In order to measure the effect of corporate governance practices and investor protection on dividends, we obtained annual payout ratios

for over 200 listed com panies since 1994 to 2002. The data was obtained from Fecus Plus and com plem ented using Econom atica. W e used as an indicator of the dividend policy of the com pany the ratio between dividend payments (including non cash paym ents) on year t and after-tax earnings on year t-1. W e used this traditional measure, even though m any tim es paid dividends may com e fr m earnings attained in different years. o In Chile, the law establishes a m inim um dividend requirement of 30% of annual earnings. The rationale for such a com pensatory m easure is to protect m inority shareholders as indicated in La Porta et al. (1997) and im plies that Chilean controllers have less freedom in order to determ ine and use their dividend policies. In theory, a com pany could pay less than 30% of earnings if unanim ously approved by shareholders.3 However, in practice, a com pany may pay less than 30% by declaring
4 the dividend and postponing the paym ent for the upcom ing years. Hence, despite

the legal restriction is possible to observe e ffective payout ratios of less than 30% of earnings. Table 3 sum marizes the data collected. Payout ratios in Chile were over 53% by 1994 and steadily declined to 36% in 200 There is wide dispersion of payout 2. ratios in our sam ple, with som e com panies paying over 150% of last year earnings. Negative ratios indicate generally, that a co pany paid dividends even when last year m earnings where negative. The table also shows that affiliated com panies to a conglom erate have, on average, higher payout ratios than non-affiliated firm s. 4. Agency problems. Corporate governance deals forem ost with agency problem s inside the firm . In highly concentrated Chilean firms, agency proble s take m ainly the form of conflict of m interest between controlling shareholders and mi ority shareholders. In this paper, we n explore several dim ensions of this relation and study their im pact on firm valuation and payout policies. Several of the theories previously discussed m aintain that agency problem s between controllers and minority shareholders are m ore severe in firm s affiliated to
3 4

Corporations Law, rule 79. Corporations Law, rule 84 establishes that if dividends are postponed the amount finally paid must be adjusted by inflation and interest. 15

after controlling for separation of rights. pension fund m anagers can buy shares of Chilean com panies that reach specific levels of ownership dispersion and are approved as investing vehicles by the Risk Classification Com m ission. 16 . For instance. inform ation sharing and other synergies. In both cases. affiliation to a conglomerate in em erging econom ies could be value enhancing due to internal capital m arkets. the effect of affiliation on firm valuation is not clear as indicated by the different com peting hypothesis with respect to it. W e constructed two different indicators of the degree of coincidence between cash and control rights. The Rule also establishes a mandatory tender offer requirement whenever a shareholder reaches the two thirds threshold through an acquisition. W e m easure separation from cash to control rights at the firm level considering direct and indirect holdings of controllers and the existence of dual class shares.conglomerate structures. A key indicator of the potential existence of agency problem s is the degree of separation between the cash flow rights accrued by the controller and the control rights he or she is exercising. Perfect coincidence is achieved as these variables approach to one. Institutional investors have had an important role in helping to develop Chilean capital m arkets. Hence. The second m easure considers only the ratio between cash flows to controllers and cash flows to all shareholders. W e will analyze the validity of this assum ption later on the paper. However. captures the proportion between the amount of cash flows accrued by the controllers and the total am ount of cash flow potentially generated by the com pany including debt paym ents.6 Specifically. the assum ption of total effective control by the controllers m eans that the percentage of cash flow rights is a direct indicator of coincidence. 6 See Walker and Lefort (1999). we m easure The ratio separation as the ratio betw een equity directly and indirectly owned by the largest shareholder and total consolidated assets under control of the com pany. we hypothesize that higher separation is associated with lower valuation and lower payout. First. Under agency theory. Following Lefort and Walker (2000) we identify over 50 conglom erate structures in the Chilean econom y operating between 1990 and 2002 and construct a dum m y variable taking the value 1 when a com pany is affiliated to any of those structures in any given year. under the 5 assumption that the largest shareholder e ffectively controls all com pany assets. the presence of 5 Rule 67 of Corporations Law establishes that the approval of major company decisions require the support of two thirds of voting shares during a shareholder meeting.

