms associated with the LA business
associations appear to be less likely to expropriate minority shareholders rights. This may
reflect the changing market environment in Latin America that lessens informational asymme-
tries.
The paper proceeds as follows. Section 2 details the theory and empirical evidence of own-
ership structure and expropriation of minority shareholders rights and the frames the research
questions. Section 3 describes the data sources, sample selection, variables of interest and the
descriptive statistics. The methodology employed to test the hypotheses is presented in Sec-
tion 4 with the empirical results discussed in Section 5. Concluding remarks are presented at
Section 6.

2. Motivation

LA equity markets are significantly underdeveloped in comparison with other emerging


economies in Asia or Eastern Europe. LA exchanges lack retail, institutional, and international
investors. Moreover, these markets cannot attract enough domestic companies willing to list their
shares. Overall, LA exchanges are characterized by low volume, decreasing market capitaliza-
432 M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442

tion, low liquidity, and little Initial Public Offering (IPO) activity. LA countries2 have an average
ratio of stock market capitalization held by minorities to gross national product (GNP) of 24%,
less than half the 58% ratio of the United States (U.S.). LA countries3 have 7 listed firms per
one million people (on average), compared to 30 for the U.S. LA equity markets may lack the
necessary depth to have active trading activity since the majority of companies shares are in the
control of wealthy families who do not wish to surrender their power.
Research on founding-family controlled firms in the U.S. indicates that these companies may
perform better and have a lower cost of debt than other firms (Anderson & Reeb, 2003, 2004).
However, research from emerging markets shows that controlling shareholders may use their
power to consume corporate resources for their own interests at the expense of minority share-
holders and other stakeholders (Johnson, La Porta, Lopez-De-Silanes, & Shleifer, 2000; La Porta,
Lopez-De-Silanes, & Shleifer, 1999; Shleifer & Vishny, 1997). The difference can perhaps be
explained by the differences in the legal as well as market environments that provide protection
for minority shareholders in the U.S. and other developed countries.
In Latin America, where the legal protection environment is weak, control has an incremental
value for controlling shareholders because it provides large private benefits in excess of the cash
flow rights a shareholder may have (Barclay & Holderness, 1989; Nenova, 2003). Controlling
shareholders employ different mechanisms to maintain control, such as placing themselves in
top managerial positions and as members of board of directors, avoiding the trade of shares
on exchanges, and/or forming a coalition of entrepreneurs. Other mechanisms to exert control
in excess of proportional ownership include pyramids, dual-class shares, cross-holdings, and
subsidiaries (Claessens, Djankov, & Lang, 2000; Lins, 2003).
Through these deviations, the controlling shareholder gains control while minimizing the
capital invested and the cost of exercising that control. In a pyramid ownership structure, a family
typically occupies the top position, and, in turn, usually holds the largest block of shares of the
company. In these arrangements, there is a significant overlap between the top firms management
group and the managers of each firm down the line in the pyramid. Thus, the controlling family is
able to effectively control all the firms, while bearing relatively less of the cash flow consequences
for exercising such control (Lins, 2003).
In Latin America, family control is very valuable, due to large private benefits discussed
previously (Nenova, 2003), and families are not willing to relinquish it. Families ensure their con-
trol in several ways, such as maintaining top managerial positions, but also through coalitions of
entrepreneurs. These types of arrangements are known in the region as grupos economicos (hence-
forth grupos), which are the dominant form of large private business organizations throughout the
region and characterize the LA business culture. Typical grupos are run by controlling sharehold-
ers, not by professional managers with little equity ownership (Santiago-Castro & Baek, 2003).
Business groups, in general, are long-term associations of several firms and the individuals
who own and manage them, which are bound together in some formal and/or informal way
(Granovetter, 1994; Khanna & Rivkin, 2001). Specifically, Chilean securities Law 18.045 defines
business groups as a collection of legal entities which share ownership, administration, or credit
responsibility ties of such a nature that there is a ground to believe that their economic and
financial behavior is guided by common interests, or that their financial risks of debt and equity
are interconnected (Silva, Majluf, & Paredes, 2006).

