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Intraday market liquidity, corporate governance, and ownership structure in markets with weak shareholder protection: evidence from Brazil and Chile

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Abstract

This paper investigates the effects of very highly concentrated ownership structures on the liquidity of stock markets in a context of weak protection for minority shareholders. Such structures are prevalent in a number of European markets as well as in various developing markets, as opposed to US markets. Two alternative hypotheses are tested. The shareholder expropriation hypothesis predicts an inverse relationship between liquidity and ownership concentration for the dominant shareholder. The dominant monitor-insider hypothesis contends that dominant shareholders are not detrimental to market liquidity, since they have incentives to reduce their costs of exit and/or to improve the information transfer of their value enhancing activities to markets. Our empirical results are more consistent with the latter. We find that alternative governance mechanisms also have liquidity enhancing effects for Brazilian and Chilean firms. In particular, cross-listing in the US market and the threat of outside takeovers serve as monitoring devices to reduce informational asymmetries.

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Notes

  1. Khanna and Yafeh (2005) provide a review of the relationship between groups and politics.

  2. Doidge (2004) uses the voting premium measured by the price differential between high vote versus low vote shares as a proxy for the private benefits of control and shows that it is lower for cross-listed firms.

  3. http://www.economatica.com/.

  4. The seven main indexes in Brazil: the Bovespa Stock Index, the Brazil IBX Index, the Electric Power Index, the Telecommunications Sector Index, the Corporate Governance index, the Bovespa Second Tier Index, and the IBX-50 Index cover 177 different firms. The IPSA Index and the INTER-10 Index in Chile cover 40 securities.

  5. The undergoing stock market integration between Chile, Colombia and Peru represent an opportunity for consolidation and growth (soon to be joined by Mexico and eventually by Brazil).

  6. For our sample of firms, however, as we will demonstrate, aggregated institutional investors have on average 5.27 % of voting rights and sometimes they are not present at all in the firm’s ownership structure. Hence, the role of blockholders as monitors for dominant shareholders may be diminished.

  7. Again, shareholder rights are proxy by the existence of a single-class share structure, Becht (1999) suggests that dual class shares enhance liquidity in German firms, however.

  8. This block represents on average 8.67 % of voting rights for sample firms. Detailed results are not reported in order to conserve space.

  9. The CEO also serves as chairman of the board in 19 % of the firms in the sample. The effect of CEO duality on performance remains controversial. See Adams et al. (2010).

  10. Detailed results are not reported in order to conserve space. They are available from the authors on request.

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Acknowledgments

We would like to thank the Editors, Roberto Di Pietra and Jean-Michel Sahut and the anonymous referees for their helpful comments. Financial support to Switzer from the SSHRC and the AMF is gratefully acknowledged.

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Authors and Affiliations

  1. Universidad ESAN, Alonso de Molina 1652, Lima 33, Peru

    Diego C. Cueto

  2. John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. W., Montreal, QC, H3G 1M8, Canada

    Lorne N. Switzer

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  1. Diego C. Cueto
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  2. Lorne N. Switzer
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Correspondence to Lorne N. Switzer.

Appendix

Appendix

The variables in (1) are defined in Table 8.

Table 8 Variable definition
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Cueto, D.C., Switzer, L.N. Intraday market liquidity, corporate governance, and ownership structure in markets with weak shareholder protection: evidence from Brazil and Chile. J Manag Gov 19, 395–419 (2015). https://doi.org/10.1007/s10997-013-9263-8

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