The Contest to the Control and Firm Value: An Analysis of Latin American Firms

Abstract

Manuscript type: Empirical.

Research Question/Issue: The power distribution within the organizations is the key issue of the study. We analyze the effect of the contestability to the control of the largest shareholders in relation to the influence on firm value.

Research Findings/Insights: Using a sample of firms from six Latin American emerging economies over the period 1997–2013, we hypothesize that the contestability effect is more prominent when a family or individual investor is the large shareholder. Our results suggest that a high (low) level of contestability results in higher (lower) firm value.

Theoretical/Academic Implications: In a distinctive setting, we analyze an under-explored agency problem, the relation between large and monitoring shareholders, the contestability to control. We emphasize the important role of the second, third, and fourth largest shareholders.

Practitioner/Policy Implications: The interaction among several large shareholders has important consequences for the protection of minority shareholders’ interest, especially in Latin American countries, which have a weaker legal setting and enforcement of law and thus represent a challenge for policymakers.

Keywords: firm value, ownership structure, corporate governance, Latin America, family firms, contestability

JEL Classification: G10, G30