2 Minority stockholder capitalization to GNP ratios: Brazil (18%), Chile (80%), Mexico (22%).
3 Exchange listed firms per 1 million population: Brazil (3.5), Chile (19.9), Mexico (2.3).
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 433

Research suggests that the external monitoring of grupos poses more challenges than that of
non-grupo firms. First, grupos lack transparency relative to non-grupo firms and, thereby, are less
susceptible to pressures from external monitors. Second, transparency problems are aggravated
in the presence of equity interlocks, a common characteristic of grupos, particularly when the
interlocks involve non-public firms. Third, grupos are generally more powerful when it comes to
lobbying and securing favors from politicians and bureaucrats (Khanna & Palepu, 2000).
Traditionally, creditors provide an important monitoring function, especially for minority
shareholders. However, minority shareholders in LA companies cannot rely to the same degree
on creditors monitoring the firm to reduce agency cost. It is well documented that LA firms use
relatively less debt as a source of financing. For example, Booth, Aivazian, Demirguc-Kunt, and
Maksimovic (2001) report lower debt ratios among Brazilian and Mexican companies compared
to those from developing countries from other regions. La Porta, Lopez-De-Silanes, Shleifer, and
Vishny (1998) report that countries with French-civil-law countries, which include LA countries,
offer creditors the weakest protection. LA countries average creditor rights score is 1.58 points
out of the maximum of 5, roughly half of the score for the U.S. This score implies that in LA
countries a creditor would have difficulty in obtaining rights to collateral even if the firm defaults
owing to the lack of legal support for the claim. Moreover, some countries under the French-origin
do not assure the secured creditors the right to collateral in reorganization. In Mexico, for exam-
ple, various social constituencies need to be repaid before the secured creditors, often leaving
the company with no assets to be claimed by creditors (La Porta, Lopez-De-Silanes, Shleifer, &
Vishny, 1997). Yet, the World Banks Doing Business index of investor protection4 indicates the
countries analyzed in this study all show better protection for investors (Brazil (5.3), Chile (6.3),
and Mexico (6.0)) relative to the region as a whole (5.1).
Another aspect of LA firms that increases the incentive for controlling shareholders to abuse
their power is the existence of dual-class shares. Dual-class shares involve the issuance of two
classes of shares, regular voting shares and other shares with either no voting rights or restrictions
on voting rights. Usually, these dual-class structures are introduced to minimize the capital invested
by the controlling shareholder and hence the cost of exercising control. Nenova (2003) reports that
such dual class share are commonly used in Brazil, Chile, and Mexico. Babatz Torres (1997) finds
that the largest shareholders in Mexico hold very little non-voting equity. Moreover, the largest
shareholder in a firm typically controls the majority of the votes, without owning the required
amount of stock for such control.
Since the LA business environment is characterized by controlling families and grupos which
appear to operate in an environment favoring the controlling shareholders at the expense of
minority shareholders, the following research questions will be tested:

1. The higher the degree of family-ownership, the higher the potential for expropriation of
minority shareholders rights.
2. When firms are affiliated with a grupo, the higher the potential for expropriation of minority
shareholders rights.

3. Data

Corporate data for LA businesses is challenging to obtain, particularly, information on the


ownership structure of the firm. LA firms, even public ones, are not required to disclose these

