Abstract - Corporate Governance and Value in Brazil (and in Chile)

This paper constructs a corporate governance practices index (CGI) from a set of 24 questions that can be objectively answered from publicly available information. The goal is to measure the overall quality of corporate governance practices of the largest possible number of firms. CGI levels have improved over time in Brazil, and an examination of CGI components demonstrates that
Brazilian firms perform much better in disclosure than in other aspects of corporate governance. This paper finds very high concentration levels of voting rights leveraged by the widespread use of indirect control structures and nonvoting
shares. The paper does not find evidence for either entrenchment or incentives in Brazil using ownership percentages, but evidence is found that the separation of control from cash flow rights destroys value. The CGI maintains a positive, significant, and robust relationship with corporate value. A worst-to-best improvement in the CGI in 2002 would lead to a 0.38 increase in Tobin’s q. This represents a 95 percent increase in the stock value of a company with the average
leverage and Tobin’s q ratios. Considering our lowest CGI coefficient, a onepoint increase in the CGI score would lead to a 6.8 percent increase in the stock price of the average firm in 2002. No significant relationship is found between governance and the dividend payout. The results are placed in context by offering
a comparative analysis with Chile.

Ricardo Leal (joint with André L. Carvalhal-Da-Silva)
Coppead Business School, Rio de Janeiro
24.Oct 2006

Back to overview