ABANTE, Vol. 6, Nº 2, pp. 117-147 (octubre 2003)

LOOKING BACK AT THE CONTROVERSY: UNEXPECTED WEALTH EFFECTS OF A TRANSITORY CLAUSE*

PABLO MORÁN V.**

ABSTRACT

This paper analyzes the effect of adopting an optional provision contained in a broader regulatory change in Chile (tender offer law or Ley de OPAs). Although the motivation for the Ley de OPAs was to strengthen corporate governance mechanisms in Chile, the availability of this optional provision (transitory article ten) for the controlling shareholders was believed to work the opposite way. In this paper we find no evidence indicating that the decision to adopt this transitory article significantly harmed minority shareholders. Several robustness checks confirm this. However, the evidence indicates that these firms realized on average significantly positive abnormal returns in the weeks that followed the decision. This abnormal return is significant only for firms with less concentrated ownership. We conjecture that this positive reaction is related to the decision to adopt the transitory article.

Keywords: Minority shareholders; Ley de OPAs; Artículo décimo transitorio. JEL Classification: G34; G38.

RESUMEN

Este trabajo analiza el efecto que tuvo la adopción de un artículo que formó parte de un cambio regulatorio en Chile (Ley de OPAs). Aun cuando la motivación de la Ley de OPAs fue el fortalecimiento de los mecanismos de gobierno corporativo en Chile, la disponibilidad de este artículo opcional (Artículo Décimo Transitorio) para los accionistas controladores fue interpretada como un elemento en contra del espíri- tu de la ley. En este trabajo no encontramos evidencia que indique que la decisión de adopción de este artículo transitorio dañó

* The author is at the Facultad de Ciencias Empresariales, Universidad de Talca. Most of this paper was written while the author was a graduate student at the John Molson School of Business, Concordia University, Canada. Detailed and insightful comments from Eduardo Walker (editor) and two anonymous referees helped improve substantially this paper. I also thank Sandra Betton, Christine Panasian, and Cristián Troncoso for valuable comments and suggestions on earlier versions of this paper. Remaining errors are, of course, my own. ** Facultad de Ciencias Empresariales, Universidad de Talca, Email: [email protected] 118 ABANTE, VOL. 6, Nº 2

significativamente a los accionistas minoritarios. Varias pruebas de robustez confirman esta conclusión. Sin embargo, la evidencia indica que estas empresas realizaron en promedio retornos anormales positi- vos y significativos en las semanas posteriores a la decisión de adop- ción. Este retorno anormal es significativo solamente para las empre- sas con una menor concentración de la propiedad. Conjeturamos que esta reacción positiva retrasada está relacionada con la decisión de adopción.

The potential for private benefits is one of the dimensions that make control valuable. The value of control is usually reflected on the market price differential between shares with equal cash flow rights but different voting power (dual class shares). To some extent, these private benefits of control are also apparent in the significant premiums that bidders are willing to pay in corporate takeovers. Traditionally, the corporate governance lit- erature focused on the agency relation between diffuse shareholders and professional managers. In this situation, the main concern is to generate suitable control and incentive mechanisms that help to align these sharehold- ers’ interests with those of management. Although the literature on corporate governance has made important contributions to our understanding of US corporate finance, it has been recently recognized that other legal environments might generate very different corporate realities. Findings in La Porta et al. (1999) indicate that most firms around the world can be characterized by having a dominant controlling group of shareholders. Shleifer and Vishny (1997) argue that such an ownership structure gives the controlling group the incentive and ability to effectively monitor managers. When this is the case, the most important agency problem is the potential for expropriation by the controlling shareholders. In an attempt to enhance the liquidity of the Chilean capital market, to promote better corporate governance practices, and to facilitate cross-border trade and investment, Chilean authorities have promoted a series of legal reforms during the past few years. The first major regulatory change is known in Chile as Ley de OPAs. The main motivation of this reform was to strengthen the legal framework that protects minority shareholders in Chile.1 Although there was consensus that the Ley de OPAs would improve the Chilean corporate governance mechanisms, a special provision of this

1 For an interesting discussion about the motivation of this law, see Clarke (1999). LOOKING BACK AT THE CONTROVERSY 119 law, known as “transitory article ten”, created a great deal of controversy. Nevertheless, we are not aware of any empirical study documenting the impact of its adoption on Chilean minority interests. The purpose of this paper is precisely to shed some light on this matter. The paper proceeds as follows. The next section reviews the most recent literature that relates corporate governance and legal protection. Section II briefly discusses the characteristics of the Chilean institutional framework that are relevant for the paper’s purposes. Research hypotheses are stated in Section III. Section IV describes our methodology and sample selection criteria. The results of our study are presented in Section V. Section VI discusses some post factum evidence and finally, Section VII summarizes our main findings and conclusions.

I. CORPORATE GOVERNANCE AND PRIVATE BENEFITS OF CONTROL

The expropriation of creditors and minority shareholders takes place when the controlling group diverts corporate resources for their private benefit. Whenever there is a potential for private benefits for the controlling shareholders, the right to control a corporation becomes valuable. The in- centive for expropriation arises because the controlling group does not bear the full cost of its private consumption. This argument can be considered an extension of Jensen and Meckling’s (1976) about the agency problem between managers and shareholders when ownership is diffuse. There are numerous examples of how controlling shareholders can transfer wealth to themselves. Influence over who is chosen for key positions, such as the CEO or board members, allows the controlling shareholders to pay them- selves excessive compensation, build empires or transfer assets at non- market prices. The sources and consequences of these private benefits of control, and consequently the control premium, have been the subject of extensive re- search in recent years. The Law and Finance literature, surveyed by La Porta et al. (2000b), emphasizes legal protection as a determinant of the potential for expropriation and private benefits available to controlling share- holders. For example, Nenova (2003) studied a sample of 661 dual-class firms from 18 countries and found that investor protection, takeover rules on pricing and mandatory offers, corporate charter provisions, and the extent of law enforcement explain 68 per cent of the systematic variation in the 120 ABANTE, VOL. 6, Nº 2 value of control-block votes. In addition, she showed that the average value of control-block votes is 4.5 per cent of the firm’s market value in common- law countries and 25.4 per cent in French legal origin countries, where investor protection is weaker. For Italy, where legal protection for minorities is poor, Zingales (1994) reports that voting shares trade at a premium of 82 per cent in relation to nonvoting shares. Zingales (1995) argues that if the marginal investor is a small shareholder not directly involved in control, this voting premium can only reflect the expectation that superior voting shares will receive a larger premium in a control contest. He proposes and tests a model in which this premium is a function of the probability that a vote is pivotal in a takeover contest and the magnitude of the private benefits obtainable by the new controlling group. The quality of the legal protection and law enforcement available to the providers of external financing affects the ability of controlling shareholders to expropriate ex post, and thus it also affects the willingness of external financiers to provide funds ex ante. For example, under weak legal protec- tion, minority shareholders will be reluctant to provide financing and, there- fore, growing firms will have more difficulty in raising funds for future investments. Consistent with this view, recent empirical evidence on corpo- rate governance has found important links between a country’s level of legal protection and financial market development (La Porta et al., 1997), market value of firms (La Porta et al., 2002) and dividend policies (La Porta et al., 2000a). In addition, La Porta et al. (1999) find evidence that the degree of legal protection can also explain how cash flows and voting rights are distributed around the world. These findings are consistent with theoretical models proposed by Bebchuk (1999), and Shleifer and Wolfenzon (2002). For example, in Bebchuk’s model the level of private benefits is the main determinant of the founder’s choice between a controlling shareholder structure (CS) and non-controlling shareholder structure (NCS) when the firm goes public. When private benefits of control are sufficiently large, a NCS structure will be an unstable condition because other competing ma- nagers will want to take control through open market purchases or tender offers in order to capture these private benefits. Therefore, when such benefits do become available, the founder will lock control by keeping a concentrated ownership or the majority share of voting rights despite potential LOOKING BACK AT THE CONTROVERSY 121 inefficiencies or liquidity and diversification costs.2 Under this logic, a controlling ownership structure can be considered as a rent protection mechanism for the controlling group.3 In addition to the external controls imposed by regulation, there are other control devices available to minority shareholders. For example, insti- tutional investors and outside block holders might be an important monitoring group on behalf of minority interests (Shleifer and Vishny (1997)). Consis- tent with this argument, McConnell and Servaes (1990) find a positive relationship between shares owned by institutional investors and firms’ performance. Furthermore, firms planning to raise external financing might be willing to create self-bonding mechanisms that protect the interests of minority shareholders. For instance, firms can voluntarily increase disclo- sure, select independent boards of directors, or impose disciplinary mecha- nisms to prevent expropriation. Reese and Weisbach (2002) report evidence indicating that cross-listing through ADR issuance is used as a self-bonding mechanism that allows firms to overcome informational costs with outside financiers.4

