14 Feb 2008  Working Papers

Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950

Executive Summary — The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. The case of Brazil is particularly interesting because, in Latin America before World War I, it boasted the second-largest equity market and largest number of traded companies. As HBS professor Aldo Musacchio shows, the considerable variation of investor protections over time at the country level, and even at the company level, urges cautions against notions about the persistency of institutions, especially of legal traditions. Key concepts include:

  • Many large Brazilian corporations at the turn of the 20th century induced small investors to buy equity by choosing bylaws that distributed power in a more democratic way among shareholders.
  • Maximum vote provisions, and to a lesser degree graduated voting scales, were correlated with lower concentration of ownership and voting power.
  • The shareholder protections in national laws that seem to have mattered most were those that facilitated the private monitoring of corporate activities by requiring corporations to publish important financial information.
  • It is possible for companies to break with the institutional environment in which they operate.
  • It is unlikely that the institutions relevant to the expansion of equity markets and development of large multidivisional corporations were determined hundreds of years ago, either at the time of colonization or when countries adopted their current legal systems.

 

Author Abstract

The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. Archival evidence such as company statutes and shareholder lists document that in many Brazilian corporations voting rights provisions, in particular, maximum vote provisions and graduated voting scales (that provided for less than proportional votes as shareholdings increase), balanced the relative voting power of small and large investors. In companies with such provisions the concentration of ownership and control is shown to have been significantly lower than in the average company. Overall, from the sample of Brazilian companies studied it seems like the concentration of control was significantly lower before 1910 than what it is today.

Paper Information