|Does corporate governance create shareholder value?|
Corporate governance, one of the most in-vogue subjects of recent years in the corporate environment, makes us wonder: do special standards of control and management really increase wealth for shareholders?
The question is reasonable. After all, there are several costs involved when a company adapts to governance standards such as those required by, for example, the Novo Mercado. Among them are turning all capital into ordinary shares, creating a board of directors and consequently hiring independent members for it, disclosing financial information in different formats than the BR GAAP, and extending tag-along rights to all shareholders. But, overall, do these costs have any effect on a company's value?
Studies on the subject suggest that they do. There is evidence that improving corporate governance brings significant accretions to share value and liquidity, reduces the cost of capital and attracts investors willing to pay more for shares in companies with good governance, including in emerging markets. It's a fact that foreign investors tend to invest less in companies from countries with little protection for minority shareholders and high concentration of control, irrespective of financial status. One of the studies — about the Italian stock market — suggests that types of shares bestowing different rights can carry price differences of up to 80%.
In 2007, a survey by Stern Stewart verified whether Brazilian companies that had announced their migration to Level 2 or the Novo Mercado had produced any benefits for their shareholders. To obtain the survey results, the authors applied a method known in the academic world as event study, which observes the returns of shares within analysis windows of one, three and five days surrounding the announcement date, comparing them to the expected returns. The expected return is calculated as a function of each company's beta (how much the share price varies in relation to a given market index). In an attempt to eliminate noise contamination from the results, they selected only companies with good liquidity and that had not disclosed material information during the analysis window. The results prove that such announcements produce returns 5% above the market within the five-day windows. In other words, migrating to Level 2 or the Novo Mercado creates value.
Another study1 attempted to discover whether there was any element associated with higher or lower return of shares from companies that recently went public. Among the factors analyzed (size of company and offering, percentage of primary offering, free float and leverage, for example), the presence of private equity (PE) funds in the capital of some companies at the time of their IPOs helped to explain superior performances compared to the market index and to companies without this type of shareholder. PE funds usually raise the corporate governance levels to increase the alignment of interests between top management and shareholders, in addition to applying other management tools.
We may conclude from reading all these works that, both in Brazil and abroad, establishing or improving corporate governance has a positive effect on share prices. In turn, companies located in markets without due regulation and/or widespread governance practices will see their shares traded at lower prices than their peers in markets where these practices are more prevalent.