娀 Academy of Management Journal
2013, Vol. 56, No. 6, 1775–1801.
http://dx.doi.org/10.5465/amj.2012.0406
LEVIATHAN AS A MINORITY SHAREHOLDER:
FIRM-LEVEL IMPLICATIONS OF STATE EQUITY PURCHASES
CARLOS F. K. V. INOUE
SERGIO G. LAZZARINI
Insper Institute of Education and Research
ALDO MUSACCHIO
Harvard University and National Bureau of Economic Research
In many countries, firms face institutional “voids” that raise the costs of doing business
and thwart entrepreneurial activity. We examine a particular mechanism that may
address those voids: minority state ownership. Minority stakes are less affected by the
“agency distortions” commonly found for full-fledged state ownership. Using panel
data from publicly traded firms in Brazil, where the government holds minority stakes
through its development bank, we find a positive effect of those stakes on firms’ returns
on assets and on the capital expenditures of financially constrained firms with investment opportunities. However, these positive effects are substantially reduced when
minority stakes are allocated to business group affiliates and as local institutions
develop. Therefore, we shed light on the firm-level implications of minority state
ownership, a topic that has received scant attention in the strategy literature.
Strategy scholars adopting an institutions-based
view have argued that emerging economies are
plagued with myriad voids in institutions that crit-
ically affect firm-level behavior and performance
(e.g., Chacar, Newburry, & Vissa, 2010; CuervoCazurra & Dau, 2009; Hoskisson, Eden, Lau, &
Wright, 2000; Khanna & Palepu, 2000; Peng, Sun,
Pinkham, & Chen, 2009). Shallow capital markets,
ineffective legal systems, and a poor supply of qualified labor are typical voids that raise the cost of
doing business and thwart entrepreneurial activity.
Scholars have studied various strategies to overcome these voids. One possibility is to forge collaborative networks to build trust and pool collective
resources (Boisot & Child, 1996; Mesquita & Lazzarini, 2008; Peng & Heath, 1996). Firms can also
build large business groups: collections of units
belonging to common controlling shareholders,
usually via cascading chains of ownership.
Through their internal, corporate markets, groups
can provide affiliates with capital, labor, or other
inputs that are scarce in external markets (Khanna
& Yafeh, 2007; Leff, 1978; Wan & Hoskisson, 2003).
This article examines another possibility for
addressing institutional voids: minority state
ownership. Development economists have em-
Research assistance was ably provided by Cláudia
Bruschi, Daniel Correa de Miranda, Darcio Lazzarini,
Diego ten de Campos Maia, Fabio Renato Fukuda, Fernando Graciano Bignotto, Guilherme de Moraes Attuy,
Luciana Shawyuin Liu, Lucille Assad Goloni, Marcelo de
Biazi Goldberg, Rafael de Oliveira Ferraz, and William
Nejo Filho. The authors are grateful for conversations
with and comments on early drafts from Dirk Boehe,
Vinicius Carrasco, Rafael Di Tella, Rosilene Marcon, João
M. Pinho de Mello, and Luiz Mesquita, as well as from
seminar participants at Harvard, FEA/USP, Insper, Insead, and the 2011 Strategic Management Society Special
Conference in Rio. We also are thankful for the insightful
comments and suggestions by three anonymous referees
and our AMJ associate editor, Gerard George. Part of this
research was conducted during Sergio Lazzarini’s visit to
the Weatherhead Center for International Affairs at Harvard University, with financial support from Insper and
CAPES (process BEX 3835/09-0). An older version, written by the last two authors, was circulated with the title
“Leviathan as a Minority Shareholder: A Study of Equity
Purchases by the Brazilian National Development Bank,
1995–2003” and won the Best Presentation Prize of the
2011 Strategic Management Society Special Conference
in Rio. Data for subsequent years were then collected and
used in the leading author’s master’s thesis at Insper.
Sergio Lazzarini and Aldo Musacchio acknowledge financial support from CNPq (Brazilian National Council
for Scientific and Technological Development), Insper
and Harvard Business School. Any errors and omissions
are the sole responsibility of the authors.
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Academy of Management Journal
phasized that an important constraint in emerging markets is scarcity of long-term capital to
fund promising entrepreneurial projects (Armendáriz de Aghion, 1999; Rodrik, 2004; Torres
Filho, 2009; Yeyati, Micco, & Panizza, 2004). Following this argument is the view that state capital
can help boost entrepreneurial activity by stimulating investments in projects that would otherwise remain unfunded (George & Prabhu, 2000;
Mazzucato, 2011). However, state capital also entails various risks. Agency theory suggests that
state ownership creates a host of distortions
caused by principal-agent conflicts, because governments may force firms to appoint particular
managers or pursue projects on the basis of political criteria instead of efficiency and profitability ones (Alchian, 1965; Cuervo & Villalonga,
2000; Dharwadkar, George, & Brandes, 2000;
Shleifer, 1998; Shleifer & Vishny, 1994). Consistently with this view, a flurry of empirical research has shown that state-owned enterprises
(SOEs) typically perform worse than private
firms (for reviews, see Chong and Lopez-deSilanes [2005] and Megginson and Netter [2001]).
Full state control has therefore been viewed as a
dysfunctional or at best temporary organizational
strategy: a “grabbing hand” detrimental to performance (Shleifer & Vishny, 1998).
The extant research, however, has not paid sufficient attention to a new form of state involvement
that does not entail majority control. In several
countries, the state instead participates in the ownership of corporations as a minority shareholder.
To illustrate, consider the following information on
the largest 100 publicly traded corporations in Brazil, Russia, India, and China, from the Standard &
Poor’s Capital IQ database. In 2007, firms with
more than 10 percent of state ownership represented between 33 percent (Brazil) and 50 percent
(China) of the total market capitalization of those
top firms. Instances with minority stakes were nontrivial. Thus, in 39 percent of the observed cases,
the state had less than 50 percent of company equity. Although governments sometimes purchase
minority equity positions as part of a bailout (as in
the case of General Motors in 2008), in many countries governments actively invest in equity through
various vehicles, such as development banks, sovereign wealth funds, and pension funds (Bremmer,
2010). Yet state minority stakes remain a poorly
understood phenomenon, despite their prevalence
and relevance in public debate (as evidenced, for
December
instance, by the Economist’s special report on state
capitalism [Wooldridge, 2012]).
Building on complementary theoretical perspectives, we offer an integrative set of hypotheses to
explain the emergence and firm-level implications
of minority state ownership. In a nutshell, our theory is as follows: As noted before, minority state
capital can supplant institutional voids in emerging economies by allowing resource-constrained
firms to invest in productive assets and profitable
projects. Because these are minority stakes, majority control will be in the hands of profit-oriented
shareholders. Thus, unless the government of a
state has some form of residual ability to intervene,
agency distortions commonly found in full-fledged
SOEs should be less intense when the state participates with minority capital. But why should ownership (equity) have this effect, instead of, say,
loans (debt) from state-owned banks? Drawing on
Williamson’s (1988) transaction cost logic, we propose that the positive effect of equity investments
depends on the nature of the underlying assets.
Unlike debt, equity does not imply a prespecified
rate of return and is more flexible, responding more
to future strategic adjustments. Thus, equity should
be particularly helpful when firms have opportunity to engage in long-term fixed investments for
which, however, they do not have enough capital.
In some sense, the government of their state acts as
a venture capitalist, supporting firms with constrained investment opportunity. Furthermore, if
government allocations are carried out through minority stakes with restrained political interference,
then the positive effect on firm-level outcomes may
occur, without the downside of the state’s grabbing
hand occurring as well.
We also propose two key contingencies affecting
the benefits of state minority ownership. First, we
submit that the positive effect of such minority
stakes is attenuated when target firms belong to
business groups. If groups already reduce resource
constraints through their internal markets, then
government equity should be more beneficial when
it is not allocated to group affiliates. Furthermore,
agency theory also supports the view that minority
state capital may be used to rescue other companies
in the pyramid comprising a business group or
simply expropriated by the majority shareholders
of the group (Bertrand, Mehta, & Mullainathan,
2002; Morck, Wolfenzon, & Yeung, 2005). Therefore, from the point of view of group affiliates, state
and group capital act as substitutes (Mahmood &
2013
Inoue, Lazzarini, and Musacchio
Rufin, 2005); however, business groups and state
minority investments can act as complements in an
economy as a whole if government targets independent firms. Second, we argue that the positive effect
of minority state ownership is reduced when institutional improvements progressively attenuate or
mitigate voids. For instance, substantial development of local capital markets greatly enhances firm
access to market-based sources of financing,
thereby reducing the need for state capital. Thus,
we not only examine firm-level implications of minority state ownership stakes, but also discuss factors that should make those stakes conducive to
superior performance.
We tested our theory using panel data from 367
publicly listed Brazilian companies observed between 1995 and 2009. Brazil was an appropriate
empirical context for our purposes for at least three
reasons. First, in that period, the ratio of Brazil’s
average stock market capitalization to gross domestic product (GDP) was 43.1 percent, compared to
98.7 percent in Chile and 129.7 percent in the
United States. Thus, relative to other countries,
Brazilian firms were more constrained in terms of
equity financing. Second, our chosen temporal
window encompasses an important privatization
wave— by itself, an external shock that changed the
ownership structure of many companies. Interestingly, the process of privatization in Brazil was
accompanied by the rise of a new form of indirect
state ownership of corporations via equity purchases by the Brazilian National Development
Bank (BNDES), through its investment subsidiary,
BNDESPAR. Responsible for executing Brazil’s
privatization program, the bank actively sought to
form consortia with private acquirers, relinquishing majority control even when it provided loans
and equity (De Paula, Ferraz, & Iootty, 2002). The
size of these allocations—US$53 billion by 2009 —
triggered criticism that these equity purchases favored large local business groups with the financial
clout to execute their projects alone, without help
from the development bank (e.g. Almeida, 2009).
Third, also during the sample period, Brazil made
important promarket reforms that affected local institutional voids. For instance, stock market capitalization to GDP in Brazil jumped from 19 percent
in 1995 to 73 percent in 2009. This phenomenon
allows us to examine how the effect of minority
stakes varies over time, according to changes in the
extent of local voids.
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THEORY: MINORITY STATE OWNERSHIP
UNDER INSTITUTIONAL VOIDS
We propose a theory that explains how minority
state ownership affects firm-level investment and
performance in an environment in which firms face
critical voids that undermine their ability to pursue
profitable projects. Thus, we integrate several theoretical strands: the institution-based view of strategy (Hoskisson et al., 2000; Peng et al., 2009),
agency theory (Cuervo & Villalonga, 2000; Dharwadkar et al., 2000; Vickers & Yarrow, 1988), and
transaction cost economics (Williamson, 1988,
1996). We start with a discussion on how ownership of minority stakes by states differs from the
more traditional forms of ownership involving full
state control and on the conditions under which
these minority stakes can positively influence firmlevel performance. Next, we outline contingencies
that should moderate this positive effect.