II. CHILEAN INSTITUTIONAL ENVIRONMENT

A. Ownership and Governance in Chile

The dominant organizational form in Chile is the conglomerate, usually with highly concentrated ownership. As discussed previously, concentrated ownership is an effective way to control agency problems between mana- gers and shareholders, but it creates incentives for self-dealing by insiders and, therefore, the incentive to expropriate minority shareholders and debt holders. As discussed in Majluf et al. (1998), Chilean corporate law prohibits cross-holdings, but dual class shares, although rare, are allowed. Thus, Chilean conglomerates normally separate control from ownership through

2 We make the distinction between ownership concentration and voting power concentration because they can be divorced through the use of special control arrangements such as dual class shares, pyramidal schemes or cross-holdings. 3 We thank a referee for pointing out this dimension to us. 4 Although these additional control mechanisms might dissociate the level of legal protection in a country and the effective expropriation by controlling shareholders, Klapper and Love (2003) find for a sample from 14 emerging countries that the average country governance is positively related to the level of countrywide legal protection. 122 ABANTE, VOL. 6, Nº 2 simple pyramidal schemes. Lefort and Walker (2000) provide a very detailed description of ownership and capital structure of Chilean conglomerates for the period 1990-1998. They find that, excluding financial firms, Chilean conglomerates accounted for 91 percent of the total assets of public corporations registered at the securities commission Superintendencia de Valores y Seguros (SVS) by the end of 1998. They note that Chilean conglomerates appear to have success in raising external finance. The debt ratio is relatively high, especially in 1998, and tends to be higher for conglomerates than for non-conglomerates during the 1990s. Minority shareholders represent a significant portion of total financing of Chilean conglomerates, larger than that of non-conglomerate firms. Interestingly, controlling groups in conglomerates own more shares than necessary for effective control. Lefort and Walker argue that this shows that the controlling shareholder’s benefits of concentrated ownership are worth the costs of having a very undiversified portfolio.5 Lefort and Walker (2000) also report that by the end of 1998 the two main minority shareholders in Chile were pension funds and ADR holders with around 25 per cent of minority ownership each. On one hand, pension funds have by law the fiduciary duty of protecting the funds they manage on behalf of Chilean workers. On the other hand, firms with ADRs are to some extent monitored by the US system. Thus, as noted, these two categories of block holders may be important external monitors in Chile.

B. Regulation of Tender Offers and Protection of Minority Interests in Chile

The Chispas case (takeover of Enersis by Endesa España) in 1997 and the unequal treatment that minority shareholders got in this transaction motivated the Ministry of Finance and the SVS to reformulate the regulatory framework on tender offers, corporate governance and transactions with related parties.6 The congressional discussions to amend the legal body began in December 1998 and concluded in December 2000 with the enactment of a new law (law 19705) known in Chile as the Ley de OPAs. The new law is intended to protect minority shareholders by reducing potential conflicts of interests between these shareholders and the controlling group. The main features of the law, as proposed at that time, include the following: 5 Becht (1999) argues that concentration of voting power through ownership concentration destroys the liquidity of stock markets; a problem observed in Chile for most publicly traded firms. 6 A clinical study of this case is found in Parisi and Yáñez (2000). LOOKING BACK AT THE CONTROVERSY 123 i. Pension funds are given more influence to choose the members of the board of directors. Moreover, the law calls for the creation of a three- member auditing committee, in charge of assessing the financial statements and appointing independent auditors.7 Furthermore, the committee is responsible for supervising transactions with related parties and executive compensation. This committee must present an evaluation of the company along with recommendations for improvement every year at the annual regular shareholders’ meeting. ii. Tender offers must be open for no less than 20 days, but no more than 30 days. Subsequent competing tender offers must be announced at least ten days before the end of the period for the original bid. A tender offer for 100 percent of the shares is mandatory whenever an investor wishes to take control of a corporation and the controlling group reaches two-thirds of the shares.8 iii. The law establishes that all shareholders share the premium that is offered in the case of a control transfer when the offered price exceeds the market price by 10 per cent.9 Moreover, the bidder must declare the intention to make an offer to the target ten days prior to making the actual announcement. The declaration must be made through two newspapers, a letter to the target and the SVS.

The law took effect as of January 1st 2001. Although the new law promotes sharing the control premium among all shareholders in the case of a tender offer, it included an optional provision (transitory article ten), applicable over the three-year period following the effective date of the law, or until December 31, 2003. In this case, the law grants the controlling group the option to keep the entire premium if they choose to do so. After the three-year period, this is no longer possible. To decide whether the company adopts the option, an extraordinary shareholders’ meeting must be held. This decision must be approved by absolute majority. Once the shareholders decided to adopt the option, they had to inform the SVS no later than six months after the date of enactment. Approximately 32 percent of the Chilean listed companies communicated their decision to adopt the aforesaid transitory article (see Table A1)

7 This last requirement applies for listed firms with a market capitalization above UF1.5 million (approximately US$41 million) 8 Any investor reaching a 10 percent stake must declare his/her intentions if he/she wants to take control of the firm. 9 This percentage is fixed by the SVS. The referred market price corresponds to a weighted average of the market prices observed over the –90 to –30 trading-days period, where day 0 is the day of the tender offer announcement. 124 ABANTE, VOL. 6, Nº 2

III. RESEARCH HYPOTHESES

Even though the study of the effects of the Ley de OPAs is interesting in itself, it is difficult to empirically isolate the effects of regulatory changes on governance and firms’ performance. However, the adoption of transitory article ten by a substantial percentage of Chilean corporations provides a unique opportunity to keep other factors constant while examining the adoption decision. Before proceeding to state our hypotheses, two remarks are in order. First, the observed market prices reflect transactions among minority shareholders or marginal investors (Zingales, 1995). Therefore, any change in value near the adoption date of this transitory article should be due to a change in the value of voting power or expropriation expectations for this marginal investor. Second, given that a controlling party must share the control premium with all shareholders if the transitory article is not adopted, it is reasonable to argue that non-adopting firms are not expected to transfer the control. Our argument is based on the conjecture that even though a potential new buyer might appear, this bidder should pay a substantial premium in order to induce current controlling shareholders to give up their current private benefits (if any). This transaction would thus require important expected efficiency gains or the potential of larger private benefits for the new bidder. We state now mutually exclusive and exhaustive hypotheses for our empirical testing. The fact that ownership concentration in Chile is high, even higher than needed for effective control, indicates that cash flow rights are important for the controlling shareholders.10 However, since private benefits are unobservable by definition, the adoption decision may signal higher likelihood of expropriation. Thus, our first hypothesis is that the marginal investor will interpret the adoption of this transitory article as bad news and a negative stock price reaction should be observed if this hypothesis is true. Nonetheless, the adoption of this article might not signal changes in the level of private benefits, but that the controlling group has the intention to sell its controlling interest during the three-year period when it is allowed to do so. Two scenarios are possible in this story. First, the decision of adopting this transitory article may have no material effect on market prices, either

10 Nenova (2003) estimates for Chile a premium for control of around 25 per cent of the market value. Although the sample comprises only seven Chilean dual class shares, this evidence is suggestive. LOOKING BACK AT THE CONTROVERSY 125 because the market assigns a very low probability to an actual tender offer or because current control is not contestable and thus the control premium will not be shared with the rest of the shareholders. Thus, no stock price reaction should be observed. Second, if control is not totally locked by the controlling shareholder and competition is expected in a future control contest,11 marginal (minority) votes might turn out to be pivotal in deciding who will obtain control. Thus, a positive stock price reaction would reflect the expected premium minority shareholders would capture in a control transfer. This argument implies that minority shareholders could be able to capture part of the control premium even if the firm had adopted the transitory article. One difficulty with this argument is that in Chile practically all firms are controlled with more than half of the voting shares in the hands of the controlling group, and thus there are no obvious (including legal) ways for minority shareholders to force a potential control premium to be shared. Only the argument of public (or political) pressure through the media and the consequent loss of corporate reputation by the bidders or the sellers could be used to justify the idea that minority shareholders in firms with more disperse ownership might actually get some fraction of the premium. Therefore, in these two situations, we hypothesize a non-negative stock price reaction at the adoption announcement date. Furthermore, under the political pressure hypothesis, the stock price reaction could be inversely related to ownership concentration.