achieving a total coverage of 106 com panies am ounting to 76% of total m arket capitalization in Chile. perform ance.pension funds as shareholders of a com pany is an indication that the firm is less risky and that its governance mechanism s are m ore m ature. (ii) about officers and the board. once the pension funds reach a given level of ownership in the com pany. The response rate was m oderately low. they m ay elect a board m em ber and becom e an active m inority shareholder. M ost questions could be answer d by a sim ple yes or no. They account for 42% of total market capitalization in Chile. the companies that answered the questionnaire tended to be the largest in term s of m arket capitalization. Questions were referred to firm practices as of the end of 2003. The questionnaire was divided in four sections: (i) about general principles. Corporate Governance Practices in Chile Corporate governance has m any m ore dim ensions than just the affiliation to a conglom erate and the degree of coincidence between cash flow rights and control rights. In order to com plem ent those m easures. The low response rate was relatively expected given the type of survey w e were conducting. 5. In 17 . For all those e questions (55 approxim ately) we used and indicator variable that took the value of 1 whenever the answer could be associated with best practices and 0 otherwise. we conducted a survey on corporate governance practices at the firm level. In addition. W e received 59 com pleted questionnaires. Around one third of the questions in the survey could be directly com pleted using public information available at the financi statements and Annual Book of the al com panies or using inform ation m ade public by the SVS (Superintendence of Securities and Exchanges). The survey was conducted between M ay and Septem ber. 2004. and (iv) about disclosure and inform ation. (iii) about shareholders. Table 4 sum m arizes the m ain results. However. through a 67 questions questionnaire handed in to principal officers and board m em bers of over 200 listed com panies in Chile. We have com piled information through those m echanism s for an additional 47 firm s. representing less than 30% of the firm s contacted. The annex at the end of the paper shows the questions and the answers per question obtained. Under the assum ption that im portant institutional investors im prove governance. their presence can improve They can also be seen as the second im portant shareholder as in Gurgler and Yurtoglu (2002).

The annex provides the precise result for each question included in the questionnaire. This    was  case. obtained in the category disclosure and information (5. by 2003. Lefort and W alker (2000c) and the report prepared by Spencer StuartPUC (2000) have looked prelim inary to board composition and functioning in Chile 18 . Not surprisingly. In general term s. Chilean com panies scored relatively well in their corporate governance practices obtaining an overall score (non-weighted) of 4.14). one third of the questions could not be answered using public information as detailed above. hence. Table 4 shows that. The weakest aspects of inform ation disclosure are prom ptness and the lack of announced targets with respect to future perform ance of the com pany. have very few independent board m em bers and few if any functioning com mittees. ownership and related party transactions. the average results sum m arized en Table 4 m ust be interpreted carefully. This procedure im plicitly considers that each question has the sam e relative im portance in order to m easure the quality of a com pany corporate governance practices. W e then norm alized each answer between 0 and 7.m any  cases. boards in Latin Am erica have m ainly an advisory character to controllers. M ost Chilean com panies do not have a code or a m ission statement that gives any explicit im portance to governance practices.  answ er  as  fact  “don’t  the  w in  a  know/don’t  answer”. boards in Latin Am erican countries tend to be m uch weaker than in the U S or UK.12 out of 7. The weakest aspect on th category was the low participation of is independent directors on com pany boards and the absence of special comm ittees such as audit and governance comm ittees. A score of seven would correspond to questions where all respondents got a 1 in the indicator regard less of the size of the com pany responding the questionnaire. Corporation law in m ost Latin Am erican countries explicitly indicates that boards are the m ain decision m aking body of a com pany and that board m em bers owe duty of loyalty and duty of care to all shareholders. The best scores are Chilean com panies adequately disclose inform ation on control. However. This assum ption is not necessarily true and. for com panies for w hich the questionnaires w ere filled using sources other than officers or board m embers. as a consequence of the high ownership concentration observed in m ost firm s in the region.  the  for instance.54.63). the worse results were obtained in the first category: general principles (2. The second category on the questionnaire was about officers and the board. The average score obtained was 4. W e then averaged the results for each section. In fact. and constitute a poor governance mechanism .

