Ownership Structures and Stock Price Synchronicity in Brazil and Russia
Khattak, Mohay ud din Khan
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This thesis investigates how various aspects of ultimate ownership affect the information environment, as measured by stock price synchronicity, of publicly traded companies in Brazil and Russia. Considering the fundamentally distinct ultimate ownership and institutional environments of the two emerging capital markets, hypotheses are developed and tested to link the association of ultimate ownership and firms’ information environments in two essays, one relating to Brazil and the other to Russia. Essay One (Chapter 3), following the introductory and conceptual framework chapters, focuses on the separate effects of the ultimate owners’ ownership concentration, control-ownership divergence, and participation in shareholder agreements, as well as the combined effect of firms’ listing quality and ownership concentration on the corporate information environment in Brazil. Using a sample of 121 companies listed on the Brazilian stock exchange in 2014, the essay notes that synchronicity is a concave function of the cash-flow rights of the ultimate owner with its inflection (maximum) point at about 50% cash-flow rights. This supports the argument that low levels of ownership concentration (<50%) attract entrenchment behaviour, leading controlling shareholders to withhold firm-specific information from the market, while higher levels of ownership concentration (> 50%) align the interests of the ultimate owners with the non-controlling shareholders, which dilutes the ultimate owners’ incentive to adopt poor disclosure and reporting practices. Additionally, the essay confirms the notion that controlling owners’ incentives to entrench are even stronger when they have both below-majority ownership stakes and a separation between ownership and control rights: “extreme managerial entrenchment” results in “extreme information asymmetry” between controlling and minority investors. Another important finding – the more (less) pronounced concave relation between ownership concentration and synchronicity for the firms listed on lower-quality listing segments (higher-quality listing segments) of the exchange – highlights the information role of institutional-level investor protection arrangements in addition to firm-level investor protection mechanisms (i.e., ownership) in Brazil. More precisely, a less (more) pronounced increasing relationship between cash-flow rights and synchronicity in the higher segments of the exchange is attributed to the dampening (exacerbation) of the entrenchment activities of the controlling owner due to high-quality investor protection provisions embedded in the listing rules. Finally, the essay finds that shareholder agreements (SAs) signed between a controlling shareholder and several non-controlling shareholders have favourable impacts on firms’ disclosure and information dissemination practices (lower synchronicity) relative to the shareholder agreements signed among several non-controlling shareholders. Essay two (Chapter 4) explores how controlling shareholders affect the information content of stock prices (synchronicity) by focusing on the four salient aspects of ownership settings peculiar to Russian corporations. These aspects are cash-flow rights, control-ownership divergence and opacity in the control structures resulting from the use of nominees and foreign off-shore companies, and the simultaneous participation of the state and oligarchs in the ownership structure. Using a sample of 117 companies listed on Moscow exchange, the essay notes that synchronicity is linearly positively (negatively) associated with cash-flow rights (control-ownership divergence). These results are consistent with the beliefs that ultimate owners with a large fraction of cash-flow rights (control-ownership divergence) avoid (pursue) expropriatory behaviour, which encourages (discourages) them to produce and share more and better-quality firm-specific information with outsiders. Further, the essay finds that the pervasive use of nominees and foreign (offshore) companies in control structures by non-transparent oligarchs results in opaque ownership structures that prevent outside investors from finding the true ultimate owners and obstructs them from policing and assessing the self-serving opportunistic behaviour of insiders: ownership opacity leads to information opacity. Finally, the essay reports a positive association between synchronicity and absolute discretionary accruals (a proxy for the quality of firm’s fundamental information), which implies that high (low) synchronicity denotes low-quality (high-quality) firm fundamental information. This provides assurance to investors that synchronicity works well as a measure of firm-specific information in an emerging capital market like Russia. The dissimilarities in empirical findings call for different policy recommendations in the two countries. In Brazil, policy changes ought to be focused only on improving one-share one-vote practices whereas in Russia both ownership disclosure and one-share one-vote practices need attention. Mandating the disclosure of ownership details for foreign offshore companies regardless of their equity interest may count as a major change in ownership disclosure practices in Russia, but would significantly improve ownership and corporate transparency. Similarly, to overcome the adverse information implications of control-ownership divergence, both the jurisdictions need policy measures for achieving the one share-one vote principle.