Majority versus Minority Stakes of the State
The bulk of the literature on government ownership compares two polar modes of ownership: private control and majority state ownership. Most
studies adopt an agency theory perspective by outlining the intrinsic conflicts that occur between the
agents and principals of those firms. Under state
ownership, conflicts are exacerbated because society (as a principal) delegates the monitoring of
SOEs to politicians in charge of the government,
who in turn are supposed to monitor SOE managers
(Cuervo & Villalonga, 2000). Thus, SOEs will typically suffer interference from politicians trying to
use those firms as mechanisms to transfer rents to
their particular constituencies (Shleifer, 1998;
Shleifer & Vishny, 1998). Governments may also
pursue a “double bottom line” by requiring SOEs to
meet goals other than profitability, such as high
employment or low consumer prices (Mengistae &
Xu, 2004; Shapiro & Willig, 1990). Furthermore,
without profit-oriented owners, SOE managers typically lack the strong (“high-powered”) incentives
commonly found in private firms (e.g., aggressive
profit sharing) and are not subject to close monitoring by private owners acting as “residual claimants” (Gupta, 2005; Vickers & Yarrow, 1988). All
these factors should have a negative effect on firmlevel economic performance; empirical research
generally supports this prediction (e.g., AnuattiNeto, Barossi-Filho, Carvalho, & Macedo, 2005;
Boardman & Vining, 1989; Kikeri, Nellis, & Shirley,
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1992; La Porta & López-de-Silanes, 1999; Megginson & Netter, 2001; Yiu, Bruton, & Lu, 2005).
Fewer studies examine cases in which a government holds minority stakes. From a theoretical
standpoint, if governments are minority shareholders, then they relinquish control of SOEs to other
owners holding majority stakes. If these majority
owners are profit maximizers, they will want to
closely monitor executives or implement pay-forperformance practices that help reduce agency conflicts. Consequently, unless there is some form of
residual interference by a state (a point to which we
return later), the ability of governments or politicians to interfere in pricing or investment decisions
is reduced if these actions conflict with the objectives of controlling owners. Consistently with this
prediction, some studies have shown that firms
with minority stakes owned by a government perform better than SOEs with majority state control,
although not necessarily better than purely private
companies (Boardman & Vining, 1989; Majumdar,
1998; Wu, 2011).
However, if state minority ownership stakes only
attenuate the agency problems rampant in SOEs
and are therefore not expected to improve performance relative to privately owned firms, then why
are such minority stakes prevalent in several countries? A possible explanation is that those stakes
result from complex political processes whereby
governments try to preserve their influence in their
economy through embedded, intertwined networks
of local capitalists (Pistor & Turkewitz, 1996; Stark,
1996). But this explanation says little about the
conditions under which minority equity may or
may not affect performance. In what follows, we
offer a theory proposing conditions under which
minority stakes may actually improve firm-level
profitability and investment.
State Minority Ownership in a Constrained
Environment
Drawing from institutional theorists who argue
that emerging countries are frequently inhibited by
poorly enforced contracts and high transaction
costs (North, 1990; Stone, Levy, & Paredes, 1996),
strategy scholars propose that weak country-level
institutions have important implications for firmlevel performance (e.g., Hermelo & Vassolo, 2010;
Hoskisson et al., 2000; Khanna & Palepu, 2000;
Peng et al., 2009). Weak institutions are associated
with numerous voids represented by shallow capital markets, costly legal enforcement, a scarce sup-
December
ply of skilled labor, and ineffective anticompetitive
regulation, and other factors that severely constrain
the entrepreneurial activity of local firms (e.g.,
Chacar et al., 2010; Cuervo-Cazurra & Dau, 2009;
Khanna & Palepu, 1997). For instance, voids associated with scarce capital markets limit firms’ ability to
invest in profitable projects, especially projects requiring large, fixed capital allocations with long maturity (Levine, 2005; Rajan & Zingales, 1996).
Starting from the premise that such voids may
constrain local entrepreneurs in less developed
countries, a vast literature on development finance
has evolved to argue that government loans can
alleviate capital constraints in the private sector
and promote projects with positive net present
value that might not otherwise have been undertaken (Rodrik, 2004; Torres Filho, 2009; Yeyati et
al., 2004). With new long-term capital unavailable
or excessively costly in existing (private) markets,
firms are able to achieve economies of scale, improve their operations, revamp technology, and so
forth—all factors that should lead to superior performance. “Latent” capabilities can therefore turn
into actual projects and spur the growth of new
firms and industries (Hausmann, Hwang, & Rodrik,
2007). Development scholars, however, have focused exclusively on the role of debt (i.e., loans,
often subsidized) provided by state-owned banks.
How can equity stakes help in the context of local
voids, especially compared to what can be
achieved through government loans?
Here we borrow from Williamson’s (1988, 1996)
discussion on the relative merits of debt and equity as
alternative governance mechanisms. Using transaction cost logic, Williamson (1988, 1996) argued that
nonredeployable investments required to revamp
production capabilities (such as dedicated technology and infrastructure) are best served by equity,
because of the higher flexibility of this financing
mode. While debt requires a fixed return over the
duration of a contract, equity can better adapt to
changing circumstances that might negatively affect the value of such assets. Shareholders have
more discretion to meet and discuss strategies to
reorganize a company and provide a longer-term
time frame for the necessary changes.
Furthermore, because state actors value social
goals other than pure profit maximization, minority
state capital will tend to be more “patient” (Kaldor,
1980). While private investors may seek short-term
gains and exit in moments of market turmoil, state
capital will more likely commit to projects with
longer time horizons (McDermott, 2003). With such
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Inoue, Lazzarini, and Musacchio
1779
an important long-term shareholder, target firms
may more easily attain legitimacy and reputation in
the marketplace, which has positive consequences
for their capacity to attract valuable resources and
partners (George & Prabhu, 2000; Vaaler & Schrage,
2009; Wu, 2011). In addition, because minority
stakes attenuate direct government control of target
firms, the perceived risk that they will be subject to
dysfunctional political interference will be lower.
In sum, with reduced agency hazards, the cost of
state equity should be compensated for by the benefit of an improved capacity to undertake profitable
projects at the firm level. Therefore, we have the
following hypothesis:
(David et al., 2006). In such cases, state-led injections of capital can be redirected to uses other than
supporting profitable investment.
We thus propose that minority state capital positively promotes investment when firms face a condition of constrained opportunity. We define firms
with constrained opportunity as those that have a
valuable investment opportunity but are at the
same time limited in their ability to attract longterm funding. We expect to find a positive association between minority state equity and investment
in firms that have latent valuable projects but lack
the necessary capital to consummate the required
fixed investments. Thus:
Hypothesis 1. In less developed institutional
settings, minority state ownership positively affects firm-level economic performance.
Hypothesis 2. In less developed institutional
settings, minority state ownership promotes
capital expenditures by firms with constrained
opportunity.
A caveat is that a state, as a powerful actor, may
have a distinctive capacity to influence decisions,
even in the position of minority shareholder. If this
is the case, and if political interference occurs at
the cost of reduced profitability, then one would
instead expect a negative or null effect of minority
state equity in cases in which a state has residual
capacity to intervene. Thus, although our hypotheses predict a positive effect of minority state equity, in our subsequent empirical tests we also devise some strategies to examine the alternative
hypothesis of residual control rights by a state.
As discussed above, superior investment capacity is a key mechanism underlying the positive
effect of minority state equity. Thus, we again use
Williamson’s (1988, 1996) framework to propose
that minority equity stakes improve firm performance by promoting capital expenditures (investment in long-term fixed assets). Although not all
fixed assets are nonredeployable (e.g., generic
land), the extent to which a firm invests in fixed
capital is a signal that its business involves longerterm, riskier projects that can benefit from the flexibility of equity as a financing mode. However,
investment per se may be neither necessary nor
desirable (David, Yoshikawa, Chari, & Rasheed,
2006; Lang, Ofek, & Stulz, 1996). Even in an environment with critical voids, heterogeneity at the
firm level may exist. Thus, a firm with access to
multiple sources of capital will not be financially
constrained (Fazzari, Hubbard, & Petersen, 1988)
and hence should not necessarily alter its investment activity simply because its state becomes a
minority shareholder. Likewise, not all firms have
promising projects with positive economic value
Contingent Effect of Target Firms’ Participation
in Business Groups
We also have reason to expect the effect of government equity to vary with the ownership structure of target firms. Since Leff’s (1978) original contribution, scholars have proposed that business
groups—that is, collections of firms under the same
controlling entity—provide their affiliates with resources flowing through internal capital markets.
Because resource allocations within groups are defined by fiat, according to the objectives of controlling shareholders, groups use internal capital markets to overcome the voids posed by scarce capital,
labor, and product markets (Khanna & Palepu,
2000; Khanna & Yafeh, 2007; Wan & Hoskisson,
2003). But if internal markets reduce external
voids, we should expect state minority stakes to be
more effective at increasing firm performance and
promoting capital expenditures when target firms
are not affiliated to groups. The latter should be
relatively more affected by external voids than
firms that have internal, group-level resources at
their disposal (Mahmood & Rufin, 2005).
Moreover, groups may be associated with the risk
of minority shareholder expropriation. Most business groups are organized through complex pyramids involving firms that have stakes in other firms
(Morck et al., 2005). In countries with weak minority owner protection, state equity may be “tunneled” through complex pyramids to support
controlling owners’ private projects or rescue struggling internal units (Bae, Kang & Kim, 2002; Ber-
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trand, Djankov, Hanna, & Mullainathan, 2007).
Here the agency conflict involves the majority owners of a group and minority investors—including a
state—providing group affiliates with extra capital.
The state may thus increase the wealth of the business group’s majority owners without necessarily
improving the performance of the companies in
which it invests. That is, the effect of state equity is
attenuated by possible tunneling inside business
groups. In keeping with this prediction, Giannetti
and Laeven (2009) found that minority holdings by
public pension funds increased firm value, but the
effect was reduced when firms were part of business groups.
These two effects— groups substituting for external financing and their potential use of tunneling—
lead to the following hypotheses:
Hypothesis 3. In less developed institutional
settings, the positive effect of minority state
ownership on the performance of a firm is attenuated when the firm belongs to a pyramidal
business group.
Hypothesis 4. In less developed institutional
settings, the positive effect of minority state
ownership on the capital expenditures of a firm
with constrained opportunity is reduced when
the firm belongs to a pyramidal business group.
Contingent Effect of Evolving Institutions
We argue that minority equity purchases by a
state can help firms alleviate constraints in less
developed institutional settings. Consequently,
as institutions develop, the positive effect of
those stakes should decline. For instance, in
more developed capital markets, firms can raise
equity capital in various forms. While firms that
are already listed can issue new equity in stock
markets, private firms can go public for the first
time or, alternatively, lure private equity investors who could use stock markets as a future exit
(divestment) mechanism. Shallow capital markets not only pose the constraint of scarce capital,
but also lack transparent mechanisms for revealing company-level information and monitoring
managers. Dyck and Zingales (2004) and Nenova
(2005) asserted that underdeveloped capital markets make takeovers less likely and magnify governance conflicts. Lending some support to this
claim, Sarkar, Sarkar, and Bhaumik’s (1998) comparison of state-owned and private banks in India
December
indicated that, in the absence of well-functioning
capital markets, private companies are not unambiguously superior to SOEs. However, as capital
markets develop, with more sophisticated mechanisms for capitalization and monitoring, new
private investors will tend to emerge and gradually replace governments as sources of capital.
