THE IMPACT OF CORPORATE GOVERNANCE ON ...

International Conference On Applied Economics – ICOAE 2010

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THE IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL CONSTRAINT: EVIDENCE FROM BRAZILIAN FIRMS AQUILES ELIE GUIMARÃES KALATZIS1 - ALINE DAMASCENO PELLICANI2 - JOÃO VITOR MOCCELLIN3

Abstract This paper analyzes if aspects of corporate governance contribute to reduce the degree of firm‘s financial constraint. Although studies of financial constraints are extensive in literature, their relationships with aspects of corporate governance are little explored and inexistent for Brazilian economy. To examine the role of corporate governance mechanism on firm‘s financial constraints, we used an unbalanced longitudinal data of 532 Brazilian public traded companies over the 1997-2002 period. We estimated a logit probability model, using as criterion for the classification of firms the KZ index proposed in the literature. The results showed evidence that firms with high concentration of ownership and control are more likely to be financially constrained. Keywords: Corporate Governance, Financial Constraints, Ownership Structure JEL Classification: G30, G31, G32

1

Introduction

The perfect market hypothesis suggests that investors and managers have access to the same quality of information about firm‘s financial activities and that its investments are only determined by investment opportunities. However, in real market with the existence of asymmetric information between firms and creditor, managers and shareholder, the cost of external financing may be higher than the costs of internal financing, which can constrain the investment capacity of firms. Studying the behavior of investment decision of firms, Fazzari, Hubbard and Petersen (1988) use the availability of internal funds as proxy for asymmetric information problems and they found that firms financially constrained presented higher dependence of internal funds that affect the firm‘s investment decisions. The seminal work of Fazzari et al. (1988) generated several critiques and many authors have initiated researches to investigate the role of financial constraint on firm‘s investment decisions (Bond and Meghir, 1994; Kaplan and Zingales, 1997; Cleary, 1999; Cleary, Povel and Raith, 2007). However, the discussion about the behavior of firm‘s investment in the presence of financial constraint continues intense. Studies as Ginglinger and Saddour (2007), Wei and Zhang (2008), and Chen, Huang and Chen (2009) analyzed how corporate governance mechanisms are related to the way of creditors and shareholders invest on firm‘s investment projects, i.e, how this mechanisms can reduced the firm‘s financial constraints. Nevertheless, the international literature that relates corporate governance and financial constraint is very recent and scarce. The principal contribution of this paper is to analyze the impact of corporate governance mechanisms on degree of firm‘s financially constrained, non-existent in Brazilian literature. Another interesting aspect of this paper is investigating the role of the corporate governance and distribution of ownership and control in emergent economy as Brazil. The principal characteristic of Brazilian firms is that they have high ownership concentration and the controlling shareholder is the largest ultimate shareholder. In addition, the highest concentration of property and control occurs mainly on firms with family ownership structure. As corporate governance variables, we considered the nature of ownership and control, the existence of controlling shareholder, the managers‘ profit participation, the presence of the largest ultimate shareholder as member of the board and as executive director. We used an unbalanced panel data of 532 Brazilian firms over the period 1997-2002 to estimate the logit probability model. The firms are classified as financially constrained or unconstrained according to KZ index proposed by Lamont, Polk and Saá-requejo (2001). This index in turn was based on estimation of ordered logit model of Kaplan and Zingales (1997). We found that as the degree of ownership concentration increases the likelihood of firm‘s financial constraint raises. On the other hand, liquidity variables reduce the likelihood of firm‘s financial constraint. This paper is organized in five sections, considering this introduction. Section 2 presents a brief review of the literature about the relationship between aspects of corporate governance and financial constraints. Section 3 describes the data and the methodology proposed in this study. Section 4 analyzes the main results of estimation of the logit model. Finally, we present the main conclusions of this work.

