Changing the Paradigm of Stock Ownership from Concentrated Towards Dispersed Ownership? Evidence from Brazil and Consequences for Emerging Countries

29 Northwestern Journal of International Law & Business, (2009) This paper analyzes micro-level dynamics of changes in ownership structures. It investigates a unique event: changes in ownership patterns currently taking place in Brazil. It builds upon empirical evidence to advance the theoretical understanding of how and why concentrated ownership structures can change towards dispersed ownership. Commentators argue that the Brazilian capital markets are finally taking off. The number of listed companies and Initial Public Offerings (IPOs) in the São Paulo Stock Exchange (Bovespa) has greatly increased. Firms are migrating to Bovespa's special listing segments, which require higher standards of corporate governance. Companies have sold control in the market, and the stock market has recently seen an attempted hostile takeover. This paper discusses these current developments and analyzes ownership structures of companies listed on Bovespa's listing segments based on data from 2006 and 2007. It provides the first evidence of the decline of ownership concentration in Brazilian corporations. There is, however, an important caveat: dispersed ownership is mainly found in Novo Mercado, the listing segment that requires the one-share-one-vote rule. This paper, then, investigates firms' migration patterns, and finds that eighty-five percent of Novo Mercado's firms are "new entrant" firms. Traditional firms have mostly migrated to Level 1, the least stringent corporate governance segment. Thus, there are two corporate worlds in Brazilian capital markets: new corporations that adopt proactive corporate governance patterns, and established corporations that retain their main patterns of corporate governance or ownership structure. This paper additionally explores the consequences of increased dispersion of ownership through private contracting, such as shareholders' agreements and bylaws. The evidence suggests an increasing reliance on shareholders' agreements to coordinate joint control and to bind directors' votes. Research also shows a growing adoption of anti-takeover devices in bylaws. Finally, this paper sheds light on the incentives that may alter preferences of controlling shareholders. This discussion also explains why controlling shareholders opt to create greater diversity of ownership structures. This analysis advances our knowledge of corporate structures in other emerging countries.