Data and Sample

The initial sample consists of 364 companies listed on various segments of Sao Paulo Stock Exchange (Bovespa, now called BM&FBovespa) in 2014. Of these, 100 companies listed on the over-the-counter market (OTC) and the alternative market (Bovespa Mais-BM)⁴¹, have been excluded as they do not pass the liquidity test of trading for calculating stock price synchronicity—that is 30 weeks of stock trading. After removing these companies, my sample reduces to 264 companies from the four major segments of the BM&FBovespa Exchange i.e., Traditional Bovespa (Standard Market), Level 1, Level 2 and Novo Mercado (NM). Out of 264 companies, 143 further eliminations are made because of:

1) being financial companies including banks, insurance companies, real-estate investment companies, investment companies, mutual funds and mortgage companies;

2) negative effects associated with financial distress, firms with negative book-to-equity ratios (Fifteen companies);

3) illiquid stocks, having less than 30 weeks of trading and lacking sufficient accounting and financial data (See Appendix A for a list of companies excluded from the sample);

4) being holding companies with equity stakes in subsidiaries and not having their own operating revenues or assets (See Appendix A for a list of companies excluded)

After making the above adjustments, my final sample reduces to 121 companies. The salient characteristics of companies listed on the four listing segments of the market are outlined in Table 3.4.

41 Bovespa Mais, a fifth segment of BM&FBovespa, was introduced in 2008, and is where only small companies, wanting gradual access to the capital market, are listed. As of 2014 only 5 companies were listed in this segment and are not included in the sample because these companies have no tradeable shares.

These companies can remain listed on this segment for seven years without offering shares to the public through IPOs.

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Table 3.4. Listing segment-wise Distribution of Sample

Listing Segment No of

firms

% of sample

Market Cap Sales Total Assets (Mill BRL) (Mill BRL) (Mill BRL)

Traditional⁴² 21 17.21 499193.02 511583.16 1092849.86

Level 1 17 13.93 243235.7 412230.82 925853.66

Level 2 11 9.02 42663.99 67949.92 94695.71

Novo Mercado 72 59.5 565353.47 545121.62 720281.00

Total 121 100 1350446.18 1536885.52 2833680.23

Table 3.4 shows that the market capitalization of firms included in my sample is BRL1,350,446.18 million, while the market capitalization of all the non-financial firms listed on BM&FBovespa is BRL1,812,052.82 million (Bloomberg, 2014). The sample can be considered a good representative of the listed companies in Brazil since it accounts for 74.5% of the stock market capitalization (excluding financial firms) in 2014.

Additionally, the sample contains a reasonable cross-section of companies from the four major corporate governance segments of the market. It is important to note that most of the companies excluded from my sample, based on the aforementioned criteria, are from the Traditional and Novo Mercado segments of the market, because these two segments are extensively dominated by holding and financial companies (See Appendix A). Hence, the percentage contribution of these segments in my sample in Table 3.4 may be slightly different from their real proportional representation in the market. Table 3.4 also indicates that companies included in the Traditional Segment are relatively larger in size, which is why that segment’s total assets (BRL 1092849.86 million) exceed the total assets (BRL 511583.16 million) held by companies in the NM Segment. This occurs because the two largest companies, Petrobras and CSN SA, belonging to the oil and gas, and steel sectors respectively, are included in this segment. Appendix B outlines the industry-wise frequency distribution of my sample. For this study, I use BM&FBovespa’s industry classification scheme, whereby a firm is classified into one of nine non-financial industries based on two-thirds of its total revenue coming from that particular sector.

Appendix B shows that most of the firms in my sample are concentrated in sectors such as utilities (21.31%), basic materials (13.93%), and capital goods and services (11.98%), where assets are largely tangible and can easily be monitored, and a very small fraction of firms belong to sectors where assets are intangible and therefore difficult to monitor such as information technology (2.46%) and telecommunications (4.13%). This

42Traditional, standard and regular represent the same segment on the Brazilian main exchange, BM&FBovesapa.

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disproportionate distribution of firms’ assets between easy-to-monitor and difficulty-to-monitor industries perhaps occurs in situations when inside managers have higher tendencies to expropriate assets and firms, in response, prefer to concentrate their assets in easy-to-monitor industries (utilities, basic materials, capital goods and services).

Throughout this study, I stick to this industry-classification scheme, except in situations where I chose to merge certain industries to improve on degrees of freedom for multivariate regression analyses in subsequent sections.

Most prior ownership structure studies rely on the immediate owners, representing the shareholders (i.e., individuals, state, institutions, corporations) holding direct equity stakes in the subject company. However, in the case of Brazilian listed companies, immediate shareholders substantially differ from the real owners actually controlling the company, indicated as ultimate owners in Appendix C, because of the extensive use of indirect ownership schemes (pyramids or cross-ownerships) and shareholder agreements.

This study thus focuses on ultimate owners and the computation of their control and cash-flow rights.

To trace the identity of ultimate owners and compute their control and cash flow rights I rely on Reference Forms (Formulário de Referência) filed by listed companies in 2015⁴³ with Comissão de Valores Mobiliários (CVM), which are available in Bloomberg Professional. However, these Reference Forms are in Portuguese and I translated them into English using Google Translate. Specifically, the Organograma do Grupo Econômico (Organization Chart of the Economic Group) and Controle (Control) sections of Reference Forms were consulted to extract detailed information about the identity of shareholders and their respective equity stakes where they hold more than a 1% stake.

For companies with foreign listings via ADRs, I use ownership information in 20F filings to produce control chains and calculate control and cash-flow rights.

Additionally, for companies where establishing the identity of ultimate shareholders was based on their proportionate representation on the board, I use board of directors’ data provided by Bloomberg Professional and data contained in the “composition of supervisory board” section (“Composição e experiência profissional da administração e do conselho fiscal” in Portuguese) of theReference Forms. I also obtain data on block holders with 2% or more direct equity stake in a company from these forms. I categorize

43 Supplements filed in 2015 by companies actually contain detailed information about their shareholding structures relating to 2014.

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the ultimate shareholder as Manager, if he/she occupies either the Chairman position on a supervisory Board or the CEO/president position on an Executive board. To identify and analyse the type of clauses agreed among the colluding shareholders participating in the agreement, I resort to the shareholder agreement section of the Reference Form.These clauses, available in Portuguese, are translated into English via Google Translate.