In areas related to shareholders rights. W e detected a very low level of board involvem ent in com m ittees. indicating an only m ediocre perform ance. Chilean companies scored relatively well (4. This result is consistent with the findings on Lefort and W alker (2000) and indicates a high likelihood of conflict of interest at the group level. Less than 5% of the largest firm s of the country have a corporate governance comm ittee and only 14% had com pensation or nom ination com m ittees. and conflicts of interest. Not surprisingly. and they can be answered by a sim ple yes or no. shareholders rights. In only 21% of the com panies the chairm an of the board is and independent and non-affiliated board mem ber. they capture a relevant feature of corporate governance practices in an em erging econom y such as a Chile.3. The average score of the 106 com panies surveyed was 11. That was the case in the applicability of the one shareone vote rule. the worst areas on the surv were board functioning and conflict of ey interest. The CGI had a m aximum score of 20. Questions on the CGI were grouped in four categories: disclosure.and reach sim ilar conclusions regarding the shortage of truly independent directors in Chilean corporations. Chilean legislation a nd. In 70% of the boards of the largest Chilean com panies there are board m em bers that are also executives or board m embers of other com panies of the sam e group.18). specially. In order to empirically ascertain the im portance of corporate governance practices  Chilean  s’  arket  in  firm m valuation  and  payout  policies. board functioning and independence.  we  focused  a  on  subset of the questionnaire. 19 . Table 5 sum m arizes the results for this subset of 20 questions that comprise our sim ple index of corporate governance practices in Chile (CGI). The Table presents the questions and the origi num ber of each question in the full nal length questionnaire. On the other hand. Chilean large firms score relatively well in disclosure and shareholders rights. the OPA Law approved on the year 2000 is on a large part responsible for the rigorous disclosure of related party transactions by listed Chilean com panies. indicating a high degree of board interlocking and lack of independence of board m em bers. They had been answered directy or indirectly by m ost com panies in the l sam ple. the general voting rights of m inority shareholders and the absence of form al sanctions applied by the SVS to board m em bers and officers. W e selected 20 questions according to the following three criteria.

  and  payout ratio. EM PIRIC AL ANALYSIS OF THE EFFEC TS OF AGENCY PROBLEM S ON FIR M ’S  MAR KET  VALUATION   The em pirical research on corporate governance boosted up after the sem inal work of LLSV during the nineties. Even if firm level corporate governance practices correlate with share prices. The em pirical m odel is. therefore. The origi al research investigated whether specific n legal arrangem ents related to investor protec tion on different countries affected capital m arkets developm ent. In this section of the paper. the dividend-earnings ratio. we cannot be sure that these practices cause investors to value firm s m ore highly. Among the indicators of firm perform ance.  dividend  as  q.  ROA  and  The empirical m odel tries to capture the hypothesis previously discussed regarding the control structure of the com pany. the extent of the agency problem at the firm level and the m arket value of the company.  they  cannot  affect  their  country’s  rules. of the type: y it ( dgroup it ) ( concentit ) ( coincid it ) ZFit ZG it 1 2 3 1 2 it W here: y:  firm   a  perform ance  value  and  indicator  such  Tobin’s  ROA. 20 . we perform regression analysis of m easures of firm performance and payout policy on corporate governance indicators at the firm level and a series of control variables. This    question is crucial to asses the potential benefits for  s  change  firm to  their  own  practices. the understanding of the difficulties entangled in the task im proves.  even  though. we consider    arket  firm m valuation  using  Tobin’s  and  arket  book  q  m to  ratios. Here we ask whether corporate governance practices at the firm level within a single country affect these  firms’  arket  m valuation. and to what extent is it tied  its  to  hom e  country’s  rules  reputation?”  and  As the list of em pirical studies trying to asses this question increases. As    clearly  stated  Black  al  by  et  (2003).V. The focus of this paper is a related question.  what  “to  extent  can  firm   a  increase  its  m arket value by upgrading its corporate governance practices. Alternative explanations related to different forms of endogeneity and om itted variable bias are also consistent with such em pirical findings.

