Country level governance variables and ownership concentration as determinants of firm value in Latin America

Abstract

The goal of this paper, which follows a corporate governance approach, is to assess whether within country changes in governance (e.g. in legal and regulatory systems and financial development) and changes in corporate ownership concentration can predict a change in the value of Latin American firms. Using fixed-effect panel data models with a representative sample of firms for the period from 1997 to 2013, we observe that the investors’ rights and their legal protection as well as the rule of law are associated with a premium in the firm market value. Contrary to what was expected, in immature financial markets, as found in Latin America, firms take advantage of both the asymmetries of information and the multiple market frictions to be overvalued. So, as the financial system develops, firm value drops. At the firm-level, results confirm the hypothesis of the expropriation of minority shareholders.