Corporate Governance in Medium Income Countries: The Case of Portugal

There has been much recent attention devoted to corporate governance issues, namely executive compensation (Jensen et al, 2004), corporate control (Dyck and Zingales, 2004) and hostile takeovers (Franks and Mayer, 1994). This new stream of empirical literature is well anchored on two powerful explanations of the firm’s structure and control – agency and transaction costs theories. However, there has been an excessive concentration on a specific type of institution – the manufacturing stock market quoted public corporation, usually headquartered in English speaking or “common law” countries. This research bias can be justified both by the theoretical attention given to the separation of ownership and control and by the availability of data for companies that are under the scrutiny of compulsory auditing.
Recently, a new stream of research has emphasized the importance of other types of institutions, such as family firms. Anderson and Reed (2003) have even obtained the counter intuitive finding that American family firms have systematically outperformed publicly owned peers. La Porta et al (1999) have underlined the need for a better understanding of corporate ownership across the world. One third neglect of current research regards the study of intermediary management levels, as stressed by Ortin-Angel and Salas-Fumas (1998).
This research project attempts at contributing to fill the previous gaps found in the empirical literature in corporate governance. The Portuguese case, as a non Anglo-Saxon, medium income economy, with a predominance of family owned firms and the services sector is an interesting research case with a potential for extrapolation into related economies. The comparison with the Anglo-Saxon countries will not be neglected either.
The work should include the following four subtopics:
Executive compensation in Portuguese firms. We plan to study the implication of firm specific variables such as size, age, ownership or nationality and executive specific variables including age, education, functional level or duration of the labor contract for the amount and type of compensation offered to the executives. The use of variable versus fixed compensation, in particular, is a core topic in executive compensation research that we wish to analyze thoroughly in the Portuguese context. This study is based on a large data base with thousands of observations used in a nearly completed doctoral dissertation by the team member Carlos Duarte from the IPT. There is an interesting potential for to be published in journals with an interest on corporate governance and finance, as well as business strategy and executive compensation. Executive gender and company performance are two topics that we will plan to study in a more detailed manner.
Life stage and corporate governance in family firms. Some recent contributions (Schulze et al, 2002) show the existence of agency problems specific to family firms which may cause the misalignment of incentives and the creation of distributive injustice. This suggests the need of corporate models that ensure bigger transparency and shows results to independent entities.
The problems of governance and compensation in family firms are more complex and relevant than may be inferred from a straight interpretation of agency theory’s predictions.
We will carry out a questionnaire of about 150 family firms to measure the governance and compensation procedures, with a special focus on the family managing generation and the involvement of family members. We will try to carry both a cross-section analysis and an in depth study of 6 firms gone through transformation processes including succession.
The impact of corporate governance on banking performance. Our goal is to replicate a study by Claessens et al. (2001) on the impact of the market share of foreign banks on the performance of the banking industry, in the context of the Portuguese economy. We plan to include other governance variables, beyond country of origin into this study, a missing explanation in the otherwise extensive literature on the impact of foreign banking in the host country’s efficiency. Specific data, at the industry level, is to be collected for undertaking the study.
The impact of capital changes on stock performance. There is a widespread belief that capital offerings, either of the seasoned equity offering (SEO) type or of the stock dividend or stock split type are not neutral, as they impact on the stock market value of shares.
The methodology to be carried out is of the event study type, with the underlying goal of measuring the impact of such events in the context of the Portuguese economy, therefore partially replicating studies carried out in the context of more developed capital markets. One interesting feature that will be looked upon is the impact of ownership – although necessarily based on quoted companies we can assess the impact of capital concentration, thereby analyzing the difference between family owned firms and companies with a predominantly dispersed ownership.