Do Leverage, Dividend Payout, and Ownership Concentration Influence Firms' Value Creation? An Analysis of Brazilian Firms

This study uses a sample of 213 Brazilian firms listed between 1995 and 2004 to examine the effect of the presence or absence of growth opportunities on the subsequent effect of leverage, dividend payout, and ownership concentration on firm value. First, we find that leverage plays a dual role: wher...

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Bibliographic Details
Published in:Emerging markets finance & trade 2010-05, Vol.46 (3), p.80-94
Main Authors: Iturriaga, Félix J. López, Crisóstomo, Vicente Lima
Format: Article
Language:English
Subjects:
agency theory
Business structures
Corporate debt
Dividends
Emerging markets
Financial economics
Financial investments
Financial leverage
Free cash flow
growth opportunities
Impact analysis
Leverage
Ownership
ownership structure
Shareholders
Stockholders
Studies
Trade finance
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Summary:This study uses a sample of 213 Brazilian firms listed between 1995 and 2004 to examine the effect of the presence or absence of growth opportunities on the subsequent effect of leverage, dividend payout, and ownership concentration on firm value. First, we find that leverage plays a dual role: whereas it negatively affects the value of firms with growth opportunities (i.e., underinvestment theory), it positively affects the value of firms without growth opportunities (i.e., overinvestment theory). Second, we find that dividends play a disciplinary role in firms with fewer growth opportunities by reducing free cash flow under managerial control. Finally, the results show that ownership structure has a nonlinear effect-that is, ownership concentration initially improves the value of most firms. However, after a certain threshold, in firms with growth opportunities, the risk increases that large shareholders expropriate wealth at the expense of minority shareholders.
ISSN:1540-496X
1558-0938
DOI:10.2753/REE1540-496X460306