How Does Legitimacy Operate in Emerging Capital Markets? Investigating the Moderating Effects of Premium Listings and Firm Size on Risk

Abstract

Drawing on an institutional theoretical perspective, we investigate the impact of the origins of organizational legitimacy on systematic risk using a sample of 358 Brazilian companies between the years 2002 and 2007. We regard three origins of legitimacy—formal–regulatory (presence in premium listings), cultural–cognitive (board of directors), and normative legitimacy (reputation)—to empirically investigate how a company's size and adherence to premium lists moderate other sources of legitimacy. Our results indicate that only under apparently better quality corporate governance conditions—presence in premium listings—do corporate reputation and the board of directors reduce systematic risk. In addition, we show that the effect of reputation on risk is positively moderated by firm size. Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd.

The Complexity of Social Capital: The Influence of Board and Ownership Interlocks on Implied Cost of Capital in an Emerging Market

“…He points out that such ties have the capacity to extract valuable resources from the environment. In Brazil, Rossoni and Mendes-DaSilva [51] and Rossoni and Machado-Da-Silva [37] used the proportion of nonredundant ties as one of the indicators of the legitimacy of the board. Rossoni et al [50], using board's social capital ideas, showed that heterogeneous relational resources have a stronger and more significant influence than the resources available from board's direct ties.…”

“…The first theoretical understanding has to do with the positioning of the board and its effects on the performance of companies. Various studies use positioning measures of a player in the network to test their research hypotheses or questions, such as small world studies, developed by Brookfield et al [27], Mendes-Da-Silva [49], and Pusser et al [67], who studied interlocking between company boards and American universities, or Rossoni and Machado-Da-Silva [37] and Rossoni and Mendes-Da-Silva [51], in their research into legitimacy and market value in companies quoted on the B3. This study produces evidence that the board and owners relational resources have more effect than only board relational position on the cost of capital [39,50].…”

“…Davis and Mizruchi [47] state that interlocking can have an economic and social influence on organizations, and Davis [31] identified that interlocking has a social influence on governance practices in the United States. Rossoni and Mendes-Da-Silva [51] found that companies with better quality corporate governance, organizational reputation, and board legitimacy have an influence on the risk of shares traded on the stock exchange. Indeed, this study contributes to the field of board interlocking and corporate governance by studying the analysis of the social capital of the board and providing empirical evidence of how interlocking influences the cost of capital of these companies.…”

Firms’ legitimation through corporate governance and its association with risk and return in Brazil

“…In theory, the Novo Mercado has the highest level of corporate governance in the Brazilian capital market (Monte, Rezende, Teixeira, & Besarria, 2010; Dalmácio, Lopes, Rezende, & Sarlo Neto, 2013; Martins & Paulo, 2014; Rossoni & Mendes‐Da‐Silva, 2018). This is an important motivation for choosing this level as the highest standard of governance in Brazil, especially, as it is optional and has the largest number of practices to be adopted by companies.…”

“…This study does not address the analysis of corporate governance practices as risk factors, we take a look at the listing phenomenon at the highest level of corporate governance of B 3 and its association with risk (Rossoni & Mendes‐Da‐Silva, 2018) and return on investment (Fuenzalida, Mongrut, Arteaga, & Erausquin, 2013). We address the fact that such listing has played an important role in legitimizing firms (Jonsson, 2020), particularly in information environments with low legal protection for investors, as usually occurs in emerging countries.…”