Why Brazilian companies adopt pyramidal ownership structures

Abstract

Pyramidal ownership structures are widespread among Brazilian companies, and represent a way of deviation from the “one share, one vote” principle. The literature about the incidence and consequences of this mechanism is extensive; however, only recently the motivations have been studied. Among the motivations, there are: financing advantages, the implicit insurance offered by the chance of cash flow transfers between companies, fiscal advantages and the moral risk. This paper investigates these motivations analyzing the ownership structure of 271 Brazilian companies traded in the stock exchange in 2004 and 257 in 2006. Cash flow and control rights are observed until the ultimate owner. The data shows an evolution of structures toward a less concentrated and lower mismatch between cash flow and voting rights. Motivations are analyzed through economic and financial variables using multiple linear regressions and logit models. Financing advantages emerge as a relevant reason. Pyramids also leverage the mismatch between cash flow and voting rights exacerbating the moral risk problem. However, there is a positive relationship between pyramidal structures characteristics and dividend payout, and negative with cash availability. These lessen the risk of expropriation since the cash flow available to the discretion of controlling managers is lower. Some interviews with board directors, auditors and lawyers were done to explore other possible reasons. As relevant reasons were cited: the reputation of the controlling shareholder; partnership reorganization for fiscal, business separation and family members ownership arrangements; the construction of better profit distribution alternatives.