Control Values and Changes in Corporate Law in Brazil

Abstract

This paper shows that firm control value for Brazilian listed companies is directly affected by changes in the legal protection for minority shareholders, on a sample of dual-class firms. Control value increases more than twice in the second half of 1997 in response to Law 9457/1997 which weakens minority shareholder protection. Control values drop to pre-1997 levels in the beginning of 1999 in response to CVM Instruction 299/1999, which reinstates some of the minority protection rules scrapped by the previous legal change. The effect of legal changes on control value is robust, and is not due to underlying changes in the intensity of acquisition activity, or the economic downturn in the late 1990s. The behavior of voting and non-voting share prices during the period are consistent with the hypotheses that (1) majority shareholders share some of the control benefits with minority vote-holders, and (2) majority shareholders increase expropriation activity during the period, especially as concerns the value of non-voting equity.

Keywords: Corporate control value, minority protection, Corporate Law reform, Brazil stock market, voting premium, dual-class firms

JEL Classification: G18, G32, G34, G38, K22