Endogeneity of Brazilian corporate governance quality determinants

Purpose - This paper aims to investigate the determinants and the evolution of voluntarily adopted firm-level corporate governance practices in Brazil from 1998 to 2004 using broad corporate governance scores. Design/methodology/approach - The authors employ a robust panel-data procedure that accounts for the main sources of endogeneity to a very representative panel of Brazilian firms over a six-year period. They address the endogeneity that arises from the simultaneous determination of the quality of corporate governance practices, the dependent variable, and possibly several firm attributes that are commonly employed as the determinants of such practices and are supposedly independent. Specifically, theoretical arguments and empirical evidence strongly suggest that the quality of corporate governance practices may influence some of the variables commonly used as its determinants just as much as they may be influenced by them. Findings - The paper finds that firm-level corporate governance practices are steadily improving but there is much room for improvement. Heterogeneity has increased. Voluntarily adhering to new stricter listing requirements is associated positively with improvements in firm-level corporate governance practices. Reducing or not using non-voting shares improves corporate governance practices. Research limitation/implications - The authors found no clear evidence of the influence of other potential determinants of the quality of corporate governance, such as growth prospects, firm size, firm value, and ownership structure. Thus, they doubt previous findings that suggest a causal relationship from value and ownership to corporate governance practices because value and ownership seem to be determined endogenously. Practical implications - Policies directed to reduce the use of non-voting shares should be implemented. Creating strict listing requirements that may be adopted voluntarily by firms could be a feasible solution to improve the quality of corporate governance practices in emerging market countries. Firms in an emerging market that find that issuance in the USA became too expensive or demanding may offer a substitute listing environment with credible requirements to foreign investors. Premium listings may partially compensate emerging market exchanges for their loss of trading to major markets. Originality/value - The paper examines the evolution of the voluntary adoption of corporate governance practices in Brazil from 1998 through 2004 while most studies use cross-section samples over one or a few years. Further, this is one of a few papers to analyze the impact of ownership structure on the quality of corporate governance practices by segregating control and cash flow rights.