The Evolution of Business Groups in Brazil, Chile and Argentina 1990-2003: How the State Affects Corporate Governance Through Business Financing

Abstract: This paper argues that the different pattern of evolution of business groups in Brazil, Chile and Argentina between 1990-2003 is better explained by differences in state involvement in the governance structure of business groups, than by state policies towards investor protection. Business groups are firms bound together by equity and social ties sometimes structured in a pyramidal way with a controlling wealthy family owner in the apex. Such business groups, ubiquitous in developing countries, went through a period of restructuring in the 1980’s and 1990’s in Brazil, Chile and Argentina. Two decades after this restructuring period, new groups emerged in Brazil, existing ones expanded in Chile, while they were sold out in Argentina. This paper aims to explain why the pattern of evolution of business groups in the three countries followed such different paths. The corporate finance literature on business groups focuses on the conflict of interest between controlling shareholders and investors and argues that business groups are prominent when minority investor protection is poor. We argue that the nature of investor protection is not a satisfactory basis for explaining the different pattern across these countries. We argue that state involvement in corporate finance was a critical factor in establishing the cross-country pattern observed for Brazil, Chile and Argentina. Business groups emerged or expanded (were bought out) if the state was (not) involved in equity financing of business groups. The State channeled public savings to business groups in the form of equity in Brazil and Chile through state related institutions and a mandatory private pension system, respectively. In Argentina, business groups were mainly financed with foreign loans. During the financial crisis of the late 1990’s, business groups already highly indebted sold their assets in Argentina while business groups in Brazil and Chile could share losses with domestic investors.