Strategy research adopting an institution-based
view also provides support for this argument. Thus,
in emerging market contexts firms benefit from a
more network-based strategy of growth as a means
to overcome resource scarcity (Boisot & Child,
1996; Peng & Heath, 1996). Such networks can involve complex entanglements between firms and
governments acting as providers of capital and
other valuable resources (McDermott, 2003). But if
institutional reforms promote the development and
sophistication of capital, labor, and product markets, then strategies based on public-private connections should become less important (Li, Park, &
Li, 2004; Peng & Luo, 2000). Hence, firms may
gradually reduce their dependence on their state
for scarce resources (Keister, 2004).1
A key element of our theory is firm-level investment; therefore, we examine how institutional development affects the behavior of firms with constrained opportunity. An implication of the above
discussion is that a progressive reduction in institutional voids should alleviate the resource constraints of firms with valuable projects that require
large capital expenditures. Therefore, a state will
become less instrumental in fostering new investment. Furthermore, given that group affiliates can
overcome institutional voids through internal markets, it follows that the attenuation of constraints
posed by external voids should especially affect
firms that do not belong to groups. Thus, standalone firms will more likely be relieved of their
resource constraints as improvements in local institutions deepen the capital, labor, and product
markets. This logic leads to our final set of
hypotheses:
1
Vaaler and Schrage (2009) argued and found that
minority state ownership helped signal state willingness
to support private owners of the privatized firms—a positive effect that is reduced when there is increased institutional stability. In another study, Doh, Teegen, and
Mudambi (2004) found that private ownership increases
with the extent of local economic development and market liberalization.
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Inoue, Lazzarini, and Musacchio
Hypothesis 5. The positive effect of minority
state ownership on the capital expenditures of
a firm with constrained opportunity is reduced
as local institutions develop.
Hypothesis 6. The attenuation effect described by Hypothesis 5 should be greater in
the case of firms that do not belong to business groups.
PRIVATIZATION AND MINORITY STATE
OWNERSHIP IN BRAZIL
In Brazil, SOEs have prevailed in diverse sectors,
including banking and railways, since the 19th century. But the Brazilian state’s sphere of influence
increased after World War I, especially in the
1940s, when the government of Getúlio Vargas inaugurated an ambitious plan of government investment in steel mills, mining, chemicals, and a wide
array of other sectors (Baer, Kerstenetzky, & Villela,
1973; Musacchio, 2009). Throughout the subsequent decades, pyramidal business groups began to
be organized, with ten or more SOEs in multiple
sectors linked to a holding company at the top
(Trebat, 1983).
A series of joint studies conducted in 1952 by
the governments of Brazil and the United States
concerned with investing in the expansion of
Brazil’s infrastructure led to the creation of a
national development bank to provide long-term
credit for energy and transportation investments.
The Brazilian National Bank of Economic Development (abbreviated as BNDE in Portuguese,
later as BNDES when “social development” was
added to its mission) assumed over the following
decade other roles, including financing machinery purchases in foreign currency, serving as
guarantor in credit operations abroad, and lending directly to Brazilian companies. In the 1970s,
BNDES began, through different programs, to invest directly in the equity of Brazilian companies. In 1982, it created BNDES Participations
(BNDESPAR) to manage those holdings.
In the early 1990s, in the midst of financial instability, hyperinflation, and high budget deficits,
the Brazilian government began to reconsider investment in SOEs because of the high opportunity
cost of holding equity in these companies (Pinheiro
& Giambiagi, 1994). Thus, the governments of Fernando Collor (1990 –92) and. especially. of Fernando Henrique Cardoso (1995–2002) undertook a
major privatization program aimed at reducing debt
1781
and improving productivity, eventually collecting
about $87 billion dollars in privatization revenues.
At the same time, a process of market liberalization
was being undertaken, with diminished tariffs in
various sectors and the progressive entry of foreign
capital. Between 1996 and 2000, the participation
of foreign companies in the total revenues of industries increased from 27 to 42 percent (De Negri, 2003).
BNDES played three roles in the privatization
process. First, it served as an agent of the government in privatization transactions, selling and
sometimes financing operations. Second, it provided loans to private and public enterprises.
Third, through its equity-holding arm BNDESPAR,
the bank purchased minority stakes in a variety of
publicly traded firms. BNDES was involved in the
privatization process not only to deflect criticism
that the state was losing its grip on the economy,
but also, by making available substantial capital, to
attract private players to the ongoing auctions. Approximately 86 percent of the revenues collected
from privatization auctions came from block sales,
acquirers typically forming consortia that included
domestic groups, foreign investors, and public entities such as BNDESPAR and pension funds of
state-owned companies (Anuatti-Neto et al., 2005;
De Paula et al., 2002; Lazzarini, 2011).
Table 1 shows how BNDES’s holdings (through
BNDESPAR) evolved in our sample of firms between 1995 and 2009. Such holdings can be direct or indirect; the latter occurs when BNDES
owns an intermediate firm that in turn owns the
final target firm. As an illustration, consider the
case of Vale, depicted in Figure 1. In that year,
BNDES’ stake in Vale was indirect because
BNDES had stakes in a holding company, Valepar, which in turn had direct stakes in Vale.
Because pyramidal structures are complex and
often involve unlisted companies, the size of
BNDES’ indirect holdings is not always publicly
available. Table 1 shows that, in each of those
years, BNDES held equity stakes in several companies, more than half being direct equity purchases. BNDES’ direct equity stakes averaged 16
percent of the firms’ total equity. Active bailouts
and conversions of debt for equity notwithstanding, most of these equity holdings were part of an
explicit strategy of investment management formulated by BNDESPAR analysts in tandem with
the restructuring events of the 1990s.
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TABLE 1
Evolution of Minority State Ownership through the
Brazilian Development Bank (BNDES)a
Number of Firms with
Minority State Ownership
through BNDESPAR
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total in
the period
Direct or
Indirect
Stakesb
Direct
Stakes
Only
23
18
27
26
29
29
28
23
24
22
25
37
44
48
47
89
11
11
15
14
13
14
16
14
14
13
17
21
26
28
32
51
Average Direct
Equity Purchase
as a Percentage
of Total Equity
17%
19%
15%
14%
19%
19%
16%
17%
19%
15%
15%
13%
12%
13%
13%
a
Compiled by the authors from data on publicly traded corporations. See the Data and Methods section for further details.
b
Indirect stakes occur when BNDESPAR participates in pyramidal ownership structures (e.g., BNDES owns Valepar, which
in turn owns Vale; see Figure 1).
DATA AND METHODS
Data Set
We used data that tracks basic financial information and ownership for 367 Brazilian firms between
1995 and 2009. All enterprises listed on the São
Paolo stock market (Bovespa) during that period for
which we could collect reliable financial and ownership information are included. We analyze these
firms’ ownership profiles and financial information
using such diverse sources as reports filed with the
CVM (the Brazilian equivalent of the US Securities
and Exchange Commission) and the Economática,
Interinvest, and Valor Grandes Grupos databases.
We cleaned the data set in several ways. First, we
dropped financial firms and publicly listed holding
corporations (i.e., we only kept their affiliates). Second, we eliminated inconsistent financial information, such as cases in which total assets were different from total liabilities. Third, to mitigate
distortions by extreme values, we winsorized at the
1st and 99th percentiles those key variables that
December
vary substantially (chiefly performance and investment variables). The panel is unbalanced as a result
of mergers, acquisitions, business attrition, and
missing information for some financial variables.
Our variables are described below. Table 2 gives
descriptive statistics.
Dependent Variables
Firm-level performance. We employ two measures of performance. Our first measure, return on
assets (ROA), corresponds to net profits over total
assets in a given year. To incorporate long-term
performance effects and gauge sources of value not
fully captured by accounting data (e.g., intangibles), we also collected data on firms’ stock market
valuation. Our second measure, market-to-book,
computed as the total market value of stocks divided by the book value of equity (e.g., Fama,
1992), is an indicator of future return on equity and
hence incorporates future market expectations
about firm-level performance (Penman, 1996).
Fixed investment. Following previous work
(Behr, Norden, & North, 2013; Fazzari et al., 1988),
we measured fixed investment as the ratio of a
firm’s yearly capital expenditures to its initial stock
of fixed capital (observed at end of the previous
year). Unfortunately, we were unable to find reliable data on more refined measures of nonredeployable investment, such as R&D expenditures.
However, in less developed markets, firms tend to
have pressing needs to invest in infrastructure and
machinery so as to build industrial production capacity. Development scholars see accelerated fixed
investment as critical in helping emerging nations
catch up to advanced, industrialized economies
(Amsden, 1989; Chang, 2002; Cimoli, Dosi, Nelson,
& Stiglitz, 2009). We thus believe that the extent of
fixed asset investments is correlated with firms’
orientation toward complex, long-maturity projects, for which the flexibility of equity can be of
particular help.
Explanatory Variables
State minority equity. Given the prevalence of
pyramidal ownership structures in Brazil (Valadares & Leal, 2000), we coded both direct and indirect equity stakes. Minority state equity, referred
to as minority in our regressions, was thus measured in three complementary ways. Direct equity
holdings by the state (through BNDESPAR) constitute a continuous variable that measures the per-
2013
Inoue, Lazzarini, and Musacchio
1783
FIGURE 1
Pyramid of the Brazilian Mining Group Vale in 2003a
Mitsui
BNDES (Brazilian
Development Bank)
Elétron
Valepar
Pension funds of
state-owned
companies
VALE
CST
Usiminas
Samitri
Cosipa
a
Fosfértil
Ultrafértil
MRS
Logística
Samarco
Caemi Metal Vale do Rio
Doce
Alumínio
Minerações
Brasileiras
Albras
Reunidas
Source: CVM, Valor Grandes Grupos.
centage of equity held by the bank (from 0 to
100%). In contrast, our measure of total stakes (direct or indirect) is discrete because, as discussed
before, we do not have precise information on the
magnitude of indirect BNDES equity holdings in
pyramidal chains. We thus created a dummy variable set equal to 1 for a company among whose
owners is another company in which BNDES has
equity, and 0 otherwise.2 To address the alternative
hypothesis that the state may have residual interference, with negative implications for profitability, we also created two new dummy variables indicating whether a BNDES direct stake was more
than 0 percent (i.e., there is some stake) or more
than 10 percent. We exploit a particular feature of
the Brazilian legislation indicating that shareholders with more than 10 percent of a firm’s equity can
require a seat on its board of directors. Thus, the 10
percent cutoff is an indication of a potential dis-
2
We focus on at most two layers of ownership, that is,
cases in which BNDES participates in a firm that in turn
has stakes in another firm.
tinctive capacity of the Brazilian government to
influence decisions.
