Academic journal article Quarterly Journal of Finance and Accounting

Corporate Performance and Ownership Structure: Empirical Evidence for Chile

Academic journal article Quarterly Journal of Finance and Accounting

Corporate Performance and Ownership Structure: Empirical Evidence for Chile

Article excerpt

Introduction

In general, the financial literature offers both favorable (Miller, 1973; Carter, 1977) and unfavorable evidence (Wernerfelt and Montgomery, 1988; Lang and Stulz, 1994; Servaes 1996, among others) on the relationship between diversification and performance, However, most of the studies have mainly focused on European countries and the United States, with no definitive evidence on this relationship in South American countries. However, it is precisely these last countries that have made most progress in corporate diversification in recent decades. Since the 1970s Chile made several economics reforms that lead to market liberalization. These reforms have being more pronounced in the 90s with several privatizations and M&A what lead to a strong change in terms of ownership (foreign versus domestic). According to Paula, Ferraz and Iootty (2002), foreign investors are responsible for 70 per cent of all privatizations and 65 per cent of all private M&A transactions in Argentina, Brazil, Chile, and Mexico. Chile is a special case in the region. Chile clearly exhibits more highly developed capital markets, with a higher number of firms, a similar ownership concentration to the other countries of the region, and the lowest country-risk premium (30). Moreover, Chile has low corruption levels, a good quality judicial system, open and regulated financial markets (the Securities Market Law, the Public Offerings Law, and Corporate Governance Law, among others). Now, given that both the markets and institutions are better prepared to undertake their functions more efficiently, the question is whether investors in Chile value diversified firms to a higher or lower degree. Specially given that the ownership concentration is clearly higher than in developed countries and therefore there are incentives for majority shareholders to obtain private rent at the expense of minority shareholders (31). This issue has not been resolved yet (32).

We are not aware of studies that investigate the relationship between diversification and performance in the case of Chilean listed firms. We only know of a pioneering research in this area done by Maquieira and Espinoza (2005) whom after studying a group of 52 public companies during 1995-2002 do not find a significant relationship between both variables. Therefore, they conclude that apparently in Chile the benefits of diversification are offset by the costs of them.

Determining the relationship between diversification and performance will provide new information to better target policies for improving corporate governance, and thereby help establishing a deeper capital market. It will also be useful in helping shareholders in their firm diversification decisions. More specifically, this article investigates the relationship between diversification and performance for a sample of 70 publicly-traded Chilean firms. The study covers the 2000 to 2007 period. This paper differs from other related studies for Chile in terms of the sample and control variables used.

The findings reveal that better performance is associated to higher diversification levels. This is especially the case when the ownership is held by the three largest shareholders. To investigate this finding further, firms are separated into two samples: more diversified and less diversified ones (focused). For the first sample, there is a negative relationship between performance and ownership concentration held by the main shareholder and the three largest shareholders. However, this does not occur with the group of focused firms where performance is higher when the largest shareholder has a higher ownership percentage.

This study is structured as follows: section II provides a brief overview of the most relevant studies that relate diversification and ownership structure with performance; section III describes the sample and provides a descriptive analysis of it; section IV explains the methodology used and reports the findings. …

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