Voluntary corporate governance with an empirical application

Abstract

The main idea of the article is to advance some arguments regarding a paradox of corporate governance: if it creates so much value for shareholders why in most countries governance is still heavily regulated by strict codes? The article advances a theoretical framework for the voluntary adoption of better corporate governance practices as influenced by four dimensions: ownership and control issues, capital structure, exit strategies and market performance. I estimate probit panel models with data from Brazilian companies that voluntarily moved to the Novo Mercado (New Market). Results indicate as significant variables representing the need for exit strategies through liquidity and the existence of shareholders’ agreements, while higher capital concentration implies a lower probability of companies voluntarily adopting better governance practices. Also, market drivers such as lower capital costs and performance are not statistically significant.

Keywords:

• voluntary corporate governance
• probit panel data
• corporate governance codes
• exit strategies
• value creation

JEL Classification:

• G34
• G32

Notes

¹ The Brazilian New Market has three levels: N1, N2 and the New Market per se (from here on NM). N1 and N2 are intermediate levels for which governance rules are not that stringent. The NM follows most of the OECD’s (1999) principles, with some peculiarities regarding the Brazilian market. See Section II for more details.

² Although 18 companies moved to the NM level, we excluded two companies, Banco do Brasil and IdeaisNet. The first one because it is a fully state-owned company that migrated to issue new stock and the second because it is structured as a venture capital fund.

³ The Advisory Committee (Conselho Fiscal) is an institution that does not have an easily translatable international counterpart. Its purpose is to generate fiscal reports on the companies’ expenditures, and it also approves the independent auditors’ reports. It works somewhat like a Board of Trustees, but its role is not as fiduciary, and it does not have as many powers inside a company. Its institution is voluntary, but it is recommended by all Brazilian corporate governance codes.