IV. METHODOLOGY AND SAMPLE SELECTION

A. Event Study Analysis

The event-study methodology appears to be a suitable alternative given the nature of our hypotheses. Event studies rest on the premise that, under the semi-strong form of market efficiency, event announcements should convey information to the market. The ultimate end of the methodology is to capture the ‘abnormal return’ due to the announcement.12 Important concerns in the event study methodology are the specification

11 Actually, one of the main objectives of the Ley de OPAs is to ensure that control transfers are carried out in a more competitive environment. 12 For a discussion of the methodology, see Campbell et al. (1997). 126 ABANTE, VOL. 6, Nº 2 and power of the test statistics. At least two issues concerning specification and power are of interest for our purposes. First, the decision of adopting this controversial article must be made within six months following the enactment of the regulatory change. It necessarily implies that announcements are not independent across firms as they are triggered by a regulatory constraint. This clustering in calendar time violates one of the basic assumptions in traditional test statistics: events are independent across firms. Thus, we would expect a non-zero cross correlation in abnormal returns and estimation assuming that independence involves a loss of efficiency. To overcome this problem, scholars have suggested the use of a joint GLS estimation of abnormal returns in a seemingly unrelated regression (SUR) framework. Despite the theoretical justification for the use of joint GLS estimation, Lee and Varela (1997) find that this approach is poorly specified, and cite several sources that have found similar results. Their findings indicate that a well-specified test (although somewhat less powerful) under clustering is the Jaffe test in combination with the market model. This dictates our first test alternative. Our second concern is the severe thin trading observed for most stocks in the Chilean market. Thinly traded stocks are more likely to be characterized by numerous zero and large non-zero returns. This combination of zero and non-zero returns alters not only the distribution of returns but also the variance estimate required in traditional parametric tests. Our second test choices will follow the findings in Cowan and Sergeant (1996). Their study is interesting and useful for our purposes because they test the specification and power of four tests in samples of US-traded stocks with differing degrees of thin trading.13 Furthermore, they also analyze the effect of event-induced increases in variance. Their conclusions appear to be general enough for the purpose of this study. The first important conclusion is that the Scholes-Williams correction for estimates in the market model does not improve the specification and the power of the traditional Patell test. We must emphasize that their study covers not only thinly traded stocks but also actively traded stocks. Their findings indicate that when the return variance is unlikely to increase, the rank test provides the better specification and power for general use. The two nonparametric tests appear to be more powerful than the

13 We must emphasize that Cowan and Sergeant run their historical simulations with firms from NYSE, AMEX and Nasdaq. Thus, foreign small firms are also represented in their study. For a discussion of the four tests and the methodology the reader is referred to Cowan and Sergeant’s paper. LOOKING BACK AT THE CONTROVERSY 127 standardized cross-sectional tests, for both thinly traded stocks and actively traded stocks. Consistent with previous evidence, the standardized test (Patell) is found to be poorly specified for thinly traded stocks, especially the upper- tail tests. Nevertheless, when the event itself changes the variance of returns, results are mixed. They recommend the standardized cross-sectional statistic for upper-tail tests and the generalized sign test for lower-tail tests. Following these findings, and given that event-induced changes in variance are unobserved, we will present results for the three suggested tests: the rank test, the generalized sign test and the standardized cross-sectional statistic.14

B. Sample and Event Definition

Our sample selection starts with the list of firms posted on the SVS web site. A total of 278 firms appear on this list, 89 of which adopted transitory article ten. Stock return data are obtained from DataStream for 68 an- nouncing firms and 109 non-announcing firms. A severe thin trading prob- lem for most of these firms forces us to use weekly returns for our event study. As a general rule, for a firm to be included in the final sample it must have at least 20 per cent and 33 per cent non-zero returns in the estimation and event window, respectively.15 The adoption of transitory article ten must be decided at a special shareholders’ meeting. The subjects to be discussed at such meetings must be announced in advance. Thus, considering that the market has full infor- mation regarding the fraction of the total shares held by the controlling group, it knows in advance if this article will be adopted whenever the controlling shareholder has the absolute majority of the shares outstanding, which is always the case in Chile. Thus, the relevant event date is that of the announcement of the special meeting and its agenda. However, be- cause we were able to identify the public announcement (relevant fact or “hecho esencial”) date only for 17 firms, we had to use as the event date the week of the special shareholders’ meeting. In addition, the date of the

14 An additional advantage of using the generalized sign test is that it is based on the proportion of positive and negative returns in the event window in relation to those in the estimation window. Thus, as this test is not based on the magnitude of the abnormal return, it helps to verify that a few firms are not driving the results. 15 In a previous version of this paper, we selected firms based on their trading presence in the Santiago Stock Exchange for the year 2000. This criterion was not satisfactory because even after imposing it, many firms in the final sample showed almost no trading during the estimation and event windows. 128 ABANTE, VOL. 6, Nº 2 special shareholders meeting was available only for the firms adopting this transitory article. This data limitation restricted our analysis to the firms that decided to adopt this article. After imposing our selection criteria, the final sample comprises a total of 40 announcing firms, of which two firms had two series of shares (Table A2). In general, for the 17 firms that had available announcement dates, the calendar delay between the announcement and the shareholders’ meeting is an average of three weeks. Therefore, we estimate the parameters of the market model using 63 weeks, from week -72 to week -10 relative to the event week (week 0). By closing the estimation period ten weeks before the date of the actual meeting (event week), we can capture any potential stock price changes caused by information leakage or anticipation surround- ing the date of the relevant fact. We will use several estimation windows, considering from week -9 to week 9 relative to the event week. As a market index, we use the general (IGPA) and the selected (IPSA) stock price indexes, and an equally weighted portfolio of the firms that did not adopt the article. The Scholes and Williams correction for non-synchronous trading is used to estimate the parameters in the market model. We do not present descriptive statistics of beta and alpha estimates because, as will be clear later, these estimates make little difference in our findings.16

V. EMPIRICAL FINDINGS

A. Effect of the Adoption Decision

Table I presents our primary results using IGPA as the market index. As outliers might influence our findings, we present the median abnormal return and the proportion of negative and positive abnormal returns for a given week. Two nonparametric tests are also presented. The last two columns show the cumulative average abnormal return (CAARs) and the average raw return for a given week. The first result that arises from this table is that no statistically significant reaction is observed during the week of the shareholders’ meeting or in the two preceding weeks. Even though some marginally significant abnormal returns are observed in the weeks preceding the meeting, inspection of medians and nonparametric tests suggests that outlier returns might be

16 These estimates are available from the author upon request. LOOKING BACK AT THE CONTROVERSY 129 influencing the average abnormal return in these weeks. Interestingly, a significantly positive reaction is observed in the weeks that follow the meeting, specifically from week two to week five. This latter result does not appear to be due to outliers as the median abnormal returns, proportions of negative and positive, and nonparametric tests are fairly consistent with the conclu- sions based on the average abnormal returns. In addition, we see that, in general, the average raw returns are significantly positive and consistent, in line with the observed AAR during this period.

TABLE I WEEKLY ABNORMAL RETURNS. This table shows the average abnormal return, the median abnormal return and the number of positive and negative abnormal returns for a given week. Abnormal returns are estimated using the market model and the IGPA index. The parameters of the market model are estimated with weekly returns from week –72 to week –10 in relation to the shareholders’ meeting week. The correction of Scholes and Williams was used in the estimation of the market model. Four tests statistic are shown. SCS, CS, GS and RT refer to the standardized cross-sectional test, Jaffe test, generalized sign test and rank test, respectively. A total of 40 firms with 42 series of returns are considered. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. In the last column, a indicates that the raw return is significant at least at 10 per cent for all four tests. Significance levels are given for a two-tailed test.