2

Literature Review

The discussion about the financial constraints on investment decisions had initiated with the seminal work of Fazzari, Hubbard and Petersen (1988). The authors identified the role of financial constrained considering a sample of 422 U.S. firms in a period of 1969-84, adopting as firm‘s classification criteria the payout policy. They introduced the cash flow variable to analyze how the presence of asymmetric information interfere on the accumulation of the firm‘s internal funds and they found that the sensitivity of investment to cash flow was significantly greater for the group classified as low payout rate. In contrast, Kaplan e Zingales (1997) classified the firms identified by Fazzari et al. (1988) as financial constrained and reclassified them according to operating performance. The authors found that 85% these firms could not been considered financially constrained since they increased their investment using credit line and internal funds. 1

Associate Professor of Production Engineering - University of São Paulo - (EESC/USP) Brazil, (corresponding author phone: +55 (16) 3373-8288; Av. Trabalhador São-Carlense 400, Cep 13560-970, São Carlos/SP, Brazil); e-mail: [email protected]. 2 Master‘s degree student in Production Engineering - University of São Paulo - (EESC/USP) Brazil, e-mail: [email protected] 3 Professor of Production Engineering - University of São Paulo - (EESC/USP) Brazil, São Carlos/SP, Brazil; e-mail: [email protected]


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The critique of Kaplan and Zingales (1997) to work of Fazzari et al. (1988) initiated an important debate related to forms to analyze the sensitivity of investment to cash flow and the classification criteria of financial constrained firms. Analyzing the critique of Kaplan and Zingales (1997), Fazzari et al. (2000) argued that the sample used by Kaplan and Zingales (1997) was too small to sustain the magnitude of the results. Cleary (1999) confirmed the results of Kaplan and Zingales (1997), based on a sample of 1,317 U.S. firms over the period 1987-94 and using a discriminant analysis to group firms. However, there are a variety of studies consistent with the work of Fazzari et al. (1988). Hoshi et al. (1991) analyzed a sample of 145 Japanese companies and found that firms affiliated with banks and banking close ties showed low sensitivity of investment to cash flow. Schaller (1993) studied 212 Canadian companies and found that unconstrained firms would be less sensitive to variations in liquidity. Bond and Meghir (1994) found that firms with reduced payment of dividends and with low emission of new shares had a higher sensitivity of investment to cash flow. Champman et al. (1996) observed that the investment of financially constrained firms was more sensitive to cash flow than unconstrained firms. Considering the discordant results, Povel and Raith (2001) and Cleary, Povel and Raith (2007) showed that different variables to represent financial constraint would lead to divergent results related to financial constraint on investment decision, which would help to explain the contradiction results between Fazzari et al. (1988) and Kaplan and Zingales (1997). Moreover, these authors also noted the existence of a U-shaped relationship between the firm's investments and internal funds available, i.e. depending on the level of internal funds appropriated by the firm, they increase or decrease their amount of investment. Despite the presence of contradictory conclusion, recent studies have arisen to highlight the importance of firm‘s structure corporate governance to explain the ambiguity in the interpretation of investment-cash flow coefficient. Hadlock (1998) ranked firms according to participation of the managers in firm‘s capital to investigate if it could align interests between managers and shareholders. Based on a sample of U.S. firms from 1973-76, he found an inverted U-shaped relation between managers‘ ownership and investment-cash flow sensitivity. For the author, as the managers care more about shareholders value, the sensitivity of investment to cash flow decreases. Wei and Zhang (2008) complemented the study of Hadlock (1998) using the difference between cash flow rights and control rights of the largest shareholder as proxy for information asymmetry and expropriation of minority shareholders rights. They observed that the sensitivity of investment to cash flow reduced with the increase in cash flow rights of the largest shareholders, but it is raised with the increase of the difference between control rights and cash flow rights. Ginglinger and Saddour (2007) classified the sample of French firms by size, defined by total asset, and dividend payout. They showed that the impact of corporate governance quality on the cash holding level maintained by the firm was explained by the existence of financial constraint and by agency conflict. According to these authors, firms controlled by families suffer more from financial constraint than firms with another nature of control. On the other hand, the assumption that family firms are more susceptible to financial constraint was not found by Andress (2008). He showed that family firms are more financially stable when compared to firms with another ownership nature with same size and payout dividend. In this case, the investment-cash flow sensitivities analysis proved to be less sensitive to cash flow availability. In addition, as family firms would be less financial constrained, its decisions would be more agile in new investment opportunities. Gugler (2003) attempted to analyze the ambiguity in interpretation of investment cash flow sensitivity introducing corporate governance variables to explain the presence of financial constraint on investment decision. The result indicated that different categories of control, such as familiar, tend to suffer greater financial constrained with high levels of asymmetric information and agency costs. Moreover, firms with concentrated ownership structure and more discretionary management showed less sensitivity of investment to cash flow. Chen, Huang and Chen (2009) used the KZ index constructed by Lamont, Polk and Saá-Requejo (2001) to classify firms between financial constrained and financial unconstrained. With a logit probability model, the authors identified firms that would have high probability to be considered financially constrained under merger and acquisitions determinants. The results indicated that family firms and state firms, in general, take decisions that are not based on maximization of firm value, and small firms and with high levels of leverage are more likely to face financial constraint. The weak legal protection for investor facilitates the separation between control rights and cash flow rights, especially through pyramidal ownership structure that permits the largest ultimate shareholder to control the firm with a small participation on firm‘s capital raising the risk of expropriation of minority shareholders. Based on a sample of Italian firms, Bianco and Casavola (1999) showed that firms in pyramidal ownership structure may overcome financial constraint given that these firms could transfer resources between firms within the group. Similarly, Carpenter and Rondi (2000) analyzed small and medium Italian firms over the period 1977 to 1993. They found that large, young and no pyramidal affiliation firms had a high investment-cash flow sensitivity, which could be explained by the fact that even large firms could show a weak relationship with the creditors, implying in difficulties to access the external financing. On the other hand, in firms with same size, age and belonged to pyramidal ownership structure, the results showed a lower sensitivity of investment to cash flow, implying a reduction in degree of financial constraint. To analyze the relationship between investment-cash flow sensitivity and agency problems, Crespi and Scellato (2007) used a sample of 1,035 Italian firms over the period of 1998-2003. The results indicated an inverse U-shaped relation between ownership concentration and investment-cash flow sensitivity. The growing segment of this function can be interpreted as an indicative of presence of imperfect capital market, in other words, an increase of ownership concentration could align the interests between managers and shareholders.