4 http://www.doingbusiness.org/.
434 M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442

matters. To overcome this obstacle, a sample was drawn from LA companies with shares traded
on U.S. exchanges as American Deposit Receipts (ADRs). These foreign companies trade under
the regulations of the U.S. Securities Exchange Commission (SEC), which require foreign firms
to annually disclose a set of information including Form 20-F. This form reports the ownership
structure information, and financial statements, among other items. The data sources for 20-F
forms were Lexis -Nexis Academic Universe, the individual companys web pages, and the
Securities Exchange Commission (SEC) EDGAR service. Since the sample for this research is
drawn exclusively from ADRs, these companies may not reflect the characteristics of domestically
traded companies. For robustness, a convenience sample of 14 Mexican companies not trading
ADRs was analyzed and t-tests of means differences found no significant difference between the
Mexican ADR firms included in the sample and the non-ADR firms.
Previous research on emerging economies dealing with the relationship between the ownership
structure and the expropriation of minority shareholders rights employs one-year data, primarily
due to data gathering constraints. However, this study utilizes three (3) years of data, fiscal years
ending from 2000 through 2002, resulting in one of the larger LA samples among the existing
research.
As of 31 December 2002, there were 110 LA companies listing ADRs on U.S. exchanges, with
firms from Brazil, Chile, and Mexico accounting for 76% of these. The final sample includes 269
observations representing 97 firms divided by countries as follows: Brazil (34), Chile (28), and
Mexico (35).
Seventy-four percent of the firms in the sample are affiliated with a grupo with each firm a
unique entity. Companies vary in reporting of their grupo or parent affiliation. For instance, some
companies file one consolidated Form 20-F, but present separate information for each entity, such
as the Brazilian company, Unibanco Holdings and Unibanco. In other cases, companies from the
same grupo prepare and file separate Form 20-Fs with individual company information, such as
Iusacell and Iusacell Celular, and TVAzteca and TV Azteca Holdings, from Mexico.
All the data necessary to construct the variables for the analyses is available from the Form
20-F, with the exception of the control variable for company size5 obtained from Datastream. To
empirically test the research questions, it is necessary to use a proxy to measure the expro-
priation of minority shareholders rights. Following previous research (Lins, 2003; Nenova,
2003), a measure of ownership concentration of the top five controlling shareholders, those
who own at least 5% of the firms stocks, is constructed to be used in the analysis. To cap-
ture the ownership structure of firms, the largest shareholder was determined and categorized into
dummy variables, representing family-management, non-affiliated companies, government, insti-
tutions, individual investors, and miscellaneous. Grupo affiliation is also represented by a dummy
variable.

3.1. Dependent variableexpropriation of minority shareholders rights

Measuring expropriation of minority shareholders rights can be difficult given its numerous
definitions and manifestations. However, emerging markets research suggests that concentrated
ownership is correlated with a lack of investor protection (Claessens et al., 2000; Denis &

5 Company size was measured with the total number of employees. It is more common to use market capitalization

or total assets to control for company size, however, those figures were not available in a common currency. To avoid
introducing further noise into the analysis, from the volatility of LA exchange rates, total number of employees is utilized
instead.
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 435

McConnell, 2003; La Porta et al., 1998, 1999; Shleifer & Vishny, 1997). Thus, a measure of own-
ership concentration may be used to assess the degree of expropriation of minority shareholders
rights.
Following prior research on ownership concentration (Claessens et al., 2000; Demsetz & Lehn,
1985; Goergen & Renneboog, 2001; Nenova, 2003), this study utilizes the Herfindahl index (HI)
to measure ownership concentration and to proxy for the expropriation of minority shareholders
rights. The HI is usually calculated as the sum of squares of the shareholdings of a certain number
of stockholders. This study uses the top ultimate share blockholders holding at or above the 5%
level.
To calculate the HI, the ultimate ownership of both direct and indirect control and cash flows
rights of each firm in the sample was traced for each of the 3 years (20002002) under consid-
eration. To do so, the direct ownership of control rights for all owners with stakes at or above
a 5% threshold was determined. Then the ultimate control of these direct owners was traced,
using the same threshold of 5% ownership. Form 20-F usually reports the identity of ultimate
control owners with at least 5% ownership. When the Form 20-F did not provide the necessary
information for determining the ultimate owners, other sources of information were utilized, such
as the web pages of the companies. Fig. 1 traces the ownership structure of an actual LA company
the theoretical company Empresa Latinoamericana to illustrate the process.
Once these ultimate owners are identified, control rights are determined for the sample com-
pany and categorized into one of the following groups: family-management ownership group,
non-affiliated company ownership group, government ownership group, institutional ownership
group, individual ownership group, and miscellaneous ownership group, following Lins (2003).
Included in the first group are family members (based on overlapping last names or known famil-
ial relations) and any management official or director.6 The non-affiliated company ownership
group consists of ownership by other companies not affiliated with family-management. Direct
and indirect ownership by all the agencies and companies identified as state-owned comprise
the government ownership group. The institutional ownership group includes ownership held by
pension funds, insurance companies, and/or banks. Individuals who are not family members or
mangers are categorized in the individual ownership group. Finally, the miscellaneous ownership
group includes any ownership that cannot be classified in the other five groups. In the case where
the ultimate controller cannot be clearly identified as being part of any of the groups, that position
was considered not identifiable.
Once the ownership group of each firm was classified, the HI index was based on the holdings
of the owners in each ownership group. The total HI was calculated across the six ownership
groups as the sum of squares of each owner group ls number of shares as a proportion of total
shares outstanding:
n
 Sli
HI = (1)
#totalshares
i=1