Week AAR Median Positive: SCS CS GS RT CAAR Average Raw (%) AR (%) Negative (-9, i ) Return (%) (%) -9 -0.13 0.07 21:21 -0.085 -0.265 0.200 -0.560 -0.13 -0.59 -8 -0.74 -0.23 17:25 -1.744* -2.495** -1.035 -1.800* -0.87 -0.62 -7 0.29 -0.06 21:21 0.586 0.663 0.200 -0.210 -0.58 0.48 -6 1.07 0.27 23:19 2.236** 1.865* 0.818 1.270 0.49 1.35 -5 -0.69 -0.24 16:26 -2.224** -1.747* -1.343 -1.970* -0.20 -0.80 -4 -0.23 -0.59 15:27 -0.158 -0.214 -1.652* -1.060 -0.43 -0.02 -3 -0.02 0.39 24:18 -0.258 -0.048 1.127 -0.030 -0.45 -0.06 -2 -1.29 -0.55 15:27 -1.638 -2.230** -1.652* -2.450** -1.74 -1.09 a -1 0.23 0.04 21:21 0.588 0.478 0.200 0.170 -1.51 1.07 a 0 0.36 -0.36 19:23 1.200 0.647 -0.417 -0.050 -1.15 1.41 1 -0.27 -0.25 18:24 -0.044 -0.490 -0.726 -1.040 -1.42 0.57 a 2 1.36 0.53 25:17 2.080** 1.625 1.435 1.530 -0.06 2.20 a 3 0.94 1.17 29:13 1.533 1.612 2.671*** 2.270** 0.87 1.50 a 4 1.53 0.06 21:21 1.704* 1.920* 0.200 1.040 2.41 2.83 a 5 1.40 1.18 25:17 2.416** 2.191** 1.435 2.030** 3.80 2.49 6 0.26 0.19 22:20 1.259 0.444 0.509 0.280 4.06 0.57 7 0.53 -0.10 18:24 0.988 1.110 -0.726 -0.130 4.59 0.60 8 -0.36 -0.48 18:24 -0.865 -0.517 -0.726 -1.130 4.23 -0.09 9 0.24 0.08 23:19 0.676 0.709 0.818 0.480 4.48 0.26

130 ABANTE, VOL. 6, Nº 2

By observing the CAAR in Table I we see that by the end of week nine, firms in the sample have accumulated an average abnormal return of 4.48 per cent. Figure 1 presents the evolution of CAARs around the event week.

FIGURE 1 CUMULATIVE AVERAGE ABNORMAL RETURNS

0,05 CAAR 0,04

0,03

0,02

0,01

0 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 -0,01

-0,02

-0,03 Weeks

Table II presents results for different event windows and three different benchmark indexes. Consistent with previous empirical research, the bench- mark that defines the ‘normal’ return makes little difference for the detec- tion of abnormal returns. We also estimate the abnormal returns using the market model without the correction of Scholes and Williams, and the results remain qualitatively the same. The IPSA index, although consistent with the other two panels, tends to show more significant abnormal returns. We believe that estimates based on the IGPA index are more reliable as this index includes all stocks traded in Chile. For the two windows centered in the event week (-1, 1) and (-2, 2), abnormal returns are not statistically significant at conventional levels, ex- cept for some weak evidence of positive abnormal return in the second panel for the standardized cross-sectional test. This confirms our previous LOOKING BACK AT THE CONTROVERSY 131 findings and indicates that no significant stock price reaction occurs in the weeks surrounding the special shareholders’ meeting. It is important to highlight that the determination reached at the shareholders’ meeting did not have a significantly negative wealth effect, which is inconsistent with our first stated hypothesis.

TABLE II CUMULATIVE ABNORMAL RETURNS Panels A, B and C show cumulative average abnormal return (CAAR), median cumulative abnormal return and proportion of positive and negative CAARs for different windows. Panel A is estimated using the market model and the IGPA index. Panel B is estimated using the market model and the IPSA index. The parameters of the market model are estimated with weekly returns from week –72 to week –10 in relation to the shareholders’ meeting week. The correction of Scholes and Williams was used in the estimation of the market model. The last panel uses as the benchmark an equally weighted portfolio of the firms that did not announce the adoption of transitory article ten and the ‘market adjusted’ model. Four tests statistic are shown. SCS, CS, GS and RT refer to the standardized cross- sectional test, Jaffe test, generalized sign test and rank test, respectively. A total of 40 firms with 42 series of returns are considered. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. Significance levels are given for a two-tailed test.

Panel A: Reference Portfolio IGPA Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-9, -5) -0.20 -0.30 20:22 0.092 -0.165 -0.108 -1.454 (-4, -2) -1.55 -0.78 20:22 -1.097 -1.134 -0.108 -2.045** (-2, 2) 0.39 -0.01 21:21 1.031 0.276 0.200 -0.818 (-1, 1) 0.32 0.27 22:20 1.188 0.378 0.509 -0.526 (2, 4) 3.83 1.13 26:16 2.668*** 2.801*** 1.744* 2.797*** (5, 9) 2.07 0.93 23:19 2.146** 1.517 0.818 0.683 Panel B: Reference Portfolio IPSA Weeks CAAR Median CAR Positive : SCS CS GS RT (%) (%) Negative (-9, -5) 1.62 1.60 25:17 1.897* 1.445 1.294 0.191 (-4, -2) -1.02 0.17 22:20 -0.726 -0.741 0.368 -1.152 (-2, 2) 1.44 1.04 25:17 1.757* 1.041 1.294 -0.026 (-1, 1) 0.89 0.58 25:17 1.837* 1.122 1.294 0.003 (2, 4) 4.69 2.84 31:11 3.107*** 3.349*** 3.146*** 2.795*** (5, 9) 3.50 2.40 26:16 3.503*** 2.882*** 1.603 1.284 Panel C: Reference Portfolio Non-adopting Firms Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-9, -5) -0.55 -0.25 20:22 -0.139 -0.526 -0.130 -0.690 (-4, -2) -1.31 -0.28 20:22 -0.860 -0.978 -0.130 -0.543 (-2, 2) 1.06 1.75 23:19 1.118 0.802 0.796 -0.220 (-1, 1) 1.12 0.20 22:20 1.680* 1.487 0.488 0.240 (2, 4) 3.50 2.56 27:15 2.464** 2.843*** 2.031** 2.434** (5, 9) 0.96 0.45 23:19 1.211 0.831 0.796 -0.630

132 ABANTE, VOL. 6, Nº 2

Regarding some potential anticipation in the market or information leak- ages, the observation of the first two windows (-9, -5) and (-4, -2) indicates that there were no significant abnormal returns for this period either. This result is important because the Chilean Corporate Law states that firms must communicate to shareholders the date and agenda of shareholders’ meetings with a minimum of 15 days’ notice. Thus, if the market were able to anticipate the determination to be reached later at the upcoming share- holders’ meeting, we would observe a stock price reaction some two or three weeks before the actual meeting. However, the evidence does not appear to show any anticipation effect (Table II). Finally, and consistently with our previous observation, the window (2, 4) shows on average a statistically significant stock price appreciation across statistical tests and benchmark indexes. Interestingly, this stock price appre- ciation also shows up when the benchmark index used is the equally weighed portfolio of firms that did not adopt the transitory article. This last result indicates that this positive and statistically significant abnormal return is present only at firms that announced the adoption of this article. Nonethe- less, given that this abnormal return is observed later than expected, it is difficult to argue that it is a reaction to the decision of adopting the tran- sitory article. Thus, even though our evidence remains inconsistent with the hypothesis that the adoption decision was perceived as a signal of changes in expected expropriation levels, this positive abnormal return in the weeks following the event week needs further exploration.

B. Robustness Analysis

Before proceeding with further analysis, we first address potential biases and problems derived from our data limitations that might influence our previous findings. First of all, the adoption decision of this article is endog- enous for firms. Thus, our selection criterion, based on the availability of the meeting date, might induce a selection bias in our study. We address this concern by assuming that the adoption decision can be modelled as a latent variable model in the spirit of the conditional event study methodology. Assuming that governance variables are the main determinants of the adop- tion decision, this problem can be modelled through a logistic regression (Table III). LOOKING BACK AT THE CONTROVERSY 133

Although the signs of AFP (Chilean pension funds), Main Shareholder, and Block Holders are consistent with the corporate governance interpre- tation for the adoption of the transitory article, none of our variables is significant at conventional significance levels. Furthermore, the three tests of overall significance reject the model at conventional levels. Thus, we find no evidence to support the conjecture that the adoption decision was related to the severity of agency problems between the minority and the controlling group. Additional analysis of means and medians confirms our previous conclusion that adopting and non-adopting firms are not systematically dif- ferent, at least in the dimensions we consider.

