Leviathan as a Minority Shareholder: Firm-Level Implications of State Equity Purchases

Abstract

In many countries, firms face institutional "voids" that raise the costs of doing business and thwart entrepreneurial activity. We examine a particular mechanism that may address those voids: minority state ownership. Minority stakes are less affected by the "agency distortions" commonly found for full-fledged state ownership. Using panel data from publicly traded firms in Brazil, where the government holds minority stakes through its development bank, we find a positive effect of those stakes on firms' returns on assets and on the capital expenditures of financially constrained firms with investment opportunities. However, these positive effects are substantially reduced when minority stakes are allocated to business group affiliates and as local institutions develop. Therefore, we shed light on the firm-level implications of minority state ownership, a topic that has received scant attention in the strategy literature. Strategy scholars adopting an institutions-based view have argued that emerging economies are plagued with myriad voids in institutions that critically affect firm-level behavior and performance (e.g.

The Influence of Political Connections on the Cost of Capital and the Performance of Companies Listed on B3

“…In general terms, the results of the present study are in part related to studies by Bandeirade-Mello and Marcon (2005), Claessens, Feijen and Laeven (2008), Bandeira-de-Mello et al (2012), Inoue, Lazzarini and Musacchio (2013), Lazzarini et al (2011). However, it points, partially, in another direction, of the findings of these same studies, specifically those of positive and significant relationships between the variables.…”

“…In contrast, Lazzarini and Musacchio (2010), Inoue, Lazzarini and Musacchio (2013) found a positive relation on the ROA of the companies when the political connection is established through the minority participation. Therefore, the government promotes longterm investments and, on the other hand, companies are less susceptible to governmental interference and expropriation of minorities.…”

“…In research by Camilo, Marcon and Bandeira-de-Mello (2012) and Inoue, Lazzarini and Musacchio (2013), this relationship is found in a significant way, but it should be noted that the periods of analysis in these studies were from 1998 to 2009 and from 1995 to 2009. In the case of the cost of capital, its reduction was not confirmed. This result corroborates, in some respects, findings by Claessens, Feijen and Laeven (2008), because the variable is sensitive in some aspects in the reduction of the cost of capital; however it does not present statistical significance.…”

“…In the Brazilian context, paradoxically, the capital market and regulatory institutions are developing concurrently with politicians offering strong incentives to cultivate particularist relations with the government (INOUE; LAZZARINI; MUSACCHIO, 2013).…”

International business responses to institutional voids

“…Researchers have tended to stress the importance of institutional voids related to formal institutions, including those pertaining to property rights protection and capital markets (Campbell & Lindberg, 1990;Khanna & Palepu, 2000;Inoue, Lazzarini, & Musacchio, 2013;Manikandan & Ramachandran, 2015). Formal institutional voids refer to the absence or underdevelopment of regulatory institutions or the formally codified, enacted and enforced structure of laws in a community, society or nation (DiMaggio & Powell, 1983;Scott, 1995).…”