where Sli represents the number of shares of company i owned by group l (Barabanov &
McNamara, 2002). HI measures ownership concentration and becomes a proxy for the expro-
priation of minority shareholders right.

6 This classification follows the definition of family firms in the related literature, such as in the case of Anderson and

Reeb (2003, 2004) and Villalonga and Amit (2006).


436 M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442

Fig. 1. Latin American company ownership structure.

3.2. Independent variables

3.2.1. Ownership structure


A series of dummy variables were created to account for the largest owner of each firm for the
3 years under consideration. The major block shareholder was categorized in one of the follow-
ing groups: family-management, non-affiliated company, government, institutional, individual,
miscellaneous, or not identifiable. A dummy variable indicates whether the company is affiliated
with a grupo or not.

3.2.2. Control variables


Control variables are included in the models to account for differences in company size, indus-
try, age, dual-class shares, and country. To control for size, a continuous variable is created using
the natural log of total employees. Industry dummies were created based on the Standard Indus-
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 437

Table 1
Descriptive statistics, means by country (standard deviation in parentheses)
Variable All Brazil Chile Mexico

Expropriation 39.08% (26.00) 37.31 (25.78) 32.87 (23.28) 45.55 (26.96)


Size 8.51 (1.33) 8.65 (1.31) 8.02 (1.02) 8.71 (1.45)
Age 3.18 (1.15) 27.18 (24.34) 64.93 (38.24) 32.22 (25.24)
Family 0.58 0.43 0.48 0.79
Non-affiliated company 0.14 0.06 0.25 0.13
Government 0.03 0.06 0.03
Institutions 0.18 0.30 0.23 0.01
Individuals 0.02 0.01 0.04
Miscellaneous 0.04 0.10
Grupo-affiliated 0.74 0.72 0.96 0.57
Share duality 0.24 0.14 0.07 0.48
Bank 0.15 0.10 0.23 0.12
Construction 0.01 0.03
Manufacturing 0.35 0.27 0.36 0.44
Services 0.01 0.03
Trade 0.08 0.03 0.14 0.09
Transportation 0.30 0.45 0.12 0.29
Utilities 0.07 0.09 0.15
N 269 98 73 98

Variable denition: Expropriation, sum of squares of the top share blockholders holding at or above the 5% level;
SIZE, natural log of total employees; AGE, natural log of the age of the company; Family, Non-affiliated Company,
Government, Institutions, Individuals, Miscellaneous, dummy variables for the ultimate ownership; Grupo-affiliated,
dummy variable for companies affiliated with a grupo; Share duality, dummy variable for companies with dual-class
shares; Bank, Construction, Manufacturing, Services, Trade, Transportation, Utilities, Dummy variables based on SIC
codes.

trial Classification (SIC) code of each company and include: financial institutions, manufacturing,
services, construction, trade, transportation, and utilities. The age of the company is a continu-
ous variable calculated from the date of establishment of each firm. A dummy variable controls
whether or not the company issues dual-class shares.