TABLE III LOGISTIC REGRESSION FOR THE ADOPTION DECISION

The model includes a total of 198 firms with available data. Of these, 78 firms adopted transitory article ten and 120 firms did not. For our model, adoption=1 and no adop- tion=0. ADR is a dummy variable that indicates the presence (1) / absence (0) of ADR holders. AFP is the percentage ownership held by AFPs in the firm. Main Shareholder is the percentage ownership of the largest shareholder in the firm. Block Holder is the num- ber of shareholders (different from the main shareholders) that own more than 5 per cent of the firm. All variables are measured as of December 2000. Sources: Bank of New York’s web site and Saens (1999) for ADR presence, Superintendencia de AFPs for AFP hold- ings and Economática for ownership structure.17

Variable Estimate Wald ?² Test p-value Intercept -0.5677 0.7785 0.3776 ADR 0.1869 0.1321 0.7162 AFP -3.5556 1.5440 0.2140 Main Shareholder 0.6871 0.6927 0.4052 Block Holders -0.0635 0.3117 0.5767 ?² p-value Likelihood Ratio 6.0520 0.1953 Score 5.8423 0.2112 Wald 5.6249 0.2290 Pseudo R² 0.0301

17 We thank Eduardo Sandoval for providing the ownership data. 134 ABANTE, VOL. 6, Nº 2

It should be mentioned that the lack of significance of these variables also helps, together with the absence of significantly negative abnormal returns, reject the hypothesis that the adoption decision signaled changes in the level of effective expropriation by the controlling group. Furthermore, the lack of significance of our ownership concentration variable (Main Shareholder) may also indicate that the adoption decision was not related to the level of ownership concentration. This is important because if this were the case, the adoption would be totally predictable by the market. However, our measure of ownership concentration may have limitations because we only consider the one shareholder with the largest stake. We chose this measure because it is impossible to classify shareholders as insiders or outsiders based only on their percentage ownership. Thus, our measure can be considered as a lower bound for ownership concentration with its corresponding limitations.18 Our second concern related to a potential selection bias comes from the fact that we used as our final selection criterion the number of non-zero returns in the estimation and event window. If firms with less concentrated ownership are more liquid, our selection criterion might introduce a selection bias toward firms with less concentrated ownership. Analysis of this issue does not indicate the presence of this bias. For example, for the full sample of firms used in Table III, the median (average) concentration (Main Share- holder) is 50 per cent (50.8 per cent), and for the 40 firms that comprise our final sample the corresponding figures is 53.5 percent (53,6 percent). Next, as an additional robustness check, we estimate the abnormal re- turns with daily data. Although we would expect to have more power in our event analysis by using daily returns, the severe trading problem forces us to reduce the sample size to 23 firms with the consequent loss of power.19

18 For a detailed discussion about this and other related issues, the reader is referred to Lefort and Walker (2000). 19 Following our previous selection criteria, firms in this sub-sample must have at least 20 per cent of non-zero returns in the estimation window and 33 per cent in the event window. LOOKING BACK AT THE CONTROVERSY 135

TABLE IV RESULTS FOR DAILY RETURNS

Panels A and B show the cumulative average abnormal return (CAAR), median cumulative abnormal return and proportion of positive and negative CAARs for different windows. Panel A is estimated using the market model and the IGPA index. Panel B is estimated using the market model and the IPSA index. The parameters of the market model are estimated with daily returns from day –351 to day –51 in relation to the shareholders’ meeting day. The correction of Scholes and Williams was used in the estimation of the market model. Four tests statistic are shown. SCS, CS, GS and RT refer to the standardized cross-sectional test, Jaffe test, generalized sign test and rank test, respectively. A total of 23 firms are considered. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. Significance levels are given for a two-tailed test.

Panel A: Reference Portfolio IGPA Days CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-20, -5) -0.46 -1.93 11:12 -0.322 -0.452 -0.461 -1.573 (-5, 5) 0.41 0.55 12:11 0.628 0.402 -0.043 1.151 (-1, 1) 0.54 -0.20 10:13 1.215 0.936 -0.879 1.918* (5, 10) 1.03 0.06 12:11 0.982 1.280 -0.043 0.492 (10, 20) 2.04 1.79 18:5 1.723* 1.753* 2.462** 2.543** (20, 30) 2.09 -1.68 11:12 1.208 1.118 -0.461 0.135 Panel B: Reference Portfolio IPSA Days CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-20, -5) 0.10 0.82 12:11 0.303 0.096 0.013 -0.772 (-5, 5) 1.43 0.78 14:9 1.483 1.505 0.848 2.002** (-1, 1) 0.90 0.61 14:9 1.797* 1.610 0.848 2.516** (5, 10) 0.99 0.19 13:10 0.838 1.217 0.431 0.323 (10, 20) 2.80 3.36 18:5 2.235** 2.343** 2.518** 3.063*** (20, 30) 4.04 0.95 14:9 2.383** 2.322** 0.848 2.059**

The evidence with daily returns is somewhat weaker for the IGPA index, but in general it is fairly consistent with our previous findings with weekly returns (Table IV). No significant reaction is observed in the days preceding the event date. Some weak evidence of positive abnormal return is found for the IPSA index in the days surrounding the event, but this finding is not consistent across test statistics. Consistently with our previous findings, in the window (10, 20), equivalent to the window (2, 4) in the 136 ABANTE, VOL. 6, Nº 2 previous results, we find a positively significant abnormal return for the announcing firms. Our next concern has to do with the fact that we used the week of the special shareholders’ meeting as our event date. It is entirely possible that the market had anticipated the decision before the actual meeting, impound- ing the information effect earlier in the price. To analyze this possibility, we studied the sub-sample of 17 firms for which we found the date of the relevant fact calling a special shareholders’ meeting.20

TABLE V CUMULATIVE ABNORMAL RETURNS FOR THE SAMPLE WITH THE CALL DATE AVAILABLE

Panels A and B show the cumulative average abnormal return (CAAR), median cumulative abnormal return and proportion of positive and negative CAARs for different windows. Panel A is estimated using the market model and the IGPA index. Panel B is estimated using the market model and the IPSA index. The parameters of the market model are estimated with weekly returns from week –72 to week –10 relative to the week of the call for the shareholders’ meeting. The correction of Scholes and Williams was used in the estimation of the market model for both panels. Four tests statistic are presented. SCS, CS, GS and RT refer to the standardized cross-sectional test, Jaffe test, generalized sign test and rank test, respectively. A total of 17 firms with 18 series of returns are considered. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. Significance levels are given for a two-tailed test.

Panel A: Reference Portfolio IGPA Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) 1.10 0.77 11:7 0.701 0.946 1.042 -0.159 (-2, 2) -1.44 -3.18 7:11 -0.952 -0.834 -0.844 -0.489 (-1, 1) -2.01 -1.74 7:11 -1.286 -1.256 -0.844 -0.917 (2, 4) -0.69 -0.19 7:11 -1.011 -0.948 -0.844 0.256 (5, 9) 5.41 7.44 11:7 1.714* 1.971** 1.042 2.681*** Panel B: Reference Portfolio IPSA Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) 1.99 1.38 12:6 1.333 1.487 1.581 0.406 (-2, 2) -0.36 0.32 10:8 -0.661 -0.212 0.637 0.000 (-1, 1) -1.49 -0.91 8:10 -1.140 -0.894 -0.306 -0.689 (2, 4) -0.36 0.32 10:8 -0.668 -0.570 0.637 0.068 (5, 9) 6.32 8.31 11:7 1.875* 2.231** 1.109 3.034***

20 We have to note that the results presented in table V considers as the event week the week of the relevant fact submitted to the SVS. LOOKING BACK AT THE CONTROVERSY 137

Consistently with our previous results, our findings reveal no significant CAAR in the weeks surrounding week 0 (Table V). We also observe the stock price appreciation as in Table II but, as expected, it shows up in the window (5, 9). Our final concern is related to confounding events for firms in our sample. In a relevant fact inspection at the SVS web site for the 40 firms in our original sample, we found potential confounding events for 26 of these firms. This surprising number of firms with potentially contaminated data is due to the fact that several firms called the special shareholders’ meeting the same day of the regular shareholders’ meeting for the first quarter of 2001. Thus, given that confounding events for these 26 firms are of different nature, implying perhaps abnormal returns of different sign, we studied the stock price reaction for the sub-sample of 14 firms for which we found no confounding events.

