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Substitute and Complementary Corporate Governance Mechanisms: A Simultaneous Equation Approach.

By Diego Cueto


Emerging economies are typically characterized by weak shareholder’s protection, with highly concentrated ownership structures which are relatively stable over time. With concentrated ownership, the conflict of interests shifts from the principal-agent problem to a dominant shareholders-minority shareholders focus. The conflict of interest between shareholders is characterized as the potential for asset diversion from the firm to dominant shareholders, reducing overall firm value. I analyze the effects of the discrepancy between voting rights and cash-flow rights for dominant shareholders and other governance mechanisms on firm value. Departing from previous literature I propose a detailed analysis of the identity of each shareholder. Voting rights and cash-flow rights are therefore aggregated only at the core of identified business groups. To minimize negative effects of ownership concentration on firm value, Latin-American firms resort to a number of different corporate governance mechanisms that are complements rather than substitutes. I find that while firm value do suffer market discounts due to the separation of ownership and control, blockholders detached from dominant shareholders ma

Topics: firm performance, emerging markets, simultaneous equations. JEL Classifications, G15, G32, G34 1
Year: 2008
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