Membership in business groups. We also coded
for state equity ownership (via BNDESPAR) in a
company that belongs to a pyramidal business
group. Figure 1 shows that Vale is, itself, a pyramidal group, given that the company has stakes in
several other firms (Samitri, MRS, Samarco, etc.).
Thus, in 2003 BNDES had an indirect stake in a
pyramidal group. A firm was considered a member
of a group when it was controlled by an owner or
owners who controlled other firms in our data set.
To detect the existence of controlling stakes, we
conducted a detailed analysis of shareholder agreements, which were available at the website of the
CVM. Thus, we identified owners who had distinctive control rights over a firm (i.e., more seats on its
board of directors). Multinationals with single subsidiaries in Brazil were not treated as groups, even
though they usually control multiple units across
the world. Our goal was to find instances in which
local controlling shareholders could use new allocations to transfer funds to localunits. Using such
criteria, we created the dummy variable group,
19.
20.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
5.
1.
2.
3.
4.
Return on assets
Market-to-book ratio
Fixed investment
Minority—direct and
indirect (dummy)
Minority—direct only
(percentage)
Constrained opportunity
Group
Ln(revenues)
Leverage
Financial expenses
Fixed assets
Foreign control
State control
Merger
Time count
Country credit rating
Ease of credit
Stock market
capitalization/GDP
Competition legislation
Availability of skilled labor
Variables
1.06 3.37
⫺0.23 4.92
0.19 0.39
0.45 0.50
11.95 2.06
0.52 5.79
0.31 0.21
0.30 0.25
0.18 0.39
0.07 0.26
0.01 0.11
6.85 4.28
4.39 5.42
3.12 9.82
16.98 14.67
.01
.02
.01
2
.06
.03
3
.60
4
5
6
7
8
⫺.02 ⫺.01 ⫺.03
.02
.00
.03
.00 ⫺.13 ⫺.04 ⫺.04 ⫺.02 ⫺.02
⫺.05
.05
⫺.03
⫺.02
⫺.01
.06
.04
⫺.01
.01
9
.01 ⫺.03
.01
.02 ⫺.07 ⫺.04
⫺.43
.29 ⫺.01 ⫺.02
.01
.08
.03
.07
.17
.06 ⫺.05
.37
.12 ⫺.01
.23
.09 ⫺.24
.39
⫺.39
.14 ⫺.01
.00
.02
.13 ⫺.02 ⫺.18
⫺.01 ⫺.02 ⫺.05 ⫺.12 ⫺.07
.05 ⫺.07 ⫺.12
⫺.02 ⫺.12 ⫺.21
.10 ⫺.02
.11 ⫺.02
.08
.10
.03
.00 ⫺.04 ⫺.02 ⫺.01
.23
.24
.05 ⫺.07
.00
.16
.07 ⫺.05 ⫺.03
.23
.02
.09
.05
.04
.02 ⫺.02
.11
.10
.00
.28
.07
.10
.05
.09 ⫺.03
.05
.02
.14
.01
.09
.04
.02 ⫺.02
.08
⫺.01
.02 ⫺.04
.00
.00
.02
.00 ⫺.09
.03
.06
.05
.02
.01
.01 ⫺.01
.07
.02
⫺.03
.04
.04
⫺0.08 0.53
1.57 2.59
10.68 62.66
0.13 0.33
1.10 4.81
1
Mean s.d.
TABLE 2
Summary Statistics
.12
.15
.00
⫺.03
⫺.07
⫺.05
⫺.10
⫺.11
.07
⫺.10
10
.06
.11
.01
.28
⫺.06
⫺.21
⫺.03
.00
⫺.02
11
.03
.02
⫺.13
⫺.01
⫺.02
⫺.01
.00
.00
12
14
.54
.03
.17
15
17
18
19
.33 ⫺.48
.09
.10 .44
.07
.04 ⫺.44
16
.00
.00 ⫺.20 ⫺.03
.01 ⫺.07 ⫺.75 ⫺.15
⫺.03
⫺.07
.12
⫺.01
.04
.01 ⫺.01
⫺.01
.01
13
2013
Inoue, Lazzarini, and Musacchio
which is equal to 1 if a company belongs to a
business group and 0 otherwise. About 45 percent
of our observations are from firms belonging to
some group. To test our hypotheses that the effect
of state equity depends on business group membership, we multiply the minority variables by the
dummy variable group.
Constrained opportunity. To measure constrained opportunity, we needed to observe cases
in which firms have investment opportunities but
are at the same time constrained in their ability to
attract funding. We measured such constrained opportunities by creating a composite variable with
two key elements. First, following previous work
(David et al., 2006), we computed the Tobin’s Q of
the firms in the database (as the market value of
stocks plus the book value of debt, divided by the
book value of total assets). We then measured investment opportunity with a dummy variable Q,
which is equal to 1 if Tobin’s Q exceeds unity and
0 otherwise. Thus, cases with Q equal to 1 indicate
that a unit increase in total assets is expected to
yield an increase in a firm’s market value by more
than one monetary unit. In other words, the firm
can create market value by expanding its assets
(David et al., 2006).
Second, we gauged financial constraints by computing the ratio of net profits to initial stock of fixed
capital (Behr et al., 2013; Fazzari et al., 1988). The
larger this ratio, the higher a firm’s ability to invest
using profits from its own operations. Constraint is
thus a dummy variable coded as 1 if a firm’s ratio of
net profits to the stock of fixed capital was below
the sample median and 0 otherwise. Compared to
other companies in the sample, a firm with constraint coded 1 has low cash flow relative to its
stock of fixed assets and thus needs to attract more
external capital in case of a planned expansion.
Finally, we combined Q and constraint (C) to create
our measure constrained opportunity, coded 1 if
both Q and C are equal to 1 and 0 otherwise. Constrained opportunity was interacted with both the
minority and the group dummy.
Institutional variables. To test our hypothesis of
a diminished effect of state equity in promoting
investment as institutions develop, we begin by
using as an interacted variable a simple count measure of time (e.g., Hermelo & Vassolo, 2010), beginning with a value of 1 for the first year of the series
(1995). The objective was to assess how the effect of
state equity changed over the years. We then followed Chacar et al. (2010) and added more direct
measures of institutional development related to
1785
the capital, product, and labor markets. The variables ease of credit, competition legislation, and
availability of skilled labor were obtained from the
World Competitiveness Report (WCR) published by
the International Institute for Management Development, Geneva. Ease of credit was measured by
the WCR survey item asking senior and middle
managers to what extent credit is easily available
for business. Competition legislation was measured
by the WCR item asking respondents whether competition legislation is efficient in preventing unfair
competition. Availability of skilled labor, in turn,
was measured by the WCR item asking respondents
to what extent skilled labor is readily available. We
further collected two variables to assess the level of
financial market development: country credit rating and stock market capitalization to GDP. Country credit rating is based on a scale from Institutional Investor. Finally, stock market capitalization
to GDP was obtained from the World Bank’s World
Development Indicators database.
Because these measures are highly correlated
with time (e.g., r ⫽ .73 for stock market capitalization), they may spuriously pick a natural improvement trend in the local environment. To avoid this
confounding effect, we measured instead the percentage of yearly variation in those variables, using
three-year moving average windows to reduce distortions by short-term effects.3 In addition, whenever we add a specific institutional variable, we
also add, as controls, time and its interaction with
our key variables of interest. With this procedure,
our institutional variables essentially measure percent variations above or below a natural trend captured by the variable for time.
Control Variables
Control variables include a measure of size,
ln(revenues), which is the logarithm of gross revenues, in thousands of US dollars, as well as two
financial measures, fixed (fixed assets to total assets) and leverage (debt to total assets). Distinct
ownership patterns are captured by two dummies,
foreign control and state control, coded for whether
a firm’s majority (controlling) owner was the state
or a foreign entity, respectively; thus, domestic pri-
3
For instance, the financial crisis of 2008 sharply reduced the level of stock market capitalization, which
nonetheless quickly recovered in Brazil, as well as in
other emerging markets.
1786
Academy of Management Journal
vate control was the baseline case. Because state
minority ownership may occur jointly with industrial concentration (e.g., a state may try to create
“national champions” in a given sector), we added
the control merger, coded 1 if a firm resulted from
a merger or acquisition deal and 0 otherwise. All
variables used in interactions with state minority
stakes (group, constrained opportunity, and institutional variables) were additionally employed as
controls to guarantee that omitted main effects did
not drive any measured effect of the interactions.
Estimation Approach
In an ideal experimental situation, the state (via
BNDES) would buy shares of Brazilian companies
randomly. However, BNDES selectively chooses its
target firms. Therefore, simple regressions assessing the effect of BNDES stakes on firm-level outcomes may suffer from selection bias or endogeneity caused by unobservable factors affecting both
the likelihood of state ownership and the outcomes
under examination (performance and investment).
To circumvent this problem, we proceeded in several complementary ways. First, in our panel regressions we adopted a fixed-effects approach
(Wooldridge, 2002) by including time-invariant
company-specific effects, time-varying industrylevel effects (i.e., industry membership dummies
interacted with year dummies), and year effects.
We thus essentially measure within-firm performance variations net of fixed and temporal factors
that will simultaneously affect all companies in the
same industry.4 This is possible in our data because
our period is associated with intense corporate restructuring and changes in corporate control (e.g.,
privatizations). In other words, our data exhibit
variation over time in terms of ownership.
Second, following the approach proposed by
Heckman, Ichimura, and Todd (1997), we ran ad4
A possible source of concern is that BNDES may
actively select regulated sectors that will likely receive
subsidies or profitable governmental contracts. However,
although 33.7 percent of the cases involve regulated utilities such as electricity and gas, 42.6 percent of the observed instances of BNDES equity are in manufacturing
industries (metals, chemicals, paper, and so on) which
operate in more or less competitive markets. Furthermore, systematic and temporal effects associated with
industry membership are already controlled for in our
regressions with our firm- and industry-year fixed
effects.
December
ditional regressions combining fixed-effects estimation with propensity score matching. While
fixed effects control for unobservable factors potentially causing spurious inference, propensity score
matching allows for the creation of comparable
control groups with traits similar to those of the
firms observed with BNDES stakes during our temporal window. Our regressions are thus analogous
to differences-in-differences estimation assessing
both within-firm variation over time and betweenfirm comparison of cases with and without state
equity (e.g., Duflo, Glennerster, & Kremer, 2007).
More specifically, using variables observed in the
first year of the sample (1995), we used probit regressions to assess which firm-level traits explain
whether a given company will be observed with a
BNDES stake in the two ways described before (i.e.,
directly or indirectly through layers of ownership).
