Are pension funds good monitors?

Sonza, Igor Bernardi; Granzotto, Alberto

doi:10.1016/j.rauspm.2017.06.003

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Original Articles • RAUSP Manag. J. 53 (02) • Apr-Jun 2018 • https://doi.org/10.1016/j.rauspm.2017.06.003 copy

Are pension funds good monitors?

Os fundos de pensão são bons monitores?

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Pension funds, when they acquire common shares of companies in the capital markets, start to participate more actively in the decision-making of boards of directors and, through their representatives, in the monitoring of managers. The aim of this study is to determine whether pension funds are good monitors. This is done by identifying the influence of the control structure of pension funds over the financial performance and the market value of Brazilian public companies. Using dynamical models of linear and non-linear regressions estimated by GMM-Sys in an unbalanced panel from 1995 to 2015, it is shown that pension funds do not play a good monitoring role, as the control structure of these funds is negatively related to the financial performance of a company or, in other words, the higher the stake, the worse the performance of the company. A possible reason for this is that pension funds invest in the capital markets for portfolio diversification, are not concerned with specific decision-making in companies and have few monitoring skills, thus generating conflicts that go against the objective of maximizing the value of the company. Also, the study identifies the fact that investors give a higher value to the shares of firms in which domestic public funds have investments, even without proof that such funds improve the profitability of companies.

Keywords
Pension funds; Performance; Control structure

Dependent variables
Internal variables	Formula	Market variables	Formula
ROA - return on assets	$\begin{matrix} ROA = \frac{operating income}{total assets} \\ ROE = \frac{net profit}{equity} \end{matrix}$	Tobin's Q^a a MVE, stock price of the firm multiplied by the number of outstanding common shares; PS, settlement value of the outstanding preferred shares; D, total debt (current liabilities minus current assets plus inventories and long-term debt) (calculation suggested byChung and Pruitt (1994) ).	$\begin{matrix} Q = \frac{(MVE + PS + D)}{total assets} \\ MB = \frac{(MVE + PS + D)}{equity} \end{matrix}$
ROE - return on equity		MB - market-to-book^a a MVE, stock price of the firm multiplied by the number of outstanding common shares; PS, settlement value of the outstanding preferred shares; D, total debt (current liabilities minus current assets plus inventories and long-term debt) (calculation suggested byChung and Pruitt (1994) ).
Independent and Control Variables
Variable	Formula/description	Authors	Signal
FP - pension funds	Total percentage of common shares belonging to pension funds that each hold above 5%.	Del Guercio and Hawkins (1999)Del Guercio, D., & Hawkins, J. (1999). The motivation and impact of pension fund activism. Journal of Financial Economics, 52(3), 293-340.,Aggarwal et al. (2011)Aggarwal, R., Erel, I., Ferreira, M., & Matos, P. (2011). Does governance travel around the world? Evidence from institutional investors. Journal of Financial Economics, 100(1), 154-182.,Edmans (2009)Edmans, A. (2009). Blockholder trading, market efficiency and managerial myopia. Journal of Finance, 64(6), 2481-2513.	+
FP - pension funds		Giannetti and Laeven (2009)Giannetti, M., & Laeven, L. (2009). Pension reform, ownership structure, and corporate governance: Evidence from a natural experiment. Review of Financial Studies, 22(10), 4091-4127.,Gillan and Starks (2000)Gillan, S., & Starks, L. (2000). Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of Financial Economics, 57(2), 275-305.,Harris et al. (2014)Harris, R. S., Jenkinson, T., & Kaplan, S. N. (2014). Private equity performance: What do we know? Journal of Finance, 69(5), 1851-1882.	-
AP - principal shareholder TPA - three largest shareholders; CPA - five largest shareholders	- Percentage of common shares owned by the company's largest shareholder. - Total percentage of common shares of the company's three largest shareholders. - Total percentage of common shares of the company's five largest shareholders.	Jensen and Meckling (1976)Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360.	+
		Silveira (2004)Silveira, A. D. (2004). Governança corporativa e estrutura de propriedade: determinantes e relação como desempenho das empresas no Brasil [Corporate governance and ownership structure; determinants and relation with the performance of companies in Brazil] (Tese de Doutorado [PhD Dissertation]). São Paulo, SP, Brazil: Faculdade de Economia, Administração e Contabilidade, USP., 250 pp.,Sonza and Kloekner (2014)Sonza, I. B., & Kloekner, G. O. (2014). Governança em estruturas proprietárias concentradas: novas evidências para o Brasil [Governance in concentrated ownership structures: New evidences from Brazil]. Revista de Administração de São Paulo - RAUSP, 49(2), 322-338.,La Porta et al. (1997La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131-1150., 1998)La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 101(6), 678-709.	-
Tang - tangibility of the assets^b b CH, cash holdings; R, receivables; I, inventories; PPE, property, plant and equipment; TA, total assets (calculation suggested byAlmeida and Campello (2007) ).	$\begin{matrix} Tang = \\ \frac{CH + 0.715 \times R + 0.547 \times I + 0.535 \times PPE}{TA} \end{matrix}$	Pöyry and Maury (2010)Pöyry, S., & Maury, B. (2010). Influential ownership and capital structure. Managerial and Decision Economics, 31(5), 311-324.,Almeida and Campello (2007)Almeida, H., & Campello, M. (2007). Financial constraints, asset tangibility, and corporate investment. Review of Financial