TABLE VI CUMULATIVE ABNORMAL RETURNS FOR THE SAMPLE WITH NO CONFOUNDING EVENTS.

Panels A and B show the cumulative average abnormal return (CAAR), median cumulative abnormal return and proportion of positive and negative CAARs for different windows. Panel A is estimated using the market model and the IGPA index. Panel B is estimated using the market model and the IPSA index. The parameters of the market model are estimated with weekly returns from week –72 to week –10 relative to the week of the shareholders’ meeting. The correction of Scholes and Williams was used in the estimation of the market model for both panels. Four tests statistic are presented. SCS, CS, GS and RT refer to the standardized cross-sectional test, Jaffe test, generalized sign test and rank test, respectively. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. Significance levels are given for a two-tailed test.

Panel A: Reference Portfolio IGPA Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) -1.92 -2.90 5:9 -1.002 -1.481 -1.069 -1.935* (-2, 2) -2.83 -0.67 6:8 -1.373 -1.680* -0.535 -1.532 (-1, 1) -1.75 -0.53 5:9 -0.904 -1.301 -1.069 -0.916 (2, 4) 1.03 0.26 7:7 0.796 0.486 0.000 0.354 (5, 9) 3.01 3.44 10:4 2.212** 1.497 1.604 0.946 Panel B: Reference Portfolio IPSA Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) -0.78 -1.63 5:9 -0.158 -0.562 -1.032 -1.483 (-2, 2) -1.37 0.42 8:6 -0.413 -0.893 0.572 -1.264 (-1, 1) -1.44 -0.29 7:7 -0.741 -1.237 0.038 -1.154 (2, 4) 2.47 0.90 10:4 1.268 1.171 1.641 1.006 (5, 9) 4.59 5.33 10:4 2.949*** 2.310** 1.641 1.303

138 ABANTE, VOL. 6, Nº 2

Consistently with our previous findings, our results indicate the absence of significantly negative CAARs in the weeks surrounding the event week for this sub-sample (Table VI). Furthermore, the positive stock price reac- tion observed in all our previous tables tends to disappear, or at least to be less significant, once we consider this set of firms only. Although the evidence in Table VI may indicate that part of the stock appreciation cannot be associated only with the adoption of the transitory article, we have to bear in mind that this evidence includes only 14 out of the 40 firms originally considered, resulting in a loss of power in our tests. Furthermore, we should say that as it difficult to attribute the late abnormal return to the adoption decision, it is also difficult to argue that this reaction obeys to news announced jointly with this adoption. Any of these two possibilities would require a late reaction to news, and therefore, curious market inefficiency at work. Unfortunately, after checking all the relevant facts available at the SVS web site for all our 40 firms, we were unable to identify events that might be associated with good news for firms during the weeks that followed the special shareholders’ meeting.21

C. Where Do We Stand?

Our results thus far indicate that the adoption decision did not have a negative effect on the market value of firms adopting this article. These results are robust to different specifications of our event study. We do not find evidence to support the hypothesis that the decision to adopt the article was perceived by the market as a signal of changes in the actual levels of expropriation by the controlling group. This conclusion leads us to the conjecture that this adoption decision may be related to how valuable the option to sell the control was for the controlling shareholders. Another finding that is consistent across most of our tests is a stock price appreciation in the weeks following the shareholders’ meeting. For the time period between weeks two and four, we detect significantly positive average weekly abnormal returns. This result is difficult to interpret, however. As we discussed earlier, this finding does not appear to be a consequence

21 Perhaps one interesting case is that of Norte Grande, Oro Blanco, and Pampa Calichera, firms controlled at this time by Inversiones SQ Holding. This latter one announced on June 22, 2001 the subscription of a contract with Norsk Hydro whereby this last firm has the option to subscribe up to 49 per cent of SQ Holding. These two firms will later (April 2002) agree to remain as the two only shareholders of SQ Holding. In this case there was no change in control, and by checking the abnormal returns for Norte Grande, Oro Blanco and Pampa Calichera we see that none of these firms presented significant abnormal returns in all the windows considered in this study. LOOKING BACK AT THE CONTROVERSY 139 of outliers. Nonetheless, it is not entirely clear whether this abnormal return is related to the adoption decision, as it occurs with a substantial delay relative to the event week. Although the evidence suggests that the stock price appreciation observed weeks after the special shareholders’ meeting might be driven by firm- specific events, we were unable to find such news after checking the relevant facts for the 40 firms in our sample (Table VI). Additionally, in an inspection of individual CARs for the firms in our original sample, we could not match firms with significantly positive abnormal returns and news announced at or after the adoption date.22 For example, in four cases there is a significantly positive abnormal return after the event week with no news found around that date; among the ten firms with positive and significant abnormal returns between weeks two and four in our sample, we did not find any industrial pattern that would allow us to attribute this revaluation effect to an industry phenomenon; and finally, in three cases (Río Maipo, Chilectra, and Santa Isabel) there are no abnormal returns in any of the windows, even though shareholders received a tender offer later within the year 2001. This latter result is to some extent surprising, in the light of the important premiums received by target shareholders in tender offers, and suggests that the market did not anticipate that the adoption of the transitory article may have signaled an upcoming tender offer.23 Despite our failure to find a convincing explanation for an apparently late stock price reaction, we should emphasize that this issue is not inconsistent with our second research hypothesis, as it implies a nonnegative stock price reaction to the announcement, negatively related with the ownership concentration. According to our hypothesis, this association results from the possibility that minority shareholders become pivotal or a nuisance in a future control contest, possibly through a political pressure mechanism. In order to see whether this association exists in our data, we partitioned our sample into two groups: firms with ownership concentration above and below the median sample ownership. The median ownership concentration as measured by the percentage ownership of the largest shareholder is 53.5 per cent in the sample.

22 Firms with significantly positive abnormal returns in the weeks that follow the event week are: Bicecorp, Telefónica del Sur, Coca Cola Embonor, Coca-Cola Polar, CMPC, Pizarreño, Enaex, Indiver, Inforsa, and San Pedro. 23 The only case with a tender offer in 2001 with a significantly positive abnormal return in the weeks that follow the adoption date is Bicecorp. 140 ABANTE, VOL. 6, Nº 2

TABLE VII SAMPLE PARTITION BASED ON OWNERSHIP CONCENTRATION

Panels A and B show the cumulative average abnormal return (CAAR), median cumulative abnormal return and proportion of positive and negative CAARs for different windows. Panel A shows the results for firms above the median ownership. Panel B shows the results for firms below the median ownership. Both panels are estimated using the market model, the IGPA index and the correction of Scholes and Williams. The parameters of the market model are estimated with weekly returns from week –72 to week –10 in relation to the shareholders’ meeting week. Four tests statistic are shown. SCS, CS, GS and RT refer to the standardized cross-sectional test, Jaffe test, generalized sign test and rank test, respectively. *, ** and *** represent significance levels of 10 per cent, 5 per cent and 1 per cent, respectively. Significance levels are given for a two-tailed test.

