The Effect of Corporate Governance Practices on Company Market Valuation and Payout Policy in Chile

Abstract

In this paper we ask whether corporate governance practices at the firm level within a single country affect these firms' market valuation. This question is crucial to asses the potential benefits for firms to change their own practices, even though, they cannot affect their country's rules. In particular, the Chilean case presents at least three interesting features that make its study especially relevant for other emerging economies. First, the Chilean corporate structure presents highly concentrated ownership, widespread use of pyramid structures to separate cash from control rights and opaque ultimate ownership identification. Second, an amendment to Securities Market Law and Corporation Law was recently passed with the intention to improve corporate governance in Chile. Finally, the Chilean capital market is relatively developed with a large participation of institutional investors for more than two decades. We perform regression analysis of measures of firm performance and payout policy on corporate governance indicators at the firm level and a series of control variables. We carefully check that our results are not due to omitted variable bias or to particular specification and samples through an extensive robustness checkout. We also control for reverse causation using two features of Chilean Corporations Law that provide an exogenous instrument for some of the corporate governance practices of Chilean firms. We find that firms that present higher coincidence between cash and control rights tend to be consistently more valued by the market. We interpret this result as an indication that potential conflicts of interest between controllers and minority shareholders are penalized by the Chilean capital market.

Keywords: Corporate Governance, Chile, Agency Costs, Firm Valuation, Emerging Markets

JEL Classification: G32, G34