For estim ation purposes we will consider three different sam ples because of restrictions on data availability. the endogeneity problem would arise. This panel provide over 1100 year-firm observations. and time and industry dum m ies. concent: ownership concentration at the firm level. Secondly. we use it to capture the effect of other dim ensions of corporate governance practices affecting firm valuation and payout policies and to provide estim ates of the incidence of corporate governance practices at the firm level on com pany valuation that are robust to the endogeneity problem . because no inform ation on dividend paym ents was available for the period prior to 1994. part of the instance. if firm s with high m arket valuation tended to adopt good governance practices in order to further im prove their share prices. First. for In that case. correlation captured in the regressions would respond in fact to reverse causation. in next section. Finally. coincid: degree of coincidence between cash and control rights at the firm level. 1.dgroup: affiliation to a conglom erate dum my. On average. Econometric concerns A key concern in this type of studies has to do with the potential endogeneity problem as discussed by Klapper and Love (2003) and Black et al (2003) am ong others. W e use the CGI (Corporate Governance Index) and its com ponents for that purpose. this is a smaller data base. this data base supplies over 1800 year-firm observations allowing obtaining robust estim ates using different estim ation procedures of the relationship between agency problem s and firm m arket valuation. Although. we constructed a sim ilar annual panel for the period 1994-2002. we also analyzed a cross section sam ple for 106 large com panies for the year 2003. ZG: a set of control variables at the group level. we use an annual panel data com prising all listed  companies  with  fair  ount  trading  a  am of  (around  200)  over  13  a  years’  e  tim horizon (1990-2002).  including  Tobin’s  in  payout  q  the  equation. In the context of this paper. ZF:  set  control  a  of  variables  the    at  firm level. Black et al (2003) refers to a slightly diffe rent  type  endogeneity  of  referred  “optim al  as  Endogeneity: 21 .

A related problem of spurious correlation could arise due to om itted variable bias. separation of control and cash flow rights or transfer control to other. corporate governance likely correlates with various economic A study that om its som e econom ic variables. This problem can be described by noticing that corporate governance  practices  the    at  firm level  could  determ ined  the  ’s  be  by  firm contracting  environm ent. payout ratio data are censored at cero since com panies do not pay negative dividends even if they were wi lling to. the signal rather  than  firm’s  the  governance  practices. which predict both variables. Hence. In addition. The idea is that firms may adopt good governance rules to signal its good behavior. if we do not adequtely control by these variables. Moreover. Chilean legislation requires com panies to pay dividends of at east 30% of last year profits. and com puted Hausman tests to evaluate the im portance of the censoring problem . they m ay decide to reduce. In that case. maybe foreign. governance and share price. we l estim ated panel Tobit regressions in the case of payout ratios due to the censored nature of the dependent variable. 7 Black et al (2003) give an alternative explanation for the potential correlation: quality signaling. W e perform ed Hausm an tests of specification in order to chose the best estimations obtained.     22 .differences”  which  occurs  when  s  firm endogenously  and  optim ally  choose  different  7 governance practices in the sense of Dem setz and Lehn (1985). Censored data: Traditionally. the a governance factors will capture the effect of the contracting environm ent on the firm on its market value. In order to account for unobservable individual effects we provide fixed and random effects estim ations in addition to the traditional pooled least squares. In equilibrium . could w rongly conclude that governance is directly associated with share price. com panies.  affects  share  prices. For instance. Hence. In such a situation. we also provide GLS heteroskedasticity consistent estim ators in case that observations of different com panies present different variances. Panel data estimation: The use of a panel data base increases the num ber of observations but introduces potential biases in the estimation. for instance. firm s with m ore tangible assets or m ore growth opportunities would want to im prove corporate governance m echanism s in order to raise external finance.

