The evolution of corporate governance and agency control: the effectiveness of mechanisms in creating value for companies with IPO on the Brazilian stock exchange

• DOI: https://doi.org/10.1108/CG-11-2019-0355
• Published date: 17 February 2021
• Date: 17 February 2021
• Pages: 775-814
• Subject Matter: Strategy,Corporate governance
• Author: Francisco Elder Escossio de Barros,Ruan Carlos dos Santos,Lidinei Eder Orso,Antonia Márcia Rodrigues Sousa

The evolution of corporate governance and

agency control: the effectiveness of

mechanisms in creating value for companies

with IPO on the Brazilian stock exchange

Francisco Elder Escossio de Barros, Ruan Carlos dos Santos, Lidinei Eder Orso and

Antonia M

arcia Rodrigues Sousa

Abstract

Purpose –From the agency theory’s point of view, this paper aims to analyze corporate governance

mechanisms about the characteristics of the companies quoted in the segments Bovespa Mais and

Bovespa Mais 2 and their influence on the creation of value in preparation for the opening ofthe initial

public offering(IPO).

Design/methodology/approach –A quantitative approach was adopted to achieve the proposed

objective using the panel data with fixed effectsand secondary data collected on the Comissa

˜ode

Valores Mobilia

´rios website, using statistical software StataV

R13.0 for statistical tests. The

population comprises non-financial companies belon ging to the Bovespa Mais and Bovespa Mais

Level 2 groups, as the survey sample took into account t he period of adhesion of the companies,

totaled in 15 companies, which cover the period from 20 08 to 2019. The selected variables

correspond to the ownership structure’s charact eristics, then the board’s composition and the fiscal

council as the body responsible for supervisi ng the administrators’ acts.

Findings –The main resultsindicate that the number of independent memberson the board of directors

and the supervisory board’s participation positively influence market performance. However, it also

reveals that the concentration of ownership brings fundraising for other companies’ acquisitions, risk

reductionconcerning information asymmetrybetween investing powers.

Research limitations/implications –The main results indicate that the number of independent

members on the board of directorsand the supervisory board’s participation positively influencemarket

performance.Despite this, it also reveals that the concentrationof ownership brings fundraisingfor other

companies’acquisitions, risk reduction concerninginformation asymmetry betweeninvesting powers.

Practical implications –This paper advancesa comparative institutional perspectiveto explain capital

market choice by firms making an IPO in a foreign market. This paper finds that internal governance

characteristics (founder-chief executive officer, executive incentives and board independence) and

external network characteristics (prestigious underwriters, degree of venture capitalist syndication and

board interlocks)are significant predictors of foreigncapital market choice by foreign IPO firms.

Social implications –While product market choiceshave been central to strategy formulation for firms

in the past,financial markets’ integration makescapital markets an equally crucialstrategic decision. This

paper advancesa comparative institutional perspectiveto explain capital market choiceby firms making

an IPO in a foreignmarket.

Originality/value –This situation generatesvalue to shareholders and is perceived by the market and,

ultimately, generates a direct relationship with the market performance of companies. While product

market choices have been central to strategy formulation for firms in the past, financial markets’

integrationmakes capital markets an equally major strategicdecision.

Keywords Corporate governance, Financial performance, Agency theory, Institutions,

Initial public offerings

Paper type Research paper

Francisco Elder Escossio

de Barros is based at

Program Posgratuation in

Administration, UNIVALI,

Biguac¸u, Brazil and

Program of Gradution in

Administration, Faculdade

Luciano Feija

˜o–FLF,

Sobral, Brazil.

Ruan Carlos dos Santos is

based at Program

Postgraduate in

Administration,

Universidade do Vale do

Itajai, Biguac¸u, Brazil and

Program of Gradution in

Administration, Centro

Universit

ario Avantis –

UNIAVAN, Balneario

Cambori

u, Brazil.

Lidinei Eder Orso is based

at Programa de

P

os-graduac¸a

˜oem

Administrac¸a

˜o,

Universidade do Vale do

Itajai, Balne

ario Cambori

u,

Brazil. Antonia M

arcia

Rodrigues Sousa is based

at Programa de Graduac¸a

˜o

em Cie

ˆncias Econo

ˆmicas,

Universidade Federal do

Ceara, Sobral, Brazil.

Received 23 November 2019

Revised 19 March 2020

31 May 2020

9 October 2020

15 November 2020

28 December 2020

Accepted 31 December 2020

DOI 10.1108/CG-11-2019-0355 VOL. 21 NO. 5 2021, pp. 775-814, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 775

1. Introduction

The past decade of the 20th century was marked by financial fraud and worldwide

repercussions, among which are Enron and WorldCom cases in the US. Following these

scandals, the authorities beganto pay more attention to the issues surrounding the veracity

of the accounting information disclosed and the negotiations conducted (Chi, 2009).

Furthermore, in Brazil, strict fraud and corruption problems in organizations occurred in the

first and second decades of the 21st century, as was Santos Bank, Boi Gordo and Daslu

(Costa and Wood, 2012) of Oleo e Ga

´s Participac¸o

˜es S.A. and Petro

´leo Brasileiro S.A.

The pricing of an IPO reflects the quality of the issuing company and the market conditions

at the issuance time. Thus, the organizational strategy, especially the ownership structure

and corporate governance, can influence the issuance of shares in an initial public offering

(IPO) (Pham et al.,2003). The public offering of shares alters many of the firm’s

characteristics, especially its ownership structure. No legal system regulating corporate

governance inexorably ensures the necessary security for minorities. In this sense, La Porta

et al. (1999) indicate that the concentration of power is a mechanism that significantly

affects investor return.