3

Data and Methodology

This paper uses a data set constructed out of the reports: Annual Informative - (IAN) and the Standardized Financial Statements (DFP), which Brazilian traded firms are required to submit annually to Securities and Exchange Commission of Brazil (CVM). Among the information available in reports, DFP consists in balance sheets and statements results of firms and IAN contains disclosure data as number of shares emitted, shares of capital held by the largest shareholders, shareholders agreement, identities of director and top executives, manager‘s participation on firm‘s profit. The sample of this study includes listed and non listed firms on


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capital markets. We excluded financial firms and firms with incomplete ownership data. To include as observation as possible, we use an unbalanced panel of 532 firms over the period of 1997-2002. All information in this database was deflated according to the General Price Index – Internal Availability (IGP-DI). The firm‘s controller is defined on shareholder voting rights, and ownership structure is based on cash flow rights. The calculation of voting rights and cash flow right depends if the firm is inside a pyramidal structure or not. We considered pyramidal ownership structure as a set of legally independent companies controlled by the same shareholder (group leader) through a chain structure that allows the controlling shareholder to control other companies into the group (Bianco and Casavola, 1999). Pyramid ownership structure allows the presence of a discrepancy between cash flow rights and voting rights. If the firm not belongs to pyramidal scheme, the cash flow right and voting right are directly determined by the fraction of total capital owned by shareholder. However, if the firm belongs to pyramidal scheme, the cash flow rights percentage is calculated by product of cash flow rights held by the shareholder in each firm inside pyramidal structure. To analyze the nature of the largest ultimate shareholders, we followed the methodology of La Porta et al. (1999), Claessens et al. (2000), and Faccio and Lang (2002) that defined the largest ultimate shareholder as who owns more cash flow rights directly or indirectly over the firm. On this way, we classified the largest ultimate shareholder into six categories: shareholder agreement, family, state, foreign, institutional and miscellaneous. The category of shareholders‘ agreement represent firms whose the largest ultimate shareholder is characterized by a block of shareholders united by a legal contract and the financial strategies are decided by all block members. Miscellaneous category comprehends cooperatives, foundations and non traded firms. Voting rights depends on the largest ultimate shareholder is a controlling shareholder of pyramidal structure or not. La Porta et al. (1999), Claessens et al. (2000), and Faccio and Lang (2002) adopted 20% of voting right to define a shareholder as controller, while Wei and Zhang (2008) considered as controlling shareholder who owns more than 50% of voting rights for a directly ownership structure or for a pyramidal ownership structure. In this paper we defined that the largest ultimate shareholder is the controlling shareholder of pyramid scheme if he has more than 50% of voting rights in each firm. On this way, the largest ultimate shareholder not always is considered the controlling shareholder of pyramidal scheme. In this paper, we define that the largest ultimate shareholder is the controlling shareholder of pyramidal scheme if he has more than 50% of voting rights in each firm. However, if the largest ultimate shareholder is not the controlling shareholder of pyramidal scheme, the controlling shareholder of pyramidal structure should have more than 50% of voting rights calculated by the product of voting rights owned by him in each firm inside pyramidal structure. The table 1 presents the description for all financial variables used in this work. Table 15: Variable Definition Variable description Abreviattion K Capital stock, measured by the property plant and equipment, net of depreciation I Firm‘s investment, measured by (Kt -Kt-1) NI Net income DA Depreciation and amortization CF Cash flow, measured by (NI+DA) S Sales LTD Long-term debt, measured by Long-term liabilities TA Total assets SE Stockholders‘ equity CL Current liabilities FCF Free cash flow, measured by (CF+I)/S TD Total debt, measured by (PC+ELP) TE Total equity, measured by (PC+ELP+PL) ROA Ratio of NI to TA OI Operational income To classify firms as financially constrained and unconstrained, we used the KZ index constructed by Lamont, Polk e Saá-Requejo (2001). This index consists of variables strictly related to financial constraint and it will indicate firms with higher likelihood to be considered as financially constraint. The KZ index proposed here takes into account three of five variables used in equation suggested by authors. Despite the smaller number of variables adopted in the construction of the KZ index, it has shown to be a good measure of financial constraint, once it captures the essence of firm‘s financial constraint. The KZ index is estimated as:   LTD  CF    3.139     1.1315  FCFit (1) KZ Index it  1.0019  K t 1  it   K t 1  it where t is the year; i is the firm; Kit is the stock capital; CFit is the cash flow variable; LTDit is the long-term debt and FCFit is free cash flows, defined as the cash flow minus capital expenditure by sales. Based on KZ index, we created a binary variable that takes the median as cutoff to classify firms as financially constrained and unconstrained. Firms that belonged to the group with greater value than median were classified as constrained, that is, the variable KZ assumes value 1 if firm were classified as constrained, and zero if were considered as unconstrained. After defining the financial constraint by the binary variable, the logit model is estimated, assuming that the probability of a firm becoming financially constrained is given by:


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   CF   LTD  '    2 ( FCF ) it   3   P( KZ it  1 | X i ,  ,  i )  F  0  1    K    cg (var_ CG ) it  K  t 1  it  t 1  it  

(2)

where i is the firm; t is the year; X is a vector of all explanatory variables; αi is the firm‘s specific effect; CFit is cash flow variable; Kt-1 is capital stock, FCFit is the free cash flow; and, LTDit is long-term debt. Among the corporate governance variables we consider dummies variables, such as, pyramidal ownership structure, ownership structure, managers‘ profit participation, the presence of the largest ultimate shareholder in the board and as executive director. In estimation of equation (2), αi can be fixed or random effect. The random effect specifies that αi is a random variable, that is,  i ~ N (0,  2 ) . While in fixed effect logit model αi may be correlated with explanatory variables, in random effect model will not be. We adopted the random effect logit to consider the largest number of observation in the model as possible, given that the fixed effect estimation is much less precise than random effect estimation. According to Cameron and Trivedi (2010) this imprecision occurs due to presence of time-unvarying information.

4

Discussion of Results

Considering the issues appointed in previous sections, this section analyzes the main economic results estimated from equations (2). The table 2 reports descriptive statistics of total sample and of firm classified by KZ index, indicating firms financially constrained and unconstrained. We noted that financially constrained firms present lower values for investment rate, cash flow, profitability, sales and free cash flow. The worst indicators of liquidity variables for financially constrained firms may be associated to the greater need of cash and the higher dependence of external resources. The larger firms are considered more financially constrained, showing a low level of profitability, probably due to the presence of high fixed costs. Debt-equity ratio shows that financial constraint firms have greater financial leverage level than unconstrained firms. In relation to long term debt, unconstrained firms presented higher value than constrained firms. This type of debt tends to be less expensive than short term and can signalize better financial conditions. Panel A of table 3 analyzes variables related to ownership and control structure of firm and other corporate governance variables. For total sample, the analysis showed that, on average, the voting rights of the largest ultimate shareholder (74.3%) is higher than your cash flow rights (49.6%), so the divergence between voting rights and cash flow rights is positive in 24.7%. For voting rights, there is no difference between financially constraint firms and unconstraint firms, however, cash flow rights is higher for constrained firms, thus unconstrained firms presented a higher divergence between voting rights and cash flow rights. Table 16: Characteristics of firms - Descriptive Statistics Indicators Investment/Capital Stockt-1 Cash Flow/Capital Stockt-1 Sales/ Capital Stockt-1 Free Cash Flow Total Assets Long-term Debt/ Capital Stockt-1 Total Debt/Total equity ROA Net income/ Stockholder‘s income Operational Income/ Capital Stockt-1 Number of Observations

