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Private contracting and corporate governance: Evidence from the provision of tag-along rights in Brazil

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  • Bennedsen, Morten
  • Nielsen, Kasper Meisner
  • Nielsen, Thomas Vester
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    Abstract

    We identify two opposing effects of issuing equity with tag-along rights that secure an equal price in the event of a takeover. First, the anti-self dealing effect commits controlling owners to sell only to new owners that increase shareholder value. Second, the rent transfer effect shifts rents to existing unprotected minority owners. The institutional setting in Brazil's stock market allows us to test this trade-off. We find that announcements of tag-along rights are associated with an average cumulative abnormal return of around 5%, and that the probability of issuing shares with tag-along rights increases with the cost of self-dealing and decreases in the share of existing unprotected minority investors. Overall, our analysis confirms that private contracting can mitigate the economic costs associated with the inadequate legal protection of investors in emerging markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 18 (2012)
    Issue (Month): 4 ()
    Pages: 904-918

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    Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:904-918

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Private contracting; Corporate governance; Brazil; Emerging markets;

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    References

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    Cited by:
    1. Black, Bernard S. & de Carvalho, Antonio Gledson & Gorga, √Črica, 2012. "What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 934-952.

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