3.2.3. Descriptive statistics


Table 1 summarizes the descriptive statistics for the 269 observations that comprise the com-
plete sample as well as the statistics separated by country (for all years combined). The ultimate
owner of the majority of the firms (58.2%) is a family, management or director. Mexican com-
panies are clearly dominated by families with 79% of all the companies being classified in this
group, while Brazil and Chile have family ownership of 42.9 and 47.9% of the firms, respectively.
Institutional ownership is the second largest group of ultimate owners of Brazilian firms (29.6%)
and third (23.3%), after non-affiliated companies, for Chilean companies.
Firms included in the sample have a mean index of expropriation of 39.1%. From the sampled
countries, Mexican companies have the highest potential of expropriation of minority sharehold-
ers rights with an index of 45.5%, followed by Brazil with 37.3% and Chile with 32.9%. These
indexes are consistent with prior research in emerging economies. For instance, Lins (2003)
reports a range from 5 to 46 as values for ownership concentration for 22 emerging economies.
The majority of the sample is affiliated with a grupo (74%), with Chile (96%) the country with
the highest proportion of grupo affiliation, followed by Brazil (72%) and Mexico (57%). The size
of the companies in the sample is fairly consistent across the three countries. Chilean companies
438 M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442

are the oldest, followed by the Mexican and Brazilian companies. The relatively young age of
Brazilian companies may be a reflection of the new companies included in the sample. These new
companies are the result of the privatization of cellular telecommunications in Brazil in 1998 that
resulted in 12 new companies.

4. Methodology

Univariate analysis is first utilized to determine whether the means of the dependent and
independent variables are equal across countries. Specifically ANOVA is employed to test the
hypothesis that the means of the ownership characteristics and expropriation among three countries
are equal. Since ANOVA does not identify where the significant differences in means lie, if there
are more than two groups, the Scheffe method is utilized to further investigate the specific country
mean differences.
With the indication that the ownership structure of firms is different among Chilean, Brazilian
and Mexican firms, additional analysis is needed to determine if indeed the differing ownership
structure leads to expropriation of shareholder rights. To do so, panel analysis is employed since
it allows for the consideration of both the cross-sectional and time-series effects in the sample,
and helps in identifying the sources of possibly mingled effects. The basic structure for analyzing
the panel data is given by the following equation:

Yit = + Xit + uit , i = 1, . . . , N; t = 1, . . . , T (2)

where i denotes the company (the cross-section dimension) and t denotes time (the time-series
dimension). Therefore, Yit is the dependent variable pooling N cross-sectional observations and T
time-series observations, and Xit s are the independent variables pooling N cross-sectional observa-
tions and T time-series observations. is the constant term for N cross-sectional observations, the
coefficient of vectors across cross-sectional observations, and uit is a random error. uit = i + vit ,
where i denotes the unobservable individual specific effect and it denotes the remainder of the
disturbance.
Panel data analysis estimates Eq. (2) by OLS techniques. There are two main models in panel
analysis regarding the assumptions concerning the error term, i : fixed- and random-effects. The
fixed-effects model assumes that differences across units can be captured in the constant term,
while in the random-effects model these differences are assumed to be randomly distributed across
cross-sectional units (Greene, 2000). The appropriateness of utilizing one over the other can be
tested using the Breusch and Pagan (1980) and/or Hausman (1978) tests. In this case, both tests,
fail to reject the appropriateness of the random-effects model; i.e., that country effects are random.
A full feasible GLS estimator model is employed due to the nature of the sample that includes
three countries with unequal observations for some companies.
To measure the relationship between the potential for expropriation of minority shareholders
rights and each the characteristics of the board of directors and the firms ownership structure, the
following specific model is estimated:
m
 n