Additionally, Yeh et al. (2008)examined the incentive for large investors to use the IPO price

as a way to maintain post-issue control. The authors demonstrate that when large

shareholders can exercise control through excess power (high concentrationof shares), an

incremental disincentive for underpricing arises (Aguilera et al.,2019). Thus, this paper’s

first hypothesis will test the influence of controllers’ concentration on partial price

adjustment.

The impacts of the recent financial crisis are clear when highlighting governance

weaknesses, which, therefore, affected investors’ reliability. Therefore, corporate

governance provides the capital market with relevant information for decision-making.

According to Ariffl et al. (2007), in addition to information about companies’ financial health

and performance, investors also need to know how they are being managed. According to

them, the quality of corporate governance practices is seen as a source of information that

provides additional decision-making criteria. For Aguilera et al. (2016) and Claessens and

Yurtoglu (2013), the popularization of Governance Corporate (GC) both in the academic

field, and organizational and political context, highlights the importance and necessity of

incentive and improve the effectivenessof monitoring mechanisms (Gonz

alez and Calluzzo,

2019).

Here, corporate governance practices were implemented by B3 (Brazil, Bag, Branch,

Counter) –formerly BM&FBOVESPA, in December 2000, by inserting the corporate

governance segments with requirements that go beyond the obligations that companies

have before the Brazilian Corporation Law (Law No. 6,404/1976). The objective of the

implementation of corporate governance practices was to improve the evaluation of

companies that voluntarily decide to join one of the segments and provide a trading

environment that stimulates investors’ interest and the valuation of companies

(BM&FBOVESPA, 2018). Thus, the set of regulatory bodies, policies, laws and processes,

for the relationship between partners, directors and employees, is necessary for

companies’ management in adopting practices. In this context, Corporate Governance

“aims to provide security for shareholdersand creditors, with the aim not to allow them to be

expropriated by company executives” (Correa and Bortoluzzi, 2015).

The corporate governance levels were created in Brazil to contain a loss of turnover for

other markets, as it was believed that this loss would be related to weak protection for

minority shareholders (Black et al., 2014). However, the creation of the Bovespa Mais

segment from B3 in 2005 seeks to contribute to the development of the Brazilian stock

market and foster small and medium-sized companies’ growth. According to the rules of the

segment, companies adhere to corporate governance and achieve a maximum term of

PAGE 776 jCORPORATE GOVERNANCE jVOL. 21 NO. 5 2021

seven years to carry out their IPO by listing their shares on Bovespa Mais. The listed

companies assume corporategovernance standards and transparency with the market at a

lower level than the Novo Mercadocompanies (Braga-Alves and Shastri, 2011).

The choice of the companies belongingto the listing segments Bovespa Mais and Bovespa

More Level 2 was because these segments,formed by small and medium-sized companies

that wish to raise funds for their growth projectvia the stock exchange, are a model planned

by B3 to make it accessible to a larger number of companies. These listing segments are

designed to bring together high growth potential, medium and long-term investors whose

concern for potential returns outweighs the need for immediate liquidity. The companies in

these listing segments acquirebenefits such as not necessarily having to place outstanding

shares in the market, in addition to clearly signaling their commitment to acceptable

corporate governance practices(BM&FBOVESPA, 2018).

The reduction of institutional asymmetry is defined by the board of directors and the fiscal

council (Baioco and Almeida, 2017). The installation of the fiscal council occurs according

to the demands of the shareholders. It is not the responsibility of the fiscal council to carry

out management activity. The fiscal council’s activities are to supervise the administrators’

legal and statutory duties aftera decision at a general meeting ordered by the shareholders

(IBGC. Instituto Brasileiro de Governanc¸ a Corporativa, 2015). The Fiscal Councils set up in

Brazilian companies should be composedof professionals nominated by the minority –non-

controlling, common and preferred stockholders –and majority shareholders. The Fiscal

Council’s primary function is to monitor the activities and financial statements of a company.

The shareholders at any ordinary or extraordinary general assembly nominate it, and its

responsibilities are to theshareholders only (Procianoy and Decourt, 2014).

What is evident with the companies of the hypothetical portfolio of Bovespa is that the

performance of the IPO can be affected by the characteristics of corporate governance

(Sahoo, 2017). Based on Aggarwal et al. (2007), contribution shows that governance

mechanisms include not only the laws of a country but also the presence of external audit

(Aguilera et al.,2015), which explores the effects of corporate governance on corporate

investment, stock yield and company growththrough shareholder interests in the portfolio of

these companies (Becht et al.,2003).

Given the governance mechanisms mentioned above, this research will focus on the

governance mechanisms found in the companies participating in the listing segments

Bovespa Mais and Bovespa Mais Level 2. Those will be analyzed by small and medium-

sized companies that seek to raise funds for their growth via the stock exchange and for

being a model planned by B3 to make it accessible to a more significant number of

companies. Inserted in this discussion, the inquiry that guides this research is: does the

implementation of corporate governance mechanisms of Bovespa Mais listed companies

tend to influence value creationfor investors in the preparation of the IPO?

The research perspective brings plausibility among the literature among the institutional

analysis, influencing corporate governance mechanism, but provides contributions to

companies’ evolution through the IPO in the stock market. The research integrates

stakeholder management and institutional perspectives for the number of contributions to

previous research. Three aspectsstand out:

1) The effects of signaling the governance characteristics of the firm has little evidence on

performance (Judge et al.,2014), suggesting that these countries of origin of stakeholders

maybe another set of guarantees thatsignificantly affect performance (Hearn et al., 2016).

2) The IPO performance resultshave a characteristic of each country, being affected by the

relationship “interest x origin” among those associated with investor protection in the

company’s country (Cuomo et al.,2013). He develops theoretical arguments and empirical

evidence.

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