Total Sample 0.7592 (6.5722) 0.8205 (3.6205) 4.0807 (9.0282) 1.6422 (7.7255) 1.67E+06 (5.01E+06) 2.3517 (9.3142) 3.7219 (19.0846) 0.0539 (0.2877) 0.2011 (0.8791) 0.8554 (5.1093) 1,474

Sample divided into groups Unconstrained Constrained Firms Firms 1.0599 0.4584 (8.8483) (2.8238) 1.5881 0.0528 (4.9668) (0.6199) 5.6327 2.5287 (10.9781) (6.1470) 3.3812 -0.0967 (10.5980) (1.0360) 1.58E+06 1.75E+06 (5.56E+06) (4.40E+06) 3.2657 1.4378 (12.9120) (2.2877) 2.7898 4.6940 (21.3453) (16.4773) 0.1121 -0.0041 (0.3054) (0.2562) 0.2301 0.1720 (0.6993) (1.0276) 1.6965 0.0143 (7.0883) (0.7636) 737 737

Notes: The table reports sample means of financial variables. Standard deviations are presented in parentheses. The subscript t indexes time.

In 40% of Brazilian firms, the largest ultimate shareholder acts as firm‘s executive director and in 50% of firms, the largest ultimate shareholder is member of the board. These results permit to conclude that in most of firms, the largest ultimate shareholder is the executive director and member of the board. The role of the largest ultimate shareholder as executive director and as member of the board is observed most of unconstrained firms.


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The managers‘ profit participation is an important mechanism of corporate governance since it is main incentive to align interesting between managers and shareholders. We noted that the managers' profit participation is lower for financially constrained firms. This participation differs in 17% when compared to unconstrained firms. Table 17: Corporate Governance Variables – Descriptive Statistics Panel A: Corporate Governance Variables Sample divided into groups Indicators Total Sample Unconstrained Firms Constrained Firms Control Right 0.7429 0.7393 0.7466 (0.2484) (0.2402) (0.2567) Cash Flow Right 0.4959 0.4642 0.5285 (0.2959) (0.2861) (0.3023) Divergence 0.2469 0.2750 0.2180 (0.2426) (0.2510) (0.2304) Director 0.4000 0.4127 0.3869 (0.4900) (0.4926) (0.4874) Board 0.5385 0.5562 0.5204 (0.4986) (0.4971) (0.4999) Profit Participation 0.4569 0.5014 0.4112 (0.4983) (0.5003) (0.4924) Panel B: Ownership and Control Structures Variables Sample divided into groups Indicators Total Sample Unconstrained Firms Constrained Firms Control 0.8187 0.8328 0.8042 (0.3853) (0.3733) (0.3970) Shareholder Agreement 0.1221 0.1170 0.1274 (0.3276) (0.3217) (0.3337) Foreign 0.1379 0.1570 0.1183 (0.3449) (0.3641) (0.3232) Family 0.4062 0.4088 0.4036 (0.4913) (0.4919) (0.4909) State 0.0487 0.0637 0.0333 (0.2153) (0.2444) (0.1797) Miscellaneous 0.0352 0.0251 0.0445 (0.1844) (0.1568) (0.2086) Funds 0.0682 0.0607 0.0758 (0.2522) (0.2390) (0.2649) Pyramids 0.5138 0.5162 0.5113 (0.4999) (0.5001) (0.5002) Notes: Panel A and Panel B reports characteristics of ownership and control structured and other corporate governance variables. Standard deviations are presented in parentheses.