Expropriationi = 0 + 1 Ownershipki + 2 Controlji + ei (3)
k=1 j=1

where Ownership is the dummy variables for ultimate owner and grupo affiliation of a company
i and Control is the control variables j for company i.
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 439

Table 2
Panel resultsrandom-effects full feasible GLS estimation
Dependent variable = HI Coefficients Standard error P > |z|

Constant 0.14*** 0.03 0.00


Ownership characteristics
Family 0.15*** 0.01 0.00
Non-affiliated company 0.08*** 0.01 0.00
Government 0.52*** 0.00 0.00
Individuals 0.22*** 0.03 0.00
Miscellaneous 0.04* 0.02 0.06
Grupo affiliated 0.03* 0.02 0.07
Control variables
Size 0.03*** 0.003 0.00
Share duality 0.02** 0.01 0.05
Age 0.001 0.004 0.68
Construction 0.34*** 0.02 0.00
Manufacturing 0.11*** 0.01 0.00
Services 0.07*** 0.02 0.00
Trade 0.07 0.02 0.00
Transportation 0.14*** 0.01 0.00
Utilities 0.18*** 0.01 0.00

Variable denition: Expropriation, sum of squares of the top share blockholders holding at or above the 5% level; SIZE,
natural log of total employees; AGE, natural log of the age of the company; Family, Non-affiliated company, Government,
Individuals, Miscellaneous, dummy variables for the ultimate ownership (reference category is Institutions); Grupo-
affiliated, dummy variable for companies affiliated with a grupo; Share duality, dummy variable for companies with
dual-class shares; construction, manufacturing, services, trade, transportation, utilities, dummy variables based on SIC
codes (reference category is Banks).
N = 95 companies; 264 observations. Prob > 2 = 0.0000. ***, ** and * denote significance at 1%, 5% and 10% level,
respectively.

5. Results

Univariate analysis indicated differences and similarities among the corporate ownership struc-
tures of firms from Brazil, Chile, and Mexico.7 Therefore, more thorough empirical analysis is
employed to determine whether there is a relationship between these structures and the expro-
priation of minority shareholders rights. Table 2 presents the results of estimating the model
specified in Eq. (3) that relates the ownership concentration measure as proxy for the degree of
expropriation of minority shareholders rights to ownership structure. In general, the results show
that if the ultimate owner of the firm is a family, the potential for expropriation appears higher,
but is lower when affiliated with a grupo.
The first research question suggested that a higher degree of family ownership increases the
potential for expropriation of minority shareholders rights. This is supported by a statistically
significant and positive variable for family ownership. This finding is consistent with prior research
that documents controlling shareholders may use their power to abuse minority shareholders (La
Porta et al., 1999). Moreover, the weak legal environment of LA countries fosters such abuses
since there is no legal remedy to contest them. The lack of enforcement provisions indicates that
even additional monitoring mechanisms will be powerless to discipline insiders (Klapper & Love,
2003).

7 ANOVA results available upon request.


440 M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442

The second research question posited that when firms are affiliated with a grupo there is a
higher potential for expropriation of minority shareholders rights. Contrary to expectations, the
dummy variable for grupo was negative and statistically significant. The original idea that grupos
are formed in response to capital imperfections (Khanna & Rivkin, 2001) may now have evolved
such that grupo affiliation provides increased access to foreign capital markets. In the past LA
grupos often arranged financing among affiliates, funding companies operations as an alterna-
tive to formal financial institutions and capital markets. However, the move to open the regions
economies and increased globalization of capital markets may have shifted the internal financing
focus to one of using the aggregated grupo strength to access foreign capital markets. Since the
data analyzed by this research is based on companies trading ADRs, there is some evidence that
grupo affiliation results in better access to the U.S. ADR market. External governance mecha-
nisms necessitated by foreign capital markets may reduce the level of information asymmetries
and, consequently, the potential for expropriation of minority shareholder rights. Furthermore,
reputation is the key asset of grupos (Khanna & Palepu, 2000) and may also serve as a major
deterrent to expropriation. Finally, Khanna and Yafeh (2005) find that profitability of business
groups in Chile and Mexico exceeds that of non-affiliated firms providing further evidence of
changing business environments in Latin America.
Minority shareholders may consider these findings to be robust across industries, with the
exception of trade, as the coefficients for the industry variables are statistically significant and
negative, relative to financial institutions. The coefficients of the company size (positive) and age
(negative) are also statistically significant suggesting that minority shareholders should exercise
caution when investing in younger and/or bigger companies. Finally, it appears that the use of
dual-class shares may lead to more expropriation of minority shareholders rights as reported by
Nenova (2003).