Panel A: Firms Above the Median Ownership Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) -2.63 -0.07 10:10 -1.094 -1.348 0.338 -1.427 (-2, 2) -1.30 -2.12 8:12 0.053 -0.612 -0.559 -1.228 (-1, 1) -0.23 -0.32 9:11 0.475 -0.154 -0.110 -1.025 (2, 4) 2.05 0.81 11:9 1.110 1.236 0.787 1.365 (5, 9) 1.31 -0.21 10:10 1.075 0.731 0.338 0.197 Panel B: Firms Below the Median Ownership Weeks CAAR Median CAR Positive: SCS CS GS RT (%) (%) Negative (-4, -2) -0.56 -1.15 10:12 -0.343 -0.292 -0.471 -1.612 (-2, 2) 1.92 1.44 13:9 1.560 1.033 0.808 -0.086 (-1, 1) 0.82 0.85 13:9 1.536 0.901 0.808 0.144 (2, 4) 5.44 3.92 15:7 2.500** 2.584*** 1.661* 2.705*** (5, 9) 2.76 3.58 13:9 1.873* 1.339 0.808 0.775

Firms with more concentrated ownership do not show on average a significant abnormal return in any of the windows studied (see Table VII, panel A). It is also clear that there is no significant abnormal return in the two windows surrounding the event week for the sub-sample of firms with less concentrated ownership (panel B). However, our evidence indicates that the firms responsible for the significantly positive abnormal returns consistently found in our previous analysis are those with less concentrated ownership. Note that in this case, the median and average cumulative abnormal returns are higher than those reported previously for the full sample. LOOKING BACK AT THE CONTROVERSY 141

We must remark that, even though our evidence appears to be consistent with our hypothesis that the adoption signaled the intention of the controlling shareholders to sell, we cannot make a strong statement attributing the stock price appreciation found to the adoption decision, as it is observed with a significant delay. We have to note that this delay is possibly incon- sistent with an informationally efficient market, although it is possible in an illiquid market such as the Chilean. Nonetheless, the fact that this positive reaction is significant only for firms with less concentrated ownership weakens the argument that some confounding events are responsible for our findings as this confounding event would have to be correlated with the ownership structure. Thus, if we allow for the possibility of a late reaction, our findings in the last table support the conjecture that the significantly positive stock price appreciation might obey to a premium that minority shareholders expect to realize in a future transfer of control.

VI. POST FACTUM COMMENTS

The three-year period granted by transitory article ten to controlling shareholders to transfer the control without a mandatory tender offer ex- pired in December 31, 2003. Even though ex post we only observe one of the possible paths agents may have considered ex ante, the actual history might provide some additional and useful insights for the case under study. Table VIII summarizes all the transactions for this three-year period. The first interesting issue that emerges is that 9 out of the 22 firms with transfers of control belong to our sample of 40 firms. In addition, 16 out of the 22 firms in this table adopted transitory article ten, which to some extent supports the idea that firms adopting this article had in mind a potential transfer of control when this decision was made. Second, of the six non-adopting firms in this list, only in one case there was a transfer of control with a tender offer. Among the remaining firms we have one case that is still pending, and four cases for which a manda- tory tender offers did not apply despite the fact that the firm had not adopted the article. To some extent, we can argue that firms that needed to transfer the control without having adopted the article found their way around the tender offer obligation. 142 ABANTE, VOL. 6, Nº 2

TABLE VIII SUMMARY OF TRANSFERS OF CONTROL.

This table presents a summary of the transfers of control that took place within the three years that followed the enactment of the Ley de OPAs in December 2000. The column Adoption indicates whether the firm adopted transitory article ten. Firms marked with (*) are the firms in this list that belong to our sample of 40 firms. Sources: Relevant facts of individual firms and Superintendencia de Valores y Seguros.

Firms with changes Adoption Tender Comments of control offer Puerto Ventanas (*) yes no Private transaction (July 2001) carried out under transitory article ten. Empresas Melón (*) yes no Private transaction (July 2001) in London implies a change in control in Blue Circle Industries PLC, controlling shareholder of Empresas Melón. AFP Planvital yes no Private transaction (November 2001) carried out under transitory article ten. Empresa Eléctrica del N. yes no Private Transaction (December 2001); the price was not substantially higher than Grande (*) the market price (as defined in the law) Rebrisa yes no Private transaction (June 2002) carried out under transitory article ten. Compañia Minera yes no Private transaction (September 2002) carried out under transitory article ten. Tamaya AFP Magister yes no Private transaction (October 2002) carried out under transitory article ten. CCU (*) yes no Private transaction (April 2003) in Holland implies a change in control in San Pedro (*) Inversiones y Renta S.A. It controls 62% of CCU which, in turn, controls 60% of San Pedro. Indisa yes no No additional information found for this case. Rio Maipo (*) yes yes Enersis opens buying power (June 2001) for all floating shares of Río Maipo and Chilectra (*) Chilectra. Santa Isabel (*) yes yes After the expiration of a shareholders pact, Royal Ahold takes control (July 2002). This group launches a tender offer for the rest of the floating shares (August 2002). This firm is later (July 2003) taken private and sold to Cencosud. Saesa yes yes Private transaction (August 2001) for 94% of ownership. Mention a tender offer, within 6 months, for remaining shares at the same privately negotiated price. Bicecorp (*) yes yes Private transaction (November 2001) for the 33% of Bicecorp. The new controlling shareholder reaches 2/3 of ownership, and launches a tender offer for remaining shares (December 2001) Banco de Chile yes yes After merging with Banco Edwards, there is a tender offer for the 5% remaining shares. Axxion no yes No additional information found for this case S.A.C.I. Falabella no no No mandatory tender offer as the control takeover is due to a merger. Esval no no Pending, under study whether or not a tender offer is mandatory. Seguros de Vida La no no No tender offer because there are only two shareholders. Construcción San Antonio Term. no no No tender offer because there is only a transfer of shares. Internacional Masisa no no Private Negotiation for 43% of Masisa (July 2002). No tender offer because the price is not substantially higher than the market price (as defined in the law).

From the firms in this list, we finally observe that in nine out of the 15 firms that adopted the article, there was a transfer of control without a tender offer. Furthermore, in five of these nine cases we found explicit mentions to transitory article ten as the reason for the absence of tender offer. In the remaining six firms that adopted the controversial article, we observe tender offers but only for the remaining floating shares. In particu- lar, in three cases the tender offers takes place after a private negotiation between the buyer and the controlling shareholder. Hence, at least for these LOOKING BACK AT THE CONTROVERSY 143 six firms, it is plausible to deduce that the tender offers were not motivated by expected efficiency gains, but by the intention to take firms private in the future, as the situation observed for Santa Isabel in 2003. In this sense, local firms might have perceived that the new regulations would increase the costs of being public

VII. SUMMARY AND CONCLUSIONS

Corporate control is valuable. Recent empirical evidence suggests that one of the most important determinants of the expropriation potential by controlling shareholders, and thus of the value of control, is the level of legal protection and law enforcement of minority shareholders. In this paper we study the impact of adopting transitory article ten on minority shareholders’ wealth in Chile. During the long congressional dis- cussion of the Ley de OPAs, it was ruled that the control premium be shared by all shareholders in a control transfer. The controversy surround- ing this transitory article comes from the fact that its adoption allows con- trolling shareholders not to share the premium if the control transfer is completed within three years following the enactment of the law. Contrary to our initial expectations, our findings indicate that minority shareholders did not suffer a wealth loss before or when this decision was adopted. In this sense, we discard the hypothesis that this decision was perceived as a signal of changes in the actual level of expected expropria- tion. Studying the abnormal returns surrounding the adoption decision week, we find no evidence of a significantly positive reaction either, which could indicate that, in the event of a control transfer, the current controlling shareholders would keep for themselves the control premium. In support of this view, we find that 22 firms that adopted the transitory article had a transfer of control in the three years that followed the enactment of the Ley de OPAs. Interestingly, we find a significantly positive stock price reaction be- tween the second and fourth week following the adoption decision. This result is fairly robust to several alternative tests and specifications of our event study. Our evidence indicates that this stock price appreciation is significant only for firms with less ownership concentration, which supports the conjecture that this reaction is potentially related to the adoption deci- 144 ABANTE, VOL. 6, Nº 2 sion. If we are willing to accept this possibility, these findings may be consistent with the idea that the increase in the value of minority interests in firms with less concentrated ownership comes from the premium minority shareholders expected to realize in a future competitive control contest. Even though this conjecture runs against the efficient market hypothesis, we failed to find an alternative explanation. At the very least, it is clear that “something significantly different” was going on with the less concentrated firms that adopted the transitory article of the law. Finally, we have to emphasize that even if this positive stock price reaction is not due to the adoption decision (but to other confounding events correlated with the ownership structure), our findings are not inconsistent with the hypothesis relating the adoption decision to the value assigned by the controlling shareholder to the option to sell the control. In this case, the absence of abnormal returns might rest on the low probability the market assigned ex ante to a transfer of control with a tender offer that would allow minority shareholders to capture a fraction of a potential control premium.