The panel B of table 3 shows the nature of ownership and control of firms. It shows that 82% of Brazilian firms are controlled by the largest ultimate shareholder. From this percentage, 40% of firms are family-controlled and the rest is distributed among other natures of property. The descriptive analysis does not show the potentiality of family-controlled firms to be financially constrained or not, since the percentage does not change when the sample is analyzed by groups. Other natures of ownership and control found in Brazilian firms are shareholder agreement (12%) and foreign (14%). For foreign-controlled firms, 15.7% are financially unconstrained and 11.8% are financially constrained. State-controlled firms represent only 6.37% for financially unconstrained firms and 3.33% are constrained. Pyramidal ownership firms are distributed in approximately 50% for both groups of firms. Table 18: Probability of Financial Constraint Variables

Random Effect Logit

(Cash Flow/Capital Stockt-1)it

-4.5255*** (0.4787)

(Free Cash Flow)it

-3.1599*** (0.3471)

(Debt/ Capital Stockt-1)it

0.1344*** (0.0214)

(Board)it

0.7289***


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(0.2966) (Profit Participation)it

0.0669 (0.2844)

(Pyramid)it

0.7056*** (0.2835)

(Shareholder Agreement)it

1.1288*** (0.4829)

(Foreign)it

1.5593*** (0.4782)

(Family)it

1.4545*** (0.3197)

(State)it

0.4117 (0.8466)

(Miscellaneous)it

1.9861*** (0.8239)

(Funds)it

1.1713* (0.6615) 510 1334 153.42

Number of Firms Number of Observations LR test

Notes: This table reports the direction of marginal effect of logit estimates. The dependent variable KZ is a dummy variable equal to 1 if the firms were classified as financially constrained and zero, otherwise. Standard errors are presented in parentheses. Symbols *** and * denote significance at the 1% and 10%, respectively. In most firms, the largest ultimate shareholder acts as member of the board and as executive director, suggesting that the board variable is also an indicative of the role of board and director.

To analyze the role of corporate governance on firm‘s financial constraint, we estimated the logit model whose dependent variable is financial constraint that takes value equal to 1 if the firm faces financing constraints and 0 otherwise. The positive (negative) signals of explanatory variables indicate an increase (decrease) in the degree of firm‘s financial constraint. The table 3 shows the estimated parameters for random effect logit model in equation (2). The positive signal of the cash flow variable indicates that the greater availability of internal funds reduces the likelihood of firms become financially constrained. The negative signal of free cash flow indicates that as this variable increases the financial constraint decreases. The free cash flow evidences the potential of a firm generate cash and can be considered a measure of financial health. The signal of debt is positive, i.e. increasing the leverage degree raises the financial constraint. Firms in pyramidal ownership structure presented a higher propensity to face financial constraint. As this type of ownership structure allows the existence of difference between control rights and cash flow rights, the owner can maintain the control of the company by a minimum cash flow rights. This can cause distrust of minority shareholders who would no longer invest in the firm, reducing the capability of firm‘s investment. The likelihood of financial constraint increases when we considered the presence of the controlling shareholder in firms with any type of property. This could be related to the high concentration of controlling shareholder on firm‘s financial decision which would not be willing to reduce your control even if were benefit to finance new investment projects. Another result that confirms the distrust of shareholders regarding the firm is the presence of the largest ultimate shareholder as member of board and as executive director of the firm. The estimation shows that firms with any type of ownership structure could increase its likelihood of financial constraint when the largest ultimate shareholder belongs to the board and acts as firm‘s executive director. Similar result was found by Setia-Atmaja (2009), showing that ownership concentration has a negative impact on board independence because the controlling shareholder would prefer less independent board to facilitate your interference on firm‘s decisions.

5

Conclusion

In this paper, we analyzed the relationship between mechanisms of corporate governance and financial constraints using an unbalanced panel data of 532 Brazilian public traded firms in the period of 1997-2002. The degree of a firm‘s financial constraint was considered by using the KZ index provided by the literature. With this, we could examine the role of corporate governance on firm‘s financial constraint using the logit probability model. The principal results obtained by the logit estimation are that the likelihood of financial constraint increases with the presence of the largest ultimate shareholder as controlling shareholder in firms with any nature of property. Firms that participate of a pyramidal ownership structure also present a higher probability become more financially constrained. We noted that the role of the largest ultimate shareholder as member of the board and as director contributes to raise the degree of firm‘s financial constraint. Therefore, our study confirms the prevalence of ownership concentrated of Brazilian firms, mainly among family firms. The results of the logit model indicated that family-controlled firms have a higher probability to face financial constraint. This results is similar to research by Gingliger and Saddour (2007), in which family-controlled firms prefer to maintain control instead to issue new shares with voting rights, constraining the access of external financing. We found evidences that firms with high concentration of ownership and control have a more likely to be financially constrained.

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