Firm-level traits include ln(revenues), leverage,
fixed assets, foreign control, state control, and a
host of industry dummies. Propensity scores were
then computed using kernel matching to generate
regression weights for the subsequent panel regressions, in which performance and investment are
dependent variables (Nichols, 2007). This technique guarantees that firms without BNDES stakes
but with traits similar to those of BNDES companies will receive more weight in the performance
and investment regressions. Furthermore, we restricted our analysis to firms with and without
BNDES stakes in regions of common support—that
is, a subset of firms with attributes within a similar
range based on computed propensity scores (Heckman et al., 1997). Although at the cost of a reduced
sample size, this procedure makes the subgroups
with and without BNDES stakes more directly
comparable.
Third, we ran additional regressions checking
alternative explanations for our results. Selection
equations were used to see if the state chose highperforming firms to invest in, which could yield a
spurious causal inference between minority state
ownership and performance. If, as critics of industrial policy contend, governments frequently “pick
winners” (e.g., Pack & Saggi, 2006), the apparent
positive effect of stakes may be spurious; that is,
BNDES may be selecting high performers instead of
increasing the performance of the firms in which it
invests. We also check whether BNDES equity
stakes have implications for the attraction of debt,
which represents an alternative, nonhypothesized
channel for the effect of minority state ownership.
To examine this possibility, we used leverage (as
2013
Inoue, Lazzarini, and Musacchio
previously defined) and financial expenses (the ratio of interest payments and amortizations to total
debt) as dependent variables in regressions to
which minority state equity and controls were
added as independent variables.
FINDINGS
Effect of Minority State Equity on Performance
Table 3 reports the results of our regressions assessing the effect of minority state equity on performance. Models 1– 4 examine the effect of stakes
on ROA: The first two models measure the effect of
direct and indirect equity stakes; the next two models assess direct equity stakes only; and the last two
models evaluate differential effects depending on
whether BNDES equity is higher than 0 percent or
10 percent. We show estimates with and without
weights based on propensity score matching (except for the last two models, which owing to space
limitations are fitted only with the matching correction). The number of observed firms in the regressions with control for matching is lower because, as explained earlier, our adopted technique
restricts the analysis to data points in regions of
common support (i.e., comparable firms).
Consistently with Hypotheses 1 and 2, we generally find positive effects of minority stakes and
negative effects when those stakes are interacted
with group membership. Model 1 shows that companies with the Brazilian state as a minority shareholder (directly or indirectly) have a return on assets 11.1 percentage points higher than that of other
firms, although the effect is wiped out when stakes
are allocated to firms belonging to pyramidal
groups (p ⬍ .05). Specifically, the coefficient of
minority times group (where minority is measured
as a dummy coding direct or indirect stakes) indicates that state ownership associated with group
affiliates reduces the aforementioned positive effect by 13.1 percentage points. However, the results
are not robust to the specification with matching
(model 2): the coefficients become statistically
insignificant.
More robust effects are found when we use the
continuous measure coding the state’s direct percent of participation in a firm’s equity. The coefficient of minority is now positively significant in
the regressions with and without control for matching. For instance, estimates of model 4 (with matching) indicate that an increase of 1 percentage point
of BNDES direct equity is expected to increase a
1787
firm’s return on assets by 0.4 percentage points
(p ⬍ .01).5 Again, this effect disappears when the
target firm belongs to a pyramidal group: The coefficient of minority times group shows that group
membership attenuates that positive effect by
0.7 percentage points (p ⬍ .05). Thus, Hypotheses 1
and 2 are consistently supported only when the
state participates directly in the equity of the target
firms. Possibly, if the state provides capital to controlling firms in a pyramid instead of directly to
firms, that capital may also be allocated to uses
other than the financing of the target firms’ own
projects.
The results of models 5 and 6 allow us to examine what happens when BNDES has some direct
equity (i.e., ⬎ 0%) versus more than 10 percent. If
BNDES’s enhanced equity allows the Brazilian government to exert dysfunctional influence in a board
of directors or in any other way, then we should
observe a negative or null effect. Yet we find just
the opposite result: the effect of BNDES equity is
only positive when participation is beyond 10 percent (p ⬍ .01). Interestingly, having more than 10
percent of a firm’s equity also does not help reduce
the negative interaction that BNDES equity has
with group membership. That is, even with enhanced equity participation, the state apparently
remains less influential than the other majority
shareholders who control a group.
Models 7–12 in turn show similar specifications
using the market-to-book ratio as a dependent variable. Although some statistical significance is
found in model 12, wherein our variable minority
involves stakes are higher than 10 percent, in the
other models the coefficients are not statistically
significant at conventional levels. Therefore, we
find more robust support for Hypotheses 1 and 2
mostly when ROA is the dependent variable. A
possible explanation is that state equity may be
alleviating short-term constraints of the target
firms, which are reflected in its current accounting
indicators, but market participants do not value
this effect in their long-term projections. Another
5
We also tested for nonlinear effects by adding the
quadratic term minority squared in the case of direct
stakes. However, the coefficient was found to be insignificant. Although our estimates may indicate a linear
effect, it is important to recall that the stakes are minority
ones: Acquiring majority control is not part of BNDES
policy. Furthermore, the bank avoids concentrating too
much capital in a single firm because of demands to
provide capital to firms in multiple sectors.
0.101
(0.079)
0.027*
(0.013)
⫺0.387**
(0.057)
⫺0.223*
(0.090)
⫺0.029
(0.027)
⫺0.019
(0.063)
⫺0.031
(0.051)
Yes
Yes
1,169
128
⬍.001
No
2,920
367
⬍.001
0.003
(0.039)
⫺0.041
(0.045)
Model 2
0.124*
(0.051)
0.078**
(0.025)
⫺0.012
(0.008)
⫺0.280*
(0.115)
0.035
(0.033)
0.01
(0.046)
⫺0.019
(0.045)
Yes
0.111*
(0.055)
⫺0.131*
(0.061)
Model 1
2,919
367
⬍.001
No
0.116*
(0.050)
0.079**
(0.025)
⫺0.012
(0.008)
⫺0.281*
(0.115)
0.031
(0.034)
⫺0.003
(0.055)
⫺0.007
(0.046)
Yes
0.009*
(0.004)
⫺0.012**
(0.005)
Model 3
1,194
130
⬍.001
Yes
0.096
(0.096)
0.032**
(0.011)
⫺0.380**
(0.056)
⫺0.225*
(0.091)
⫺0.038
(0.037)
⫺0.073
(0.078)
⫺0.081
(0.060)
Yes
0.004**
(0.002)
⫺0.007*
(0.003)
Model 4
Direct Stakes
Only
2,919
130
⬍.001
Yes
0.091
(0.092)
0.030**
(0.011)
⫺0.388**
(0.055)
⫺0.200*
(0.096)
⫺0.047
(0.039)
⫺0.070
(0.075)
⫺0.090
(0.064)
Yes
0.003
(0.047)
⫺0.070
(0.057)
Stake
> 0%:
Model 5
1,194
130
⬍.001
Yes
0.091
(0.097)
0.034**
(0.012)
⫺0.360**
(0.055)
⫺0.256**
(0.091)
⫺0.018
(0.041)
⫺0.080
(0.079)
⫺0.077
(0.064)
Yes
0.183**
(0.060)
⫺0.233**
(0.080)
Stake
> 10%:
Model 6
2,209
345
⬍.001
No
0.579
(0.514)
0.096
(0.101)
1.264
(0.863)
⫺1.236
(0.765)
0.410
(0.382)
1.170*
(0.633)
0.058
(0.443)
Yes
0.108
(0.378)
⫺0.056
(0.462)
Model 7
946
125
⬍.001
Yes
0.883
(0.600)
0.172*
(0.069)
2.397*
(1.060)
⫺0.688
(0.721)
0.781†
(0.436)
0.861
(0.594)
⫺0.545
(0.411)
Yes
0.065
(0.310)
⫺0.165
(0.379)
Model 8
Direct/Indirect
Stakes
2,208
345
⬍.001
No
0.595
(0.505)
0.093
(0.104)
1.168
(0.840)
⫺1.287†
(0.766)
0.372
(0.365)
1.021†
(0.526)
⫺0.033
(0.374)
Yes
0.048
(0.042)
⫺0.038
(0.044)
Model 9
968
127
⬍.001
Yes
0.828
(0.575)
0.140*
(0.062)
1.857*
(0.841)
⫺0.960
(0.863)
0.643†
(0.379)
0.894
(0.767)
⫺0.413†
(0.214)
Yes
0.012
(0.017)
⫺0.018
(0.021)
Model 10
Direct Stakes
Only
Market-to-Book Ratio:
Minority Equity Measured as
968
127
⬍.001
Yes
0.696
(0.491)
0.127*
(0.057)
1.953*
(0.807)
⫺0.897
(0.838)
0.555
(0.385)
0.656
(0.573)
⫺0.435*
(0.217)
Yes
⫺0.182
(0.433)
0.273
(0.576)
Stake
> 0%:
Model 11
968
127
⬍.001
Yes
0.710
(0.486)
0.161*
(0.068)
2.059*
(0.790)
⫺1.014
(0.805)
0.769*
(0.367)
0.503
(0.580)
⫺0.380†
(0.209)
Yes
0.901†
(0.532)
⫺1.555*
(0.595)
Stake
> 10%:
Model 12
a
Under the dependent variables return on assets and market-to-book ratio, direct/indirect stakes is coded as a dummy variable; direct stakes only, as a percentage. Robust
standard errors (clustered on each firm) are in parentheses.
†
p ⬍ .10
* p ⬍ .05
** p ⬍ .01
Year, firm, firm-industry
fixed effects
With propensity score
matching
Observations
Firms
p (for F-test)
Merger
State control
Foreign control
Fixed assets
Leverage
ln(revenues)
Controls
Group
Minority ⫻ group
Hypothesized effects
Minority
Variables
Direct/Indirect
Stakes
ROA:
Minority State Equity Measured as
TABLE 3
Effect of Minority State Ownership on Performancea
2013
Inoue, Lazzarini, and Musacchio
possibility is that market investors may detect firms
with valuable opportunities just awaiting extra capital; hence these firms might attain superior market
value even before their new capitalization. Accounting measures might thus allow better assessment of the actual operational gains emanating
from new injections of state capital.
Effect of Minority State Equity on Fixed
Investments
We next tested Hypotheses 3 and 4 by assessing
how state equity affects the investment of firms
with constrained opportunity, interacting minority
with constrained opportunity and with constrained
opportunity times group. As per Hypothesis 3, we
expected the interactions between the minority
stake variables and constrained opportunity to be
positive, because state capital will trigger new investment, especially in the case of financially constrained firms with valuable projects. As for Hypothesis 4, we expected the interactions between
the stake variables and constrained opportunity
times group to be negative, with the positive effect
of state capital larger in the case of firms that do not
belong to groups. Given that we were introducing
three-way interactions, we also added as controls
all possible two-way interactions between key variables (e.g., Chari & David, 2012).