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APPENDIX A TABLE A1 UNIVERSE OF FIRMS ANNOUNCING THE ADOPTION OF TRANSITORY ARTICLE TEN

Company Name Meeting Company Name Meeting Date Date AFP Cuprum S.A. 26-Apr-01 Enersis S.A. 2-Apr-01 AFP Magister S.A. 30-Apr-01 Forestal, Construct. y Com. Del Pacífico Sur S.A. 26-Apr-01 AFP Planvital S.A. 28-Mar-01 Forestal Cholguán S.A. 24-Apr-01 Agencias Universales S.A. 27-Apr-01 Gasco S.A. 19-Apr-01 Agrícola El Peñón S.A. 25-Apr-01 Hoteles Carrera S.A. 25-Apr-01 Agrícola Nacional S.A.C. e I. 14-Jun-01 Indiver S.A. 20-Apr-01 Antarchile S.A. 30-Apr-01 Industrias Alimenticias Carozzi S.A. 26-Apr-01 Banco de A. Edwards 22-Mar-01 Industrias Forestales S.A. 26-Apr-01 Banco de Chile 20-Mar-01 Infodema S.A. 6-Jul-01 Bicecorp S.A. 26-Apr-01 Instituto de Diagnóstico S.A. 24-Apr-01 Cemento Polpaico S.A. 18-Jun-01 Inversiones Industriales Colina S.A. 27-Apr-01 Cementos Bío Bío S.A. 25-Apr-01 Inversiones Siemel S.A. 27-Apr-01 Chilectra S.A. 5-Apr-01 Jugos Concentrados S.A. 19-Apr-01 Chilena Consolidada Seguros Generales S.A. 26-Apr-01 Leasing Nacional S.A. 17-Apr-01 Cía. Nac. De Teléfonos, Telefónica del Sur S.A. 25-Apr-01 Madeco S.A. 24-Apr-01 Coca-Cola Embonor S.A. 26-Apr-01 Minera Michilla S.A. 20-Apr-01 Comatel S.A. 25-Apr-01 Minera Valparaíso S.A. 27-Apr-01 Compañía Cervecerías Unidas S.A. 4-Jun-01 Norte Grande S.A. 1-Jun-01 Compañía Chilena de Fósforos S.A. 23-Apr-01 P&S S.A. 24-Apr-01 Compañía Chilena de Navegación Interoceánica S.A. 27-Apr-01 Pesquera Iquique-Guanaye S.A. 24-Apr-01 Compañía de Inversiones Chispa Uno S.A. 5-Apr-01 Portuaria Cabo Froward S.A. 27-Apr-01 Compañía de Petróleos de Chile S.A. 25-Apr-01 Puerto de Lirquén S.A. 18-Apr-01 Compañía de Teléfonos de Coyhaique S.A. 24-Apr-01 Puerto Ventanas S.A. 7-Mar-01 Compañía Eléctrica del Río Maipo S.A. 30-Mar-01 Quintec S.A. 26-Apr-01 Compañía Industrial El Volcán S.A. 27-Apr-01 Rebrisa S.A. 27-Apr-01 Compañía Minera Tamaya S.A. 20-Apr-01 Renta Nacional Cía. De Seguros de Vida S.A. 3-Apr-01 Corpesca S.A. 24-Apr-01 Renta Nacional Cía. De Seguros Generales S.A. 3-Apr-01 CTI, Compañía Tecno Industrial S.A. 24-Apr-01 Santa Isabel S.A. 27-Apr-01 Dresdner Banque Nationale de Paris 6-Jun-01 Sipsa S.A. 25-Apr-01 Duncan Fox S.A. 30-Apr-01 Soc. de Desarrollo y Fabric. Químicas Sintex S.A. 26-Apr-01 Editorial Lord Cochrane S.A. 1-Jun-01 Sociedad Austral de Electricidad S.A. 23-Apr-01 Embotelladora Andina S.A. 17-Apr-01 Sociedad de Inversiones Campos Chilenos S.A. 23-Apr-01 Embotelladora Coca-Cola Polar S.A. 26-Apr-01 Sociedad de Inversiones Oro Blanco S.A. 1-Jun-01 Empresa Eléctrica Colbún Machicura S.A. 18-Jun-01 Sociedad de Inversiones Pampa Calichera S.A. 1-Jun-01 Empresa Eléctrica de Magallanes S.A. 30-May-01 Sociedad Matriz del Banco de Chile S.A. 20-Mar-01 Empresa Eléctrica del Norte Grande S.A. 19-Jun-01 Sociedad Pesquera Coloso S.A. 25-Apr-01 Empresa Eléctrica Pangue S.A. 30-Mar-01 Somela S.A. 24-Apr-01 Empresa Eléctrica Pehuenche S.A. 30-Mar-01 Soprocal, Calerías e Industrias S.A. 27-Apr-01 Empresa Nacional de Electricidad S.A. 2-Jun-01 Supermercados Unimarc S.A. 27-Apr-01 Empresa Pesquera Eperva S.A. 30-Apr-01 Telefónica del Sur Carrier S.A. 24-Apr-01 Empresas CMPC S.A. 27-Apr-01 Transam Comunicaciones S.A. 24-Apr-01 Empresas Lucchetti S.A. 26-Apr-01 Viña San Pedro S.A. 25-Apr-01 Empresas Melón S.A. 30-Apr-01 Viña Tarapacá Ex Zavala S.A. 24-May-01 Empresas Pizarreño S.A. 27-Apr-01 Viña Undurraga S.A. 5-Jun-01 Enaex S.A. 26-Apr-01

LOOKING BACK AT THE CONTROVERSY 147

TABLE A2 SAMPLE OF FIRMS

Firms are sorted according to the date of the special shareholders’ meeting. The sample comprises a subset of 40 firms that announced the adoption of transitory article ten. Two firms have two series of shares (Coca-Cola Embonor and Embotelladora Andina). In total, 42 series of returns fulfill our selection criteria and are used in our tests. Source: Superintendencia de Valores y Seguros’s web site.

Company Name Meeting Company Name Meeting Date Date Puerto Ventanas S.A. 7-Mar-01 Embotelladora Coca-Cola Polar S.A. 26-Apr-01 Compañía Eléctrica del Río Maipo S.A. 30-Mar-01 Enaex S.A. 26-Apr-01 Empresa Eléctrica Pehuenche S.A. 30-Mar-01 Industrias Forestales S.A. 26-Apr-01 Enersis S.A. 2-Apr-01 Empresas CMPC S.A. 27-Apr-01 Chilectra S.A. 5-Apr-01 Empresas Pizarreño S.A. 27-Apr-01 Embotelladora Andina S.A. 17-Apr-01 Inversiones Industriales Colina S.A. 27-Apr-01 Gasco S.A. 19-Apr-01 Inversiones Siemel S.A. 27-Apr-01 Indiver S.A. 20-Apr-01 Santa Isabel S.A. 27-Apr-01 Compañía Chilena de Fósforos S.A. 23-Apr-01 Supermercados Unimarc S.A. 27-Apr-01 Sociedad de Inversiones Campos Chilenos S.A. 23-Apr-01 Antarchile S.A. 30-Apr-01 Instituto de Diagnóstico S.A. 24-Apr-01 Empresas Melón S.A. 30-Apr-01 Madeco S.A. 24-Apr-01 Empresa Eléctrica de Magallanes S.A. 30-May-01 P&S S.A. 24-Apr-01 Norte Grande S.A. 1-Jun-01 Cementos Bío Bío S.A. 25-Apr-01 Sociedad de Inversiones Oro Blanco S.A. 1-Jun-01 Cía. Nac. de Teléfonos, Telefónica del Sur S.A. 25-Apr-01 Sociedad de Inversiones Pampa Calichera S.A. 1-Jun-01 Compañía de Petróleos de Chile S.A. 25-Apr-01 Empresa Nacional de Electricidad S.A. 2-Jun-01 Viña San Pedro S.A. 25-Apr-01 Compañía Cervecerías Unidas S.A. 4-Jun-01 AFP Cuprum S.A. 26-Apr-01 Cemento Polpaico S.A. 18-Jun-01 Bicecorp S.A. 26-Apr-01 Empresa Eléctrica Colbún Machicura S.A. 18-Jun-01 Coca-Cola Embonor S.A. 26-Apr-01 Empresa Eléctrica del Norte Grande S.A. 19-Jun-01