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The Effect of Corporate Governance Practices on Company Market Valuation and Payout Policy in Chile

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Author Info
Fernando Lefort
Eduardo Walker

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Abstract

In this paper we ask whether corporate governance practices at the firm level within a single country affect these firms` market valuation. This question is crucial in assessing the potential benefits for firms of changing their own practices, even though they cannot affect their country`s rules. In particular, the Chilean case presents at least three interesting features that make its study especially relevant for other emerging economies. First, the Chilean corporate structure presents highly concentrated ownership, widespread use of pyramid structures to separate cash from control rights and opaque ultimate ownership identification. Second, an amendment to the Securities Market Law and the Corporations Law was recently passed with the intention of improving improve corporate governance in Chile. Finally, the Chilean capital market is relatively developed, with more than two decades of substantial participation by institutional investors. We perform regression analysis of measures of firm performance and payout policy on corporate governance indicators at the firm level and a series of control variables. We carefully check that our results are not due to omitted variable bias or to particular specification and samples through an extensive robustness check. We also control for reverse causality using two features of Chilean Corporations Law that provide an exogenous instrument for some of the corporate governance practices of Chilean firms. We find that firms that present higher coincidence between cash and control rights tend to be consistently more valued by the market. We interpret this result as an indication that potential conflicts of interest between controllers and minority shareholders are penalized by the Chilean capital market.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 3210.

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Date of creation: Nov 2005
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Handle: RePEc:idb:wpaper:3210

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fernando Lefort & Eduardo Walker, 2000. "Corporate Governance: Challenges For Latin America," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 2(2), pages 99-111. [Downloadable!]
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  22. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Corporate Governance in Latin America," RES Working Papers 4494, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Juan Cruces & Enrique Kawamura, 2005. "Transacciones basadas en información privilegiada y conducción empresarial en América Latina," RES Working Papers 3207, Inter-American Development Bank, Research Department. [Downloadable!]
  3. Juan Cruces & Enrique Kawamura, 2005. "Insider Trading and Corporate Governance in Latin America," RES Working Papers 3206, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Gobierno Corporativo en América Latina," RES Working Papers 4495, Inter-American Development Bank, Research Department. [Downloadable!]
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