In order to construct our proxy for the potential existence of agency problem s we calculated for each com pany the m arket value of the consolidated equity held by the controlling shareholders. shows that higher ownership concentration is negatvely correlated with firm valuation and i that a higher coincidence between cash flow and control rights is positively correlated with firm valuation. Following m ost of  em pirical  the  literature. Empirical results on agency problems and firm valuation In the first part of the empirical anal ysis we want to explore the inform ation contained on the panel data regarding the effect of agency conflicts at the firm level on its m arket valuation and payout ratios. cash flow available. affiliation is positively correlated with firms’ ROA. and the book value of assets. W e then divide this value by the market value of assets calculated as the sum of the m arket value of total equity plus debt. As explained before this ratio indicates the percentage a ccrued by the controllers of each dollar of assets created by the com pany. investm ent et ratios. Tables 6 and 7 explain the construction of these variables and sum m arize descriptive statistics for them including cross correlations. W e also com puted a sim ple m easure of ownershi concentration as the fraction of total p equity held by the three largest shareholders ( oncent). as a proxy for bad corporate governance practices at the com pany level. thus. presented in Table 7. log of firm size.  use  we  Tobin’s  m easured  the  q  as  ratio  between  sum   the  of  the m arket value of equity and book value of debt.2. tim e dum m ies and 11 industry dum m ies. In the next subsection. W e also calculated the m arket to book ratio of equity and ROA. A sim ple look at the correlation m atrix of the variables. W e take the lack of coincidence between cash flow rights and control rights as an indicator of conflict of interest and potential agency problem s and. Although group affiliation is not correlated with the proxies to m arket valuation of com panies. debt-equity ratios (at m ark values).      23 . W e want to study the effect of agency problem s in the firm and its value. W e take this variable as an indication of the coincidence between cash flow rights and control rights and we call itCoincid .B. pension fund dumm y. From a long list of control variables. c In order to m easure firm valuation w e consider three variables. we com plem ent our analysis by considering indicator variables of the quality of corporate governance constructed from index variables derived from the questionnaire previously described. we selected group affiliation dum m y. average traded volum es.

Dummy variables for each of 12 years. Dgroup Dafp Laec DE Ratio Cash Invest Turnover Industry dummies Time dummies Dummy of group affiliation. Book value of debt divided by market value of equity. as previously discussed. Market value of common stock / book value of common stock Return on assets. 1 if the firm is affiliated to a conglomerate. Net income divided by book value of total assets. Number of shares traded during the year divided by total number of shares at the end of the year. Market value of total shares directly and indirectly owned by the controller divided by market value of total assets (book value of debt + book value of preferred stock + market value of common stock). the co rrelations do not necessarily indicate causation because of potential endogenous relations and om itted variable bias. Cash flow available. M-to-B Ratio ROA Concent Coincid Market to book ratio. p Investment rate of company. pension fund. Percentage of common stock owned by the three largest shareholders Degree of coincidence between cash flow rights and control rights. W e tackle the second problem by running m ultiple regressions using the set of control 24 . Net income plus dereciation divided by market value of assets. Change in fixed assets plus depreciation divided by last period fixed assets.Figure 1 com plem ents this evidence presenting scatter plots of these relationships indicating that these results are not likely due to few outliers. We    estimate market value of assets as the book value of debt + book value of preferred stock + market value of common stock. Log of market value of company assets. Dummy of pension fund investment. Dummy variables for membership in one of 11 industries. Capital structure of company. 1 if company shares may be acquired by a However. Table 6 Description of Main Variables Var Tobin’s  q  Description Market  book  assets  book  of  /  value  assets  the  of  at  end  each  of  calendar  year.