6. Conclusion

LA markets have distinctive characteristics that provide a unique scenario to expand research
on corporate governance. First, the misalignment of interest between majority and minority
shareholders is the root of agency problems, not the divergence between goals and objectives
of management and owners. Second, corporate governance mechanisms to alleviate agency prob-
lems are inefficient or non-existent. Third, weak legal environment enhances the potential of
agency problems, especially the expropriation of minority shareholders rights. Therefore, the
purpose of this work is to empirically examine the link between corporate ownership structure
and the expropriation of minority shareholders rights of firms represented in LA equity mar-
kets. The results support a positive relationship between family ownership and expropriation of
minority shareholders rights.
The main contribution of this research is two-fold. First, the study serves the purpose of
empirically relating a measurement of expropriation of minority shareholders rights to corporate
ownership structures found among firms in LA equity markets. The results generally support the
posited nature of the relationships and add to the body of empirical evidence supporting these
relationships hypothesized in the prior research. Second, this analysis furthers the understanding
of the role that corporate ownership structures in Latin America may play in the expropriation of
minority shareholders rights. The study of this relationship in the LA context brings new insights
into emerging economies.
As in all studies, this research has its limitations. The narrow sample period is one of weak points
of the analysis. Observations spanning over only three (3) years may not be representative of the
M. Santiago-Castro, C.J. Brown / Journal of Economics and Business 59 (2007) 430442 441

relationship between corporate ownership structure and expropriation of minority shareholders


rights, hindering the general applicability of the results. The use of only three countries may
also be considered as a similar shortcoming. Nevertheless, the present work sheds light into an
unexplored area in finance.

Appendix A

See Table A1.

Table A1
Agency Problem and corporate governance mechanismsdeveloped economies vs. Latin America
Developed economies Latin America

Agency problem Dispersed ownership and control Concentrated ownership typically a


lead to misalignment of goals and prominent family or business group
objectives between hired have placed family members or
professional managers and the associates as top executives. There is
dispersed shareholders a misalignment of goals and
objectives between the majority and
minority shareholders
Results of agency problems Strategies that benefit entrenched Strategies that benefit majority
managers at the expense of shareholders at the expense of
shareholders, such as shirking, minority shareholders, such as
excessive consumption of minority shareholder expropriation,
perquisites, excessive compensation, nepotism, and political corruption
and pet projects
Top management team Professional managers who often Typically family members or
have made their way up through the associates (through relationship of
ranks or are hired from outside after business groups or marriage).
an extensive search and scrutiny of Monitored mainly through family
qualifications. Monitored internally consensus
by boards of directors and externally
by market for corporate control
Boards of directors Legitimate legal and social Need to establish institutional
institutions with fiduciary duty to legitimacy. Boards often are regarded
safeguard shareholders interests as rubber stamp of the controlling
shareholders and, thus, are ineffective
Ownership Dispersed520% is considered Concentratedtypically at least
concentrated ownership 50% is controlled by majority
shareholders
Institutional protection for Formal constraints set an upper Formal institutional protection is
minority shareholders bound on potential expropriation. often lacking, corrupted, or not
Informal norms promote shareholder enforced. Informal norms typically
wealth maximization hold the interests of major
shareholders

Adapted from Governing the Corporation in Emerging Economies: A PrincipalPrincipal Perspective, Young, Peng,
Ahlstrom, and Bruton (2002), Academy of Management Proceedings.

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