Leviathan as a Minority Shareholder: A Study of Equity Purchases by the Brazilian National Development Bank (BNDES), 1995-2003

by Sergio G. Lazzarini & Aldo Musacchio

Overview — There is a trend in many developing countries toward governments buying minority stakes in private companies. While there has been ample discussion on the wisdom of such actions, little has been said about how governments can make such interventions work better. This paper aims to fill that void, using data from the Brazilian National Development Bank (BNDES). Research was conducted by Sergio G. Lazzarini of the Insper Institute of Education and Research, and Aldo Musacchio of Harvard Business School. Key concepts include:

  • Having a development bank as a shareholder alleviates the capital constraints that publicly traded companies face.
  • Having a minority rather than a majority stake reduces the likelihood of political interference on the part of the development bank. However, this benefit may be thwarted when the bank targets companies in which the government already has close ties, such as relationships with state-owned business groups.
  • Having BNDES as a minority shareholder does not appear to improve a company's access to loans.
  • Governments considering minority equity stakes as an industrial policy tool should avoid pyramidal groups with poor governance.

Author Abstract

There is a growing literature comparing the performance of private vs. state-owned companies. Yet, there is little work examining the effects of having the government as a minority shareholder of private companies. We conduct such a study using data for 296 publicly-traded corporations in Brazil, looking at the effects of equity purchases by the National Bank for Economic and Social Development (BNDES) on firm performance between 1995 and 2003. Our fixed-effects regressions show that BNDES's purchases of equity lead to increases in return on assets and investment in fixed assets. Finally, we find that the positive effect of BNDES' equity purchases is reduced when the target firms belong to state-owned and private pyramidal groups. Therefore, our argue that having development banks owning minority stakes can have a positive effect on performance as long as they promote long-term investments and are shielded from governmental interference and potential minority shareholder expropriation.

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