an increase in ownership  concentration  can  associated  m ore  be  to  power  controllers’  on  hands  and.  potentially. W e find that the presenc of pension funds as m inority shareholders e increases the m arket value of listed companies. m ore agency conflicts between controlling and m inority shareholders. W e found that including a large set of control variables does not alter the prelim inary results. firm valuation is negatively l and significantly correlated with ownership concentration and positively and significantly correlated with the degree of coin cidence of cash flow and control rights. W e will explore this possibility later in the paper using a m easure of turnover. holding the relation betw een cash and control rights constant.variables listed before. Table 8 presents this first set of results using standard OLS pooled m ultivariate regressions.  find    we  that  larger  s  firm have  higher  a  Tobin’s  indicating  q  higher  m arket valuation. Holding ownership concentration e constant. are penalized by th m arket. On the other hand. This result is robust across different estim ation procedures and means that for a given level of separation of cash from control rights. characterized by a lesser degree of coincidence of cash and control rights in hands of com pany controllers. the negative coefficient in the ownership concentration value could also be related to liquidity problem s. R obustness Checks Both coefficients were statistically significant in m ost 25 . m ore aligned incentives increase com pany value. These results tend to support the hypothesis that agency problem s. institutional investors tend to m itigate agency problem s between controlling and m inority shareholders. The results indicate that under this type of m odel specification group affiliation does not significantly affect firm value. W e also found that changing the set of contol variables did not affect the signs and r significance of these coefficients.  Also. 3. specifications. Both the tim e dum m ies and the industry dum m ies were statistically significant as a group in all specifications where they were included. In al specifications. There is another im portant result regarding corporate governance practices and firm valuation. while m ore indebted firm s present lower m arket valuation after controlling for other factors. W e tried several specifications in order to see whether our results are robust. However.

coincidence and valuation. for a given leve of control rights. However. the owners of firm s with l high  Tobin’s  are  ore  q  m likely  increase  to  their rights over the com pany cash flows. In    Table  we  10  show  cross  section  regressions  each  for  of the 12 years included in the sam ple. The the  of  q  the  Table show s that the results hold when we substitute  Tobin’s  with  M arket  q  the  to  book  ratio  the  ’s  or  firm ROA. Am ong other things. The results are presented in Table 12. W e find an inverse U shaped relation for concentration but no significant non-linear relation between coincidence and value after we control for ownership concentration. W e find that introducing these variables squared does not substantially change the results. Both ownership concentration and the degree of coincidence between cash flow and control rights could be endogenously  determ ined  the  ’s  arket  by  firm m valuation  and/or  performance. Endogeneity of this type would im ply that. Again. hence biasing our previous results. again. alm ost certai ly. Endogeneity checks Because of all these safeguards we are very confident that our results are not induced by som e om itted variable bias. 4. previous results m ay be due to spurious correlations arising from m easurement error in  construction  Tobin’s  and  c oncentration and coincidence variables. w e still have to tackle the potentially endogenous nature of the correlations obtained. In this table we show the results for different econometric m ethods. The coeffici ents obtained are. we run fixed effects panel regressions that take care of potential unobservable firm effects that m ight be correlated with ownership concentration and rights coincidence.Tables 9 and 10 present additional results that confirm the robustness of the findings. W e also checked for the existence of non-linearities on the relationship between concentration. the coefficient on concentration is negative and significant while the coefficient on coincidence is positive and significant in each of the 12 cross sections. Additional tests for robustness are presented in Table 11. very sim ilar to those previously obtained and. 26 . In Table 9 we replicate the last regression of Table 8 using different The evidence shows that it is highly unlikely that our m easures of firm valuation.  The positive coefficient obtained for the coincidence between cash and control rights variable can also be explained under the reverse causation story. rule out the possibility that the results n could be due to om itted variable biases.

