Corporate governance and pyramidal ownership: the role of Novo Mercado

The literature has not reached a consensus on the motivation and implications of pyramidal ownership schemes. For some, such arrangements make it easier for controlling shareholders to expropriate outside investors. More recently, some studies have challenged this view and emphasized that their rationale lies in overcoming financial constraints. This paper focuses on whether firms owned through pyramidal schemes are more likely to be listed on the “Novo Mercado,” the Brazilian stock exchange’s premium listing segment created in 2000, which prohibits firms from issuing non-voting shares. We built a dataset of ownership data with annual observations for a panel of firms over the period 2003-2010 by hand-collecting data drawn from reports that firms submit periodically to the Brazilian securities regulator (CVM). Estimating fixed effects non-linear panel data models of a binary dependent variable, we find that firms listed on the Novo Mercado are less likely to be owned through a pyramid arrangement, result which appears to be consistent with the expropriation view.