۱- Introduction

۲- Theoretical background and hypotheses

۳- Sample and method

۴- Results

۵- Conclusions

References

Abstract

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.

Introduction

Recent research has stressed the national bundles perspective to corporate governance and the importance of understanding how corporate governance differs around the world which requires a rich view of national institutions (Filatotchev et al., 2013; Schiehll et al., 2014). The national institutional and legal environment has specific corporate governance nuances according to local rules which motivates research in specific countries (Chhaochharia and Laeven, 2009). In markets with strong shareholder protection, the institutional environment tends to promote better corporate governance systems with lower variability among firms (Durnev and Kim, 2005). Conversely, weak legal protection can lead to market pressures to improve the corporate governance system through the legal system or promoting the voluntary adoption of good governance practices (Claessens and Yurtoglu, 2013; Klapper and Love, 2004). Despite the role of the institutional environment on corporate governance, an important heterogeneity of firm practices exists within national boundaries. Indeed, many firms integrate corporate governance practices beyond those determined by law or adopted by other firms. Thus, the voluntary adoption of best governance practices in specific markets is a relevant line of study (Aguilera and Jackson, 2003). Unlike Anglo-Saxon countries where corporate ownership is dispersed, the ownership structure in most other countries is much more concentrated with few shareholders owning a significant fraction of shares (Attig et al., 2009; Holderness, 2009; La Porta et al., 1999). Thus, unlike the primary agency problem of the manager–shareholder relationship in economies with dispersed ownership, the concentrated ownership and the relations between large and minority shareholders in economies with concentrated ownership create a principal–principal agency problem (Renders and Gaeremynck, 2012; Young et al., 2008).