Furtherm ore. but the OLS coeffi ient would overstate it. it should be difficult to get suitable instrum ents unless som e restrictive assum ptions are m ade or an exogenous condition on corporate governance practices is im posed on firm s. That would be the case if they increased ownership concentration through a pyram id scheme without increasing necessarily the coincidence between their cash and control ri ghts. For that purpose. we directly tackle the endogeneity problem using an instrum ent related to control concentration. Given those restrictions. it could also be argued that the controllers of com panies m ore valued by the m arket also tend to increase the concentration of their holdings. we run an Arellano and Bond Dynamic Panel GM M regression. 27 . if c an  endogenous  relation  the  of  type  predicted  Dem setz’s  by  hypothesis  present. In the case of ownership concentration. It should be strongly correlated with the independent variable for which there is suspicion of endogeneity (conc and coincid). The estim ated coefficients are very sim ilar to those obtained before but a Sargan test of the validity of the instrum ents (lagged values of the control variables) largely rejects the null hypothesis. hence. In order to adequately solve the endogeneity problem s we should find suitable instrum ents to run som e type of instrum ental variable or sim ultaneous equations m odel.hence increasing the degree of coincidence between cash flow and control rights. we conjecture that the endogeneity problem is not likely very im portant in this case. Because the concentration and coincidence m easures present m uch less tim e series variation that firm valuation and perfo rmance variables. Under this reverse causation. through its effect on the independent variable. This econom etric procedure takes care of unobserved firm specific effects and potential endogeneity of the explanatory variables under the assum ption that there is no second order serial correlation on the error term . there could still be a causal connection between coincidence and firm value. However. and it should predict the dependent variable only indirectly. in this case since the coefficient on concentration is negative. would not reinforce the direct effect. but not directly. The last regression in Table 11 intends to solve the endogeneity problem under som e restrictive assum ptions.  is  even if there is a causal relation for som e firm s between coincidence and valuation one could not imply that other firm s can im pr ve their m arket values by increasing the o degree of coincidence between rights. A suitable instrument should ideally be exogenous and not influenced by the dependent variable of interest. However. the reverse causation correlation would run in the opposite direction and.

The results are straightforward.A shows that. it becomes very difficult for the controller to attract external investors in ord er to separate cash from control rights. the degree of coincidence tends to be higher in firm s that surpass the two thirds threshold. Table 13 shows that the 2SLS regressions indicate that. Table 13 shows that the results hold for a sim ilar 28 . a com pany m ay have a controlling shareholder that contro with two thirds of the votes a holding ls company that owns two thirds of the com pany shares. Notice that although both variables are related. directly or indirectly. and that company m arket value does not respond in an evident way to the threshold. Table 13 presents OLS re gressions  Tobin’s  on  of  q  this  dum m y. as expected.A and B show the relationship between a control dum my variable and the coincidence between cash and control rights. even in the zero debt case. Therefore. Figure 2. that effective control requires two thirds of voting rights. firm s with control concentration over two thirds present higher coincidence. Lower ownership concentration and higher coincidence are still related to higher valuation.B shows that there is no obvious clustering of firm s around the two thirds threshold. although. W e  then  a  run  second  stage  regression  Tobin’s  in  control  of  q  all  variables  and  the instrum ented coincidence variable. m ore than two thirds of voting rights as an instrum ent for the coincidence of cash and control rights variable. in any case. For instance. W e find that. W e then present a first stage 2SLS regression of the degree of coincidence on the concentration dum m y and a series of controls. the coincidence between cash and control rights would be only four ninths. Figures 2. Rule 67 of Chilean Corporations Law establishes that m ajor com pany decisions m ustbe taken with the support of two thirds of voting rights. then. the control concentration dumm y for this com pany would be 1. after controlling for endogeneity and om itted variable bias. in the following analysis we will use a dum m y variable that takes the value of one whenever the controller of a firm holds. W hen we include the dum m y variable in our standard specification the previous results do not change. the coefficient on the degree of coincidence rem ains positive although the econom ic and statistic significance is notoriously reduced.In the previous analysis.  the  coincidence variable and a series of control variables under different specifications. Therefore. A hypothesis for this result is that as a com pany reaches such a level of concentration in voting rights. It could be argued. the relationship is not obvious. we had used a m easure of ownership concentration and of coincidence of cash and control rights. Figure 2.

once the controller has achieved such a high level of ownership. firms with pension funds as m inority shareholders and larger firm s present higher payout ratios. VI. separation of cash from control rights affects payout ratios in a non/linear way. we find that there is a threshold around 45% where the effect of higher controlling shareholder participation changes the sign of the m arginal effect of separation on payout ratios. firms affiliated to conglom erates. he/she can m ake alm ost anything without opposition and there m ay be better (less expensive in term s of taxes) ways of getting his/her m oney back. payout ratios start to decrease. They are structured in a sim ilar way as those for Tobin-s q. 4. D O CORPORATE GOVERN ANC E PRACTIC ES AFFECT FIRM MARKET VALUATION AND PAYOUT POLICY? 1. Dividend Payout Ratios Tables 14 and 15 present the results for the regressions using the dividend payout ratio as the explanatory variable. A hypothesis for that result m ight be related to tax incentives. In addition we consider a dum m y variable that takes the value of 1 whenever we had to fill the 29 . In the case of dividend payout ratios we find inverse U shaped relationships sim ilar to the one obtained for the German case by Durtouglu et al. Third. However. C orrelations with firm market valuation In this section w e focus on cross section data for the year 2003 in order to include other dim ensions of corporate governance in the em pirical analysis. increase payout policy. As we already discussed.set of regressions run for a smaller sample of firm s after controlling for traded volum es. shareholders rights and conflict of interest. m ore debt im plies less dividends. increases in ownership concentration. As explained above. First. board practices. Second. we divided the corporate governance index in four sections: disclosure. as expected. Sim ilar to the Germ an case. w hen concentration in term s of equity reaches over 70% of shares own by the controller. The results are the following. W e find that for low values of the coincidence variable. We include in the analysis the corporate governance indicator variables constructed starting from the questionnaire and sum m arized in the CG Index described above.

even the positive and significant coefficient on the Conflict indicator could be due to endogeneity of the reverse causation type. Finally. In Table 17 we present multivariate Logit regressions betw een the CGI com ponents and the control variables. the shareholders rights sub-index although significant. Following 30 shareholders rights is the exception and presents negative. while the opposite is . 2. the CGI index and sub-indices are The sub-index positively correlated am ong them and with m arket valuation. im ply m ulticolinearity in the regressions. the high correlation observed am ong the different m easures of corporate governance and the control variables m ay. and only few questions have individual significance in the regressi ons. and hence low individual explanatory power. the other sub-indices. we look at the effect of better corporate governance practices as m easured by the CG index and its com ponents on m arket valuation.answers to the questionnaire without com pany assistance and consider. but low. we can not affirm that these type of better corporate governance practices at the firm level are valued by the m arket. the pension fund dum m y. appears with negative sign in the regressions. as previously discussed. Controlling for Endogeneity Of course. Larger firm s. Of course. firm s with m ore growth opportunities and with m ore ca flows available tend to present better sh corporate governance practices. less indebted firm s. The regressions presented in Tables 18 are estimated over a cross section sam ple of 85 companies for the year 2003. because m ost of the variables that were significant in the previous panel data regressions are statistically insignifican in these cross section regressions. of course. also separately. W ithout knowing if that is the case. The lack of explanatory power can be attributed to the lim ited sam ple use. The overall index is not significant and. In t addition. In Table 16 we look at the correlations between the control variables used in the previous regressions and the corporate governance indicators. one could expect that the different m easures of corporate governance are highly correlated. W e find that after controlling for the list of control variables previously used only the sub-indexConflict of Interest appears to be statistically significant in ex plaining firm value. In general. true for debt. correlation with Firm size is positively correlated with good corporate governance practices and less potential for agency problem s. The results are not very encouraging.

  The last two colum ns of Table 18 show 2SLS regressions using the size dum m y  an  as  instrum ent  the  for  CGI  index  a  in  regression  Tobin’s  on  agency  of  q  the  problem variables and the set of control va riables. Figure 3. firm s with m arket capitalization above this value will tend to have better corporate governance practices in order to be sure that they com ply with the law. Sim ilarly to the Korean case. Figure 3. the result is only significant at the 15% level.8 Presumably.Black et al (2003) we look for exogenous determ inants of corporate governance practices not directly caused by firm m arket valuation. 31 .A shows that. 8 Rule 50 bis. How ever. The results show that the second stage coefficient of conflict of interest  Tobin’s  rem ains  on  q  positive  and  ilar  sim in  value to the one obtained in an OLS regression indicating no evidence of endogeneity in an im portant way. As a sim ple way to look at the validity of this instrum ent. in fact.B shows that there is no apparent relationship between this size threshold  com pany’s  arket  and  m valuation. Corporations Law. Chilean Corporations Law requires that all firms with m arket capitalization above 45 m illion dollars form an audit com m ittee com posed by a m ajority of independent directors. firm s above this threshold present an audit com mittee while the sm aller ones do not.