Table 4 shows the corresponding regressions. As
in our previous performance results, Hypotheses 3
and 4 are only consistently supported when minority stakes are direct (models 3 and 4). The inference
is robust to the alternative methods with and without matching. If we use the estimates with matching (model 4), we see that an increase of one percentage point in state equity is expected to increase
capital expenditures by more than three times the
initial stock of the fixed capital of firms with constrained opportunity (p ⬍ .05). This result suggests
that these firms are in a process of accelerated
growth or have very low initial stock of fixed capital. In addition, the coefficient of the three-way
interaction (minority ⫻ constrained opportunity ⫻
group) indicates that, again, the aforementioned
positive effect disappears in the case of firms belonging to groups. The main effect of state capital
(minority) is insignificant. In sum, minority state
equity promotes investment only in the case of
stand-alone firms with constrained opportunity
and when equity investments are directly allocated
to target firms instead of indirectly through layers
of ownership.
1789
Effect of Institutional Development
Given that we only found significant effects of
direct minority capital, to test Hypotheses 5 and 6
we restricted our analysis of institutional effects to
those direct stakes only. For robustness, we also
controlled for matching in all regressions.6 Table 5
essentially expands model 4 of Table 4 by adding
interactions between the institutional variables and
the previously interacted variables (minority ⫻
constrained opportunity and minority ⫻ constrained opportunity ⫻ group). Given that we had
three- and four-way interactions, we again added
all possible lower-order interactions as controls
(Chari & David, 2012). Every column in Table 5
introduces a particular institutional variable, beginning with the simple count variable for time in
model 1 and the other, more refined variables in
models 2– 6.
In keeping with Hypotheses 5 and 6, estimates
from the first model show that the positive effect of
state equity in promoting new investments for
firms with constrained opportunity has diminished
over time, especially in firms that do not belong to
groups (p ⬍ .01). A similar pattern is found for the
institutional variables ease of credit (model 3),
stock market capitalization to GDP (model 4), and
availability of skilled labor (model 6). Recall that,
to avoid spurious inference due to natural improvement trends in the local economy correlated with
these particular institutional variables, in models
2– 6 we added time and all its interactions as controls. Thus, our results confirm that positive improvements in local institutions—in other words, a
gradual mitigation of voids—tend to reduce the
benefits of minority state capital. For instance, the
significant effect of the capital market variables
suggests that firms may become progressively less
dependent on state capital as credit as equity markets develop.7
Robustness Check: Are Our Results Driven by
Selection?
As an additional robustness test complementing
our fixed-effects approach with and without match6
The results, however, are similar in regressions without matching (not reported here but available upon
request).
7
In fact, models with only data after 2002 show no
significant effect of state equity on performance or investment (see, e.g., Lazzarini et al., 2012).
1790
Academy of Management Journal
December
TABLE 4
Effect of Minority State Ownership on Fixed Investmentsa
Minority State Equity Measured as
Direct/Indirect Stakes
Variables
Hypothesized effects
Constrained opportunity ⫻ minority
Constrained opportunity ⫻ minority ⫻ group
Controls
Minority
Minority ⫻ group
Constrained opportunity
Group
Constrained opportunity ⫻ group
Ln(revenues)
Leverage
Fixed assets
Foreign control
State control
Merger
Year, firm, firm-industry fixed effects
With propensity score matching
Observations
Firms
p (for F-test)
Direct Stakes Only
Model 1
Model 2
Model 3
Model 4
53.032
(48.268)
⫺52.350
(48.084)
21.657
(13.371)
⫺18.091
(13.544)
7.114**
(1.697)
⫺7.113**
(1.693)
3.767*
(1.641)
⫺3.710*
(1.659)
5.732
(3.927)
⫺5.906
(3.889)
⫺1.968
(1.457)
⫺0.077
(1.008)
1.48
(1.761)
⫺0.768
(0.698)
⫺0.002
(0.031)
⫺4.689
(5.837)
2.677
(2.273)
⫺5.127
(6.091)
0.313
(1.411)
Yes
No
1,970
314
⬍.001
3.433
(3.603)
⫺5.079
(3.897)
⫺2.706
(1.657)
⫺3.133
(2.974)
0.317
(2.372)
⫺2.252*
(1.106)
⫺6.641
(4.296)
2.92
(8.051)
2.907
(2.214)
⫺6.810
(6.546)
⫺5.968
(3.725)
Yes
Yes
861
122
⬍.001
0.502
(0.402)
⫺0.651
(0.401)
⫺2.452†
(1.341)
⫺1.014
(1.008)
1.591
(1.444)
⫺1.207†
(0.661)
⫺0.001
(0.029)
⫺1.477
(3.300)
3.882
(2.487)
⫺0.773
(1.498)
0.116
(1.453)
Yes
No
1,969
314
⬍.001
0.284
(0.381)
⫺0.438
(0.373)
⫺3.566†
(1.875)
⫺5.859
(3.863)
0.263
(2.890)
⫺2.278*
(0.954)
⫺1.387
(3.641)
7.852
(12.527)
4.447*
(2.599)
⫺4.805
(4.237)
⫺5.649
(3.799)
Yes
Yes
878
124
⬍.001
a
Direct/indirect stakes is coded as a dummy; direct stakes only, as a percentage. Robust standard errors (clustered on each firm) are in
parentheses.
†
p ⬍ .10
* p ⬍ .05
** p ⬍ .01
ing, we unveil the selection process by performing
additional regressions using state equity as a dependent variable and the firm-level variables ROA,
market-to-book ratio, leverage, and fixed assets as
explanatory variables. For instance, if BNDES is
selecting firms that already have superior capabilities, then the effect of ROA and market-to-book
would likely be positive. We used the lagged values
of these variables because BNDES likely observes
past variables in its equity investment decisions.
Also, given that minority was a discrete variable,
but we wanted to control for unobservable firmspecific characteristics that might affect BNDES’s
choice of companies in which to participate, we
adopt the conditional logit model (Chamberlain,
1980), a fixed-effects specification for discrete data.
To check whether effects change when the percentage of the state’s direct stake is considered, we ran
2013
Inoue, Lazzarini, and Musacchio
1791
TABLE 5
Moderating Effect of Institutional Variables on Fixed Investmentsa
Variables
Time:
Model 1
Country Credit
Rating: Model 2
Ease of
Credit:
Model 3
Hypothesized effects
Constrained opportunity ⫻ minority
⫻ institutional
Constrained opportunity ⫻ minority
⫻ group ⫻ institutional
⫺1.361**
(0.445)
1.401**
(0.454)
1.398
(1.181)
⫺1.489
(1.182)
⫺0.649**
(0.030)
0.680**
(0.033)
⫺0.523*
(0.231)
0.528*
(0.231)
⫺1.084
(0.971)
1.157
(0.971)
⫺3.138**
(0.489)
3.217**
(0.492)
0.480
(0.608)
⫺1.892
(3.186)
1.690
(3.339)
⫺0.585
(0.538)
⫺0.766
(0.596)
⫺10.454†
(5.473)
14.087**
(5.032)
⫺14.127**
(5.055)
⫺0.059†
(0.035)
0.083*
(0.038)
⫺0.361
(0.518)
1.114
(0.815)
0.596
(1.502)
Already added
as regressors
Yes
2.898**
(0.579)
5.433†
(3.221)
10.067
(7.565)
⫺0.363
(0.424)
⫺2.866**
(0.562)
⫺17.067†
(9.360)
23.114**
(2.804)
⫺22.182**
(2.819)
0.055
(0.037)
⫺0.063†
(0.034)
⫺0.043
(0.108)
0.233
(0.310)
⫺0.246
(0.420)
Yes
2.978**
(0.513)
6.341†
(3.258)
10.171
(6.671)
⫺0.171
(0.138)
⫺2.831**
(0.514)
⫺16.040*
(7.998)
18.205**
(0.571)
⫺16.053**
(1.053)
0.020
(0.019)
⫺0.017
(0.020)
0.044
(0.052)
0.008
(0.122)
0.095
(0.167)
Yes
2.028**
(0.643)
4.538
(3.090)
10.174
(6.362)
0.033
(0.086)
⫺1.930**
(0.604)
⫺16.230*
(7.568)
32.967**
(5.722)
⫺33.383**
(5.720)
0.029**
(0.004)
⫺0.031**
(0.005)
0.075
(0.049)
0.138†
(0.081)
⫺0.119
(0.125)
Yes
3.370**
(1.049)
6.612†
(3.626)
11.954
(8.809)
⫺0.657
(0.650)
⫺3.312**
(0.970)
⫺17.736
(11.920)
17.752**
(3.066)
⫺16.350**
(3.142)
⫺0.099†
(0.059)
0.108†
(0.062)
⫺0.256
(0.258)
⫺0.404
(0.720)
0.26
(1.009)
Yes
1.133**
(0.381)
4.535
(3.963)
10.366
(6.555)
1.436
(1.528)
⫺0.920
(0.595)
⫺18.867†
(11.225)
47.630**
(4.011)
⫺48.544**
(4.087)
0.124**
(0.043)
⫺0.130**
(0.046)
0.17
(0.213)
0.213
(0.288)
0.018
(0.586)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
878
⬍.001
Yes
660
⬍.001
Yes
660
⬍.001
Yes
660
⬍.001
Yes
660
⬍.001
Yes
660
⬍.001
Controls
Minority
Group
Constrained opportunity
Institutional variable (see header)
Minority ⫻ group
Constrained opportunity ⫻ group
Constrained opportunity ⫻ minority
Constrained opportunity ⫻ minority
⫻ group
Minority ⫻ institutional
Minority ⫻ group ⫻ institutional
Group ⫻ institutional
Constrained opportunity ⫻
institutional
Constrained opportunity ⫻ group
⫻ institutional
Above interactions with time count
ln(revenues), leverage, fixed,
foreign, state, merger
Year, firm, firm-industry fixed
effects
With propensity score matching
Total observations
p (for F-test)
Stock Market
Competition
Capitalization to Legislation:
GDP: Model 4
Model 5
Availability of
Skilled Labor:
Model 6
a
Minority (equity) is measured as direct stakes. Robust standard errors (clustered on each firm) are in parentheses. All institutional
variables (except time count) are computed as percentage variations within three-year moving windows.
†
p ⬍ .10
* p ⬍ .05
** p ⬍ .01
additional fixed-effects regressions using our continuous measure of direct stakes as a dependent
variable. Moreover, because our period of analysis
covers the term of two distinct presidents, Fer-
nando Henrique Cardoso (1995–2002) and Luiz
Inácio Lula da Silva (2003–10), we separated our
regressions into two periods, 1995–2002 and 2003–
09, to determine whether the changes in the effect
1792
Academy of Management Journal
December
TABLE 6
Results of Selection Analysis: Factors Affecting the State’s Presence as a Minority Ownera
Minority State Equity Measured as
Direct/Indirect Stakes:
Conditional Logit
Variables
ROAt – 1
Market-to-book ratiot – 1
Constrained opportunityt – 1
Groupt – 1
ln(revenues)t – 1
Leveraget – 1
Fixed assetst – 1
Foreign controlt – 1
State controlt – 1
Mergert – 1
Year and firm fixed effects
Year-industry fixed effects
Observations
Firms
p (for likelihood ratio test)
p (for F-test)
Direct Stakes Only: Ordinary Least Squares
with Fixed Effects
Model 1:
1995–2009
Model 2:
1995–2002
Model 3:
2003–2009
Model 4:
1995–2009
Model 5:
1995–2002
Model 6:
2003–2009
1.289
(1.438)
⫺0.076
(0.229)
0.164
(0.574)
2.238†
(1.180)
⫺0.441
(0.365)
0.773
(1.733)
0.463
(1.615)
⫺2.018†
(1.047)
⫺0.302
(1.130)
⫺17.964
(987.023)
Yes
No
329
39
⬍.001
0.521
(3.095)
0.932*
(0.410)
⫺3.006*
(1.227)
⫺30.961
(3,109.987)
⫺1.323
(0.892)
⫺6.070†
(3.676)
⫺0.743
(3.684)
⫺1.608
(1.851)
⫺16.53
(2,186.026)
8.629
(7.506)
⫺0.289
(0.674)
5.183
(3.554)
14.305
(3,094.068)
3.121
(3.417)
6.406
(5.119)
6.543
(4.889)
17.172
(2,283.934)
4.224
(4.364)
0.038
(0.038)
0.326
(0.368)
⫺0.664
(0.964)
⫺0.502
(0.664)
0.564
(1.232)
1.289
(1.394)
0.51
(1.728)
⫺0.423
(1.139)
0.017
(0.446)
Yes
Yes
1,573
279
5.586
(6.042)
0.078
(0.086)
⫺0.089
(0.635)
⫺2.161
(1.511)
⫺0.997
(0.821)
⫺2.126
(1.892)
⫺0.702
(2.008)
⫺0.730
(1.386)
⫺1.447
(1.412)
⫺0.381
(1.421)
0.014
(0.038)
0.294
(0.376)
0.431
(1.111)
⫺0.423
(0.324)
3.931
(2.852)
2.450†
(1.317)
6.720†
(3.537)
Yes
Yes
861
239
⫺2.378
(1.828)
Yes
Yes
712
188
⬍.001
⬍.001
⬍.001
Yes
No
110
23
⬍.001
Yes
No
95
17
⬍.001
a
Direct/indirect stakes is coded as a dummy variable; direct stakes only, as a percentage. Standard errors are in parentheses. Models 4–6
present robust standard errors clustered on each firm. Year-industry fixed effects are excluded from the conditional logit model to facilitate
convergence of the maximum-likelihood estimation. In addition, some variables are excluded from some conditional logit regressions
because some subsamples lack sufficient within-firm variability.
†
p ⬍ .10
* p ⬍ .05
of state equity found over the years are the result of
changes in the government itself.
Models 1 and 4 of Table 6 show the results for the
whole period. All variables are insignificant at conventional levels, suggesting that our results are not
driven by selection.8 Thus, models 1 and 4 of Table 6 indicate that, during the whole period, the
bank did not systematically select companies on
the basis of past performance or other financial
8
The number of observations in the conditional logit
model is substantially reduced because the model drops
cases without within-firm variance in allocations (i.e.,
firms in which BNDES never invested or equally invested during the whole period).
indicators. Splitting our regressions for the two periods also fails to reveal substantial differences.
While during 1995–2002 we detect significant effects of market-to-book and constrained opportunity when stakes are assessed indirectly or directly
(model 2), these effects do not hold when direct
stakes only are considered (model 5). Estimates
when the dependent variable measures direct
stakes (models 4 – 6) are widely insignificant, except for the marginally significant effect of fixed
assets or foreign control in the subsample for 2003–
09. However, this should not be a source of
concern, because those variables are themselves
controls in our performance and investment regressions (Tables 3 and 4). In addition, given that only
2013
Inoue, Lazzarini, and Musacchio
direct stakes yielded consistent effects in those regressions, we concluded that selection did not
likely drive our previous results.9
Additional Robustness Check: Are Our Results
Driven by Improved Access to Debt?
Our key predicted mechanism is that state ownership alleviates investment constraints, especially
for companies with large capital needs. An alternative mechanism is that BNDES could increase leverage in a firm in which it has bought equity by
opening lines of credit (from its own banking arm
or from other banks). We therefore ran our regressions with two distinct dependent variables: leverage and financial expenses. Models 1– 4 of Table 7
indicate that state equity does not significantly
change leverage. That is, when BNDES becomes a
minority shareholder, it does not appear to improve
access to loans. Models 5– 8, in turn, examine
whether state equity affects financial expenses. Although we found a significantly negative effect of
minority in model 5, the effect did not hold when
we controlled for matching (model 6). Thus, we fail
to find consistent support for the alternative explanation that state equity may be affecting firms’ ability to attract loans. This finding is consistent with
allegations that BNDESPAR, BNDES’s equity arm,
usually operates independently not only of the
bank unit responsible for debt financing, but of
other banks as well.10
9
As an additional test, we collected new data on
whether the firms in our data set voluntarily adhered to
the so-called New Market, a set of governance rules involving improved transparency and accountability. Of
the firms that adhered to the New Market by 2009, 15
percent had BNDES equity. Of the firms outside the New
Market, a slightly higher portion, 21 percent, had BNDES
equity. Adding a dummy, New Market, to explain selection
(i.e., in the specifications reported in Table 6) also did not
yield significant results. Thus, at least with respect to firms
with and without the New Market rules, there is no indication that firms with (presumably) improved governance
practices were systematically selected.
10
For yet another test, using 2002– 09 data collected
for a companion paper (Lazzarini et al., 2012), we more
directly assessed whether receiving BNDES equity implied receiving BNDES loans—which are heavily subsidized and, unlike equity allocations, directly affect profitability. The correlation between dummy variables
coding whether firms had BNDES equity/loans is very
small (⫺.03) and not statistically significant at conventional levels.
1793
Some Illustrations
Aracruz and NET are Brazilian companies that
illustrate the effects unveiled in our quantitative
analysis. A leading worldwide exporter of cellulose
pulp, Aracruz managed a complex, vertically integrated chain with investments in forest cultivation
as well as in processing plants. BNDES was instrumental in promoting Aracruz’s initial development. With 38 percent of voting shares in 1975,
BNDES helped fund approximately 55 percent of
the industrial investments that enabled the firm
initiate pulp production in 1978 (Spers, 1997). Production efficiency was substantially improved
through capital expenditures that supported a new
capitalization program in the 1990s. Aracruz’s processing capacity jumped from 400,000 tons of pulp
per year in 1978 to 1,070,000 tons in 1994 and
1,240,000 tons in 1998. A new expansion plan approved by the board in 2000 triggered some
$800 million dollars in new capital expenditures
between 2001 and 2003, 75 percent allocated to
industrial processing plants and 20 percent to investments in land and forest technology.
Although BNDES contributed to an important
portion of Aracruz’s equity in its stage of accelerated growth, the bank acted as a minority shareholder and progressively sold some of its shares to
private owners Safra and Lorentzen. The presence
of private controllers notwithstanding, Aracruz
was practically managed as a focused, stand-alone
firm, with improved governance practices (after its
period of initial growth, the firm even managed to
list advisory depository shares on the New York
Stock Exchange). This case therefore illustrates
how minority equity by the Brazilian state can be
used to boost productive fixed investments in a
context of reduced risk of expropriation.
In contrast, NET illustrates a potential negative
effect of group membership. The firm was a subsidiary of Globo, a large media group in Brazil founded
by journalist Irineu Marinho in 1925. Indirectly
through Globopar, the Marinho family held stakes
in publishing and printing companies as well as in
cable, satellite, and Internet service providers,
among other businesses. By 1999, the Marinho family, through Globopar’s pyramid, had acquired majority control of Globo Cabo, also known as NET. To
support its ambitious plans to expand broadband
infrastructure in Brazil, BNDESPAR agreed to capitalize NET with the purchase of shares worth
around $89 million dollars.
0.043
(0.057)
Yes
Yes
727
119
⬍.001
⫺0.316**
(0.026)
⫺0.019
(0.047)
0.000
(0.007)
⫺0.109†
(0.065)
⫺0.002
(0.032)
0.078
(0.068)
0.043
(0.057)
⫺0.022
(0.063)
⫺0.357**
(0.082)
0.015**
(0.003)
⫺0.011
(0.037)
0.033
(0.044)
⫺0.373**
(0.050)
0.009**
(0.002)
⫺0.282**
(0.021)
⫺0.036
(0.028)
⫺0.002
(0.006)
⫺0.025
(0.049)
0.01
(0.027)
⫺0.037
(0.037)
⫺0.071
(0.046)
⫺0.011
(0.037)
Yes
No
1,664
303
⬍.001
Model 2
Model 1
Yes
No
1,663
303
⬍.001
⫺0.284**
(0.021)
⫺0.032
(0.029)
⫺0.001
(0.006)
⫺0.022
(0.049)
0.009
(0.028)
⫺0.041
(0.036)
⫺0.066
(0.050)
⫺0.001
(0.002)
0.000
(0.003)
⫺0.375**
(0.050)
0.009**
(0.002)
Model 3
Yes
Yes
749
121
⬍.001
⫺0.306**
(0.031)
⫺0.023
(0.064)
0.002
(0.007)
⫺0.146†
(0.078)
0.046
(0.058)
⫺0.003
(0.060)
0.001
(0.002)
⫺0.003
(0.003)
⫺0.358**
(0.094)
0.020**
(0.004)
Model 4
Direct Stakes
Only
0.042
(0.035)
0.017*
(0.008)
⫺0.042
(0.056)
0.044
(0.032)
0.08
(0.051)
⫺0.201**
(0.071)
⫺0.061*
(0.025)
Yes
No
1,664
303
⬍.001
⫺0.061*
(0.025)
0.042
(0.038)
⫺0.476**
(0.065)
0.013**
(0.003)
⫺0.765**
(0.069)
Model 5
⫺0.016
(0.044)
Yes
Yes
727
119
⬍.001
0.078†
(0.046)
0.014*
(0.007)
⫺0.114
(0.101)
0.065
(0.042)
0.291**
(0.076)
⫺0.016
(0.044)
⫺0.013
(0.063)
⫺0.382**
(0.089)
0.015**
(0.004)
⫺0.853**
(0.090)
Model 6
Direct/Indirect
Stakes
Yes
No
1,663
303
⬍.001
0.041
(0.035)
0.017*
(0.007)
⫺0.040
(0.057)
0.050
(0.033)
0.084
(0.051)
⫺0.200**
(0.071)
⫺0.002
(0.002)
0.000
(0.003)
⫺0.480**
(0.065)
0.013**
(0.003)
⫺0.772**
(0.068)
Model 7
Yes
Yes
749
121
⬍.001
0.043
(0.065)
0.013†
(0.007)
⫺0.146
(0.120)
0.116**
(0.040)
0.120
(0.091)
⫺0.002
(0.001)
0.000
(0.003)
⫺0.386**
(0.093)
0.018*
(0.007)
⫺0.674**
(0.101)
Model 8
Direct Stakes
Only
Financial Expenses: Minority State
Equity Measured as
Under the dependent variables leverage and financial expenses, direct/indirect stakes is a dummy variable; direct stakes only is a percentage. Robust standard errors (clustered
on each firm) are in parentheses. State control and merger are excluded from some regressions owing to insufficient within-firm variability, given the other existing controls and
fixed effects.
†
p ⬍ .10
* p ⬍ .05
** p ⬍ .01
a
Year, firm, firm-industry fixed effects
With propensity score matching
Observations
Firms
p (for F)
Merger
State control
Foreign control
Fixed assets
Leverage
ln(revenues)
Group
Financial expenses
Leverage
Market-to-book ratio
ROA
Minority ⫻ group
Minority
Variables
Direct/Indirect
Stakes
Leverage: Minority State Equity
Measured as
TABLE 7
Effect of Minority State Ownership on Leverage and Financial Expensesa
2013
Inoue, Lazzarini, and Musacchio
The currency crisis that affected Brazil in the late
1990s, however, drove up Globo’s debt and put
financial strain on Globopar and a number of its
group affiliates, including NET. When NET’s market expansion proved unsuccessful, with demand
(the number of subscribers) falling short of expectations, it posted successive losses. In March 2002,
the situation having become critical, the group announced a capitalization plan of around $430 million dollars. BNDES again agreed to contribute. The
bank’s involvement was, however, heavily criticized, some suggesting that it was acquiescing to
the pressure of a strong domestic group. BNDES’
new capital injections were then made conditional
on a change in NET’s governance practices—
which, according to Eleazar de Carvalho, then president of BNDES, were “the basic and primordial
element” of the problem.11 This illustration is
therefore consistent with our hypothesis and finding that the positive effect of state equity is attenuated when investments are allocated to pyramidal
groups.
DISCUSSION AND FINAL REMARKS
Implications for Theory
From a theoretical standpoint, our article contributes with a new framework explaining the performance implications of minority state ownership.
Building on the institution-based view of strategy
and firm theories, we posit that minority stakes can
have a positive impact on firm performance and
investment— especially in the case of firms with
latent investment opportunities but, at the same
time, with severe constraints in their ability to assess external capital, which is often the case in
developing and emerging economies. We also theorize and find supporting evidence that this performance effect is attenuated when target firms belong
to business groups. Furthermore, we submit that
the effect depends on institutional development. If
minority state equity helps reduce voids in a local
environment, then the value of those capital injections should diminish as capital, product, and labor markets develop. Thus, we unveil complex
interactions between state ownership, group ownership, and environmental conditions commonly
found in emerging markets.
11
Interview, “Para BNDES, ajuda à Globo não é garantida” [For BNDES, support of Globo is not guaranteed], O
Estado de São Paulo, March 17, 2002.
1795
In this sense, our theory advances researchers’
understanding of the relatively overlooked phenomenon of minority state investment in emerging
markets and contributes to the discussion about the
pros and cons of state capitalism (Bremmer, 2010).
We inform this debate from the point of view of
firms, by examining the conditions under which
state ownership positively affects firm-level performance and investment. Furthermore, given our
study’s emphasis on firm-level outcomes, it also
adds to the current debate in strategic management
on nonmarket sources of performance heterogeneity associated with public policy and country-level
institutional factors (Hoskisson et al., 2000; Mahoney, McGahan, & Pitelis, 2009; Peng et al., 2009;
Spencer, Murtha, & Lenway, 2005). Although there
has been a flurry of research on how emerging
market conditions affect firm-level strategies, studies focusing on the role of the state in which a firm
is located as a source of differential performance
have been scant. Similar analyses can be performed
in other institutional contexts to gauge whether and
in which conditions heterogeneous performance
can be explained by active state policy.
In addition, after drawing from the literature on
institutional voids, our study advances this literature by proposing ways in which local policies may
be promoting instead of limiting. Strategy scholars
have rarely examined in detail how state policies
can affect industry- and firm-level development.
Mahmood and Rufin’s (2005) paper is a notable
exception; they also discuss the role of state at
various stages of development and propose a substitutive role between state intervention and business groups. However, while they discuss the costs
and benefits of governmental centralization, we
study cases in which a state participates in firms
whose control is decentralized to private owners.
We therefore shed light on the new—and understudied—forms of state capitalism whereby a state
acts as a minority investor in the economy of its
nation. Our findings thus suggest a new programmatic agenda wherein scholars not only examine
how firms react to limiting institutions, but also
how local policies can positively interact with private strategies to foster competitive advantage.12
12
One could argue that foreign minority equity could
have a positive effect similar to that of state equity. To
examine this possibility, we collected data on instances
of foreign firms jointly participating as minority shareholders in control blocks of shares with other domestic
1796
Academy of Management Journal
Implications for Practice
Our study also has important practical implications. While some authors contend that government
interference in an economy creates inefficiency and
crowds out private entrepreneurship, our evidence
suggests that the state-led purchase of equity stakes in
publicly traded corporations may not be problematic,
depending on the governance profiles of target firms
and stage of institutional development. In a context of
poorly developed capital markets, state-backed, longterm equity can allow firms to undertake performance-enhancing projects and promote capital expenditures needed to achieve efficiency gains. The
potential for political distortions associated with government ownership is attenuated in the case of minority holdings because these holdings leave other
investors and managers to play the key roles in the
private companies in which government invests.
When the government injects capital into pyramidal
groups (especially domestic and state-owned ones),
its equity participation tends to be associated with
negative effects. In such cases, capital injections apparently either become unnecessary (perhaps because of the existence of internal capital markets
within groups) or are tunneled through the pyramids
to support inefficient allocations.
In conclusion, our results suggest that policy
makers considering minority equity stakes as an
industrial policy tool should avoid pyramidal
groups with poor governance and target instead
stand-alone firms; focus investments where there
is a clear need to undertake productive capital
expenditures by well-run firms; allocate equity
capital directly in target firms instead of indirectly through layers of ownership; and progressively exit targeted firms as the local institutional
context develops. Under these guidelines, the
grabbing hand of the state (Shleifer & Vishny,
1998) may eventually become a helping hand.
Suggestions for a Future Research Agenda
The effect of state minority ownership in other
institutional contexts. Admittedly, some of our
owners. We then performed similar analyses and found
no consistent, significant effects of minority foreign equity. A possible explanation is that such minority foreign
positions may simply serve as “real options” for future
expansion; they may therefore not necessarily affect local
profitability or investment.
December
results may be idiosyncratic to Brazil and to its
particular mechanisms of minority state participation. Thus, future work is needed to verify the
generalizability of our results to other developing
and emerging economies using other channels of
state capital and other types of outcomes. More
theoretical work is also needed to explain why
minority state equity remains generally widespread, as discussed in the introduction. Our theory rests on the idea that those minority stakes
can help firms subject to scarce external financing and therefore is unable to predict any performance-based impact in more developed economies with active and liquid capital markets (e.g.,
OECD, 2005).
The role of state loans (besides equity). Along
these lines, it would also be important to examine
the effect of not only state equity, but also debt. As
of 2011, Lazzarini, Musacchio, Bandeira-de-Mello,
and Marcon (2012) identified 286 development
banks throughout the world that heavily provide
firms with long-term loans besides equity. We argue here that, from a transaction cost standpoint,
equity has the advantage of supporting risky,
nonredeployable investment. However, given the
prevalence of loans from development banks, it
would also be informative to examine the conditions under which loans can also prop up firmlevel development. Through their loans, development banks can also help restructure targeted firms
and improve their performance as a result (George
& Prabhu, 2000).
The effect of state capital on innovation. In
connection with the work of Mahmood and Rufin
(2005), who focus on innovation as a key outcome
variable, one might look at whether having government as an investor leads firms to be more innovative. Some have proposed that states are instrumental in fostering basic research in various sectors
such as computing, health, and agriculture (Graham, 2010; Mazzucato, 2011; Mowery, 1984). A
recent study by Aghion, Van Reenen, and Zingales
(2013) showed that innovation is positively affected by the presence of “institutional” investors
who can increase managerial incentives to execute
riskier, long-term innovation projects. Since states
should be long-term investors, then we should see
innovative activity correlated with new state investments in the minority equity of entrepreneurial
firms with constrained innovation opportunities.
Although here we focus on how state capital can
revamp fixed assets, one could also examine its
2013
Inoue, Lazzarini, and Musacchio
effect on more intangible aspects, such as R&D expenditures and knowledge spillovers among firms.
The diversity of state ownership and governance. Minority stakes may also come in various
forms: Beyond development banks, governments
have variously used public pension funds, life
insurance companies, sovereign wealth funds,
state-owned holding companies, and so forth
(Wooldridge, 2012). It would be interesting to assess how these various forms of equity differ and
affect firm performance. Furthermore, the governance of such minority investments should be
studied in a more microanalytical way. Do governments, as minority shareholders, form alliances
with other private owners to pursue certain types of
strategies? Arguably, governments may participate
in coalitions with other shareholders and hence
exert influence on firm-level decisions even if they
hold only minority stakes. For instance, in 2009,
the Brazilian government, as a minority shareholder through BNDES and public pension funds
(Figure 1), was able to pressure the mining firm
Vale to invest locally in steel mills and buy ships
assembled in the country. This form of residual
interference will be observed, however, only when
other minority shareholders collude with the state,
which is not always a feasible outcome (Musacchio
& Lazzarini, 2014). In other words, future work
could more closely examine complex corporate
networks formed by state and private actors and the
consequences of those networks for firm-level
performance.
To be sure, opportunities abound to study the
various forms through which states can either promote or derail firm-level development through
complex interactions with investors and entrepreneurs. We sincerely hope that our work helps
spark future work in strategic management and
related disciplines to more closely assess alternative forms of state capitalism and their firm-level
implications.
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Carlos F. K. V. Inoue (carlosfkvi1@insper.edu.br) is a
Ph.D. candidate in strategic management at the Rotman
School of Management, University of Toronto. He
holds a master’s degree from Insper Institute of Education and Research, Brazil. His research focuses on
public-private interactions and corporate social
responsibility.
Sergio G. Lazzarini (sergiogl1@insper.edu.br) is a professor of organization and strategy at Insper Institute of
2013
Inoue, Lazzarini, and Musacchio
Education and Research. He received his Ph.D. in business administration from the John Olin School of Business,
Washington University in St. Louis. His research interests
include advances in the theory of the firm, the interplay of
institutions and firm strategies, and the performance implications of public-private interactions.
Aldo Musacchio (amusacchio@hbs.edu) is an associate
professor of business administration at Harvard Business
1801
School and a faculty research fellow at the National
Bureau of Economic Research. He has a Ph.D. in economic history from Stanford University. His research
interests include corporate governance, state capitalism
and, in general, the intersection of strategy and political
economy.