Ownership, Control and
Corporate Valuation of
Brazilian Companies
Ricardo Leal (COPPEAD/UFRJ)
André Carvalhal (COPPEAD/UFRJ)
Sílvia Valadares (Min. Planejamento)
Jairo Procianoy (PPGA/UFRGS)
Introduction


Objectives: analyze the control structure of
Brazilian companies and its effect on
corporate valuation
Presentation structure:
Data and methodology
 Direct shareholding composition
 Indirect shareholding composition
 Control & Value
 Conclusion

Hypotheses



Higher concentration of voting rights is
associated with more expropriation
Higher expropriation is associated with
lower corporate valuation
Therefore: Higher concentration of
voting rights is associated with lower
corporate valuation.
Data



Companies listed on the São Paulo Stock
Exchange (Bovespa) that are not controlled by
the Government
Year-end 1998
Sample: 225 firms, representing 70% of the
Bovespa market capitalization including
government-controlled companies, and more
than 90% of the Bovespa market capitalization
excluding government-controlled companies.
Methodology




Two forms of shareholding composition: direct
and indirect
We consider all shareholders with 5% or more of
the voting capital
Information on the shareholding structure
collected from the Infoinvest database
All 225 companies were divided into two groups:
firms with a majority shareholder (more than 50%
of the voting capital) and firms without a majority
shareholder
Control Groups

For the companies with one majority
shareholder:

If there is an indirect control structure (pyramid):
– shareholder does not maintain control indirectly
– shareholder maintains control indirectly:




by increasing its share of the voting capital
by maintaining the same interest
by decreasing its share in the voting capital
there is no indirect control structure
Control Groups
Is there a majority shareholder
No. Stop.
Is there a pyramid?
No. Stop.
Does shareholder keep control?
No. Stop.
Increase
Same
Decrease
Direct and Indirect Control

Firms with a controlling shareholder:
 largest
has 74% of the voting capital
directly and 55% indirectly, on average
 3 largest have 87% of the voting capital
directly and75% indirectly

In firms without a controlling shareholder
the difference between direct and
indirect control is minimal.
Direct Shareholder Composition



Large degree of concentration of voting capital
Reasonable difference between the percentage of
voting and total capital held by large shareholders,
voting rights are not the same as cash flow rights
The issuance of non-voting shares appears to be
used by large shareholders to maintain control of
the firm without having to hold 50% of the total
capital
Direct Shareholder Composition
Table I
Direct Shareholding Composition of Companies - 1998
Average
Largest
Shareholder (median)
Average
3
Largest
Shareholders
Companies with a
Companies without a
Total
majority shareholder
majority shareholder
sample
(155)
(70)
(225)
Voting
Total
Voting
Total
Voting
Total
Capital
Capital
Capital
Capital
Capital
Capital
74%
53%
31%
22%
61%
43%
(75%)
(50%)
(30%)
(18%)
(59%)
(37%)
86%
62%
65%
44%
79%
56%
(89%)
(60%)
(69%)
(43%)
(84%)
(55%)
87%
62%
76%
49%
84%
58%
(90%)
(62%)
(78%)
(48%)
(88%)
(59%)
(median)
Average
5
Shareholders
(median)
Largest
Indirect Control

If controlling shareholders make full
utilization of the 2:1 non-voting to voting
shares proportion to minimize their
investment then, indirectly, we should
expect to see these shareholders with a
proportion of 17% or less of the voting
capital
Computing Share of Capital
If a shareholder has 50% of a company
that has 50% of another, then his or her
indirect share of the total capital is 50%
times 50% or 25%.
 The same criteria is used to compute
the share of the total capital owned by
controlling shareholders

Indirect Shareholder Composition
Table II
Indirect Shareholding Composition of Companies - 1998
Average
Largest
Shareholder (median)
Average
3
Largest
Shareholders
Companies with a
Companies without a
Total
majority shareholder
majority shareholder
sample
(155)
(70)
(225)
Voting
Total
Voting
Total
Voting
Total
Capital
Capital
Capital
Capital
Capital
Capital
55%
37%
34%
23%
48%
33%
(54%)
(31%)
(29%)
(18%)
(47%)
(26%)
71%
48%
61%
40%
68%
46%
(76%)
(45%)
(62%)
(37%)
(71%)
(43%)
75%
50%
70%
46%
73%
49%
(79%)
(49%)
(74%)
(41%)
(78%)
(47%)
(median)
Average
5
Shareholders
(median)
Largest
Comments on Indirect Control



Total capital participation of major shareholders
is much higher than 17%
This suggests that the utilization of pyramids as
a mechanism to maintain control with less
investment is not very common in Brazil
Therefore, there may exist private benefits of
control, potentially by the expropriation of
minority shareholders
Indirect Majority Shareholders
Table III
Indirect Participation of Controlling Shareholders - 1998
Do
Direct participation of
Indirect participation of
majority shareholder
majority shareholder
Voting
Total
Voting
Total
Capital
Capital
Capital
Capital
75%
54%
26%
16%
Concentration (15)
64%
40%
81%
51%
Maintenance (17)
74%
52%
74%
52%
Diversification (36)
77%
54%
59%
35%
Average
73%
50%
68%
43%
four
74%
52%
50%
31%
composition
74%
56%
74%
56%
not
maintain
control (53)
Maintain
Control (68)
Average
of
groups
Same
(34)
Indirect Control
Of the 121 companies where there is a
majority direct shareholder and where
pyramids are used, in 53 the major
shareholder does not maintain control
indirectly, while they do in 68
 In the 68 firms where they maintain
control indirectly, in 15 cases they
concentrate their voting power, in 17
they keep it and in 36 they diversify

Measuring Value




Tobin’s Q and industry adjusted Tobin’s Q
Price-to-book value (P-B) and industry adjusted
P-B
Beta and industry adjusted beta to account for
risk
We conduct an ANOVA and a differences in
means test in order to compare the expropriation
measures among the six groups of companies
Value and Control



Value seems to be lower for firms where
control is kept indirectly
Value seems to be lower for firms where
control is not only kept but increases indirectly
compared to the greater value of firms where
the share of control is kept but decreases
indirectly
Lower valuation for indirect concentration of
the voting share is consistent with potential
minority shareholder expropriation
Measuring Expropriation (1996)
Table IV
Measuring Expropriation and Risk in Brazilian Companies - 1996
Companies
Companies
without a
with a majority
majority
shareholder
shareholder
(55)
Q
0.95
F Test
Q Adj.
0.00
1.22
0.06
F Test
Do not
(11)
(6)
(21)
composition
Maintain
(14)
Control (31)
0.96
0.86
0.86
0.01
0.75
-0.12
F = 0.58
-0.39
F Test
 Adj.
Same
F = 0.36
F Test

Diversification
F = 0.06
F Test
P-B Adj.
Maintenance
F = 0.27
F Test
P-B
Concentration
1.01
F = 3.51(*)
-0.45
0.64
F = 3.05(*)
0.92
P-value = 0.93
-0.01
P-value = 0.99
0.90
P-value = 0.88
-0.08
P-value = 0.71
0.87
P-value = 0.005
0.72
P-value = 0.01
0.96
Critical F = 2.28 (5%)
-0.02
0.04
-0.01
Critical F = 2.28 (5%)
0.98
1.10
0.99
Critical F = 2.28 (5%)
-0.30
0.09
0.12
Critical F = 2.28 (5%)
0.35
0.70
0.27
Critical F = 2.28 (5%)
0.17
0.54
Critical F = 2.28 (5%)
0.04
Measuring Expropriation (1996)
Table V
Measuring Expropriation and Risk in Brazilian Companies - 1996
Differences in means between 2 groups of firms
Q
Q
P-B
Adj.
P-B

 Adj.
Adj.
Without majority shareholder - Concentration
0.09
-0.01
0.47
0.18
-1.40*
-1.09*
Without majority shareholder - Maintenance
0.03
0.01
0.32
0.14
-1.26*
-1.17*
Without majority shareholder – Diversification
-0.01
0.02
0.24
0.36
-0.74*
-0.62*
Without majority shareholder - Same composition
-0.01
-0.04
0.12
-0.03
-1.09*
-0.99*
Without majority shareholder - Not maintain control
0.09
0.01
0.23
-0.06
-0.66*
-0.49
Not maintain control - Concentration
0.00
-0.02
0.24
0.24
-0.74
-0.60
Not maintain control - Maintenance
-0.06
0.00
0.09
0.20
-0.60*
-0.68*
Not maintain control - Diversification
-0.10
0.01
0.01
0.42
-0.08
-0.13
Not maintain control - Same composition
-0.10
-0.05
-0.11
0.03
-0.43
-0.50
Diversification - Concentration
0.10
-0.03
0.23
-0.18
-0.66
-0.47
Diversification - Maintenance
0.04
-0.01
0.08
-0.22
-0.52*
-0.55*
Diversification - Same composition
0.00
-0.06
-0.12
-0.39
-0.35
-0.37
Maintenance - Concentration
0.06
-0.02
0.15
0.04
-0.14
0.08
Same composition - Concentration
0.10
0.03
0.35
0.21
-0.31
-0.10
Same composition - Maintenance
0.04
0.05
0.20
0.17
-0.17
-0.18
* indicates comparisons significant at the 5% level
Measuring Expropriation (1998)
Table VI
Measuring Expropriation and Risk in Brazilian Companies - 1998
Companie
Companies
s without a
with a majority
majority
shareholder
shareholde
r
(70)
Q
0.79
F Test
Q Adj.
-0.03
0.66
-0.13
F Test
Do not
(15)
(17)
(36)
composition
Maintain
(34)
Control (53)
0.84
0.92
0.76
-0.02
0.53
-0.25
F = 0.84
0.53
F Test
 Adj.
Same
F = 1.37
F Test

Diversification
F = 0.53
F Test
P-B Adj.
Maintenance
F = 1.77
F Test
P-B
Concentration
0.43
F = 1.91
0.06
0.02
F = 1.88
0.81
P-value = 0.12
0.02
P-value = 0.75
0.65
P-value = 0.24
-0.l4
P-value = 0.84
0.55
P-value = 0.09
0.07
P-value = 0.1
0.98
Critical F = 2.26 (5%)
0.07
-0.02
0.01
Critical F = 2.26 (5%)
0.98
0.84
1.23
Critical F = 2.26 (5%)
0.06
-0.11
0.27
Critical F = 2.26 (5%)
0.82
0.35
0.64
Critical F = 2.26 (5%)
0.15
-0.16
Critical F = 2.26 (5%)
-0.08
Measuring Expropriation (1998)
Table VII
Measuring Expropriation and Risk in Brazilian Companies - 1998
Differences in means between 2 groups of firms
Q
Q
P-B
Adj.
P-B

 Adj.
Adj.
Without majority shareholder - Concentration
0.03
-0.01
0.13
0.12
0.10
0.04
Without majority shareholder - Maintenance
-0.02
-0.05
0.01
0.01
-0.02
-0.01
-0.19*
-0.10*
-0.32*
-0.19
-0.29
-0.09
-0.05
-0.01
-0.18
-0.02
0.18*
0.22*
Without majority shareholder - Not maintain control
-0.13*
-0.04
-0.57
-0.40
-0.11
0.14*
Not maintain control - Concentration
0.16*
0.03
0.70*
0.52
0.21
-0.10
Not maintain control - Maintenance
0.11
-0.01
0.58
0.41
0.09
-0.15
Not maintain control - Diversification
-0.06
-0.06
0.25
0.21
-0.18
-0.23*
Not maintain control - Same composition
0.08
0.03
0.39
0.38
0.29*
0.08
Diversification - Concentration
0.22*
0.09
0.45*
0.31
0.39*
0.13
Diversification - Maintenance
0.18*
0.05
0.33*
0.20
0.27
0.08
Diversification - Same composition
0.14
0.09
0.14
0.17
0.47*
0.31*
Maintenance - Concentration
0.05
0.04
0.12
0.11
0.12
0.05
Same composition - Concentration
0.08
0.00
0.31
0.14
-0.08
-0.18
Same composition - Maintenance
0.03
-0.04
0.19
0.03
-0.20
-0.23
Without majority shareholder - Diversification
Without majority shareholder - Same composition
* indicates comparisons significant at the 5% level
Conclusion




Large degree of concentration of the voting
capital in Brazilian companies in 1998
Reasonable difference between the
percentage of voting and total capital held by
large shareholders
The utilization of a pyramid structure does not
appear to be an effort to avoid the one shareone vote rule in Brazilian companies.
Lower valuation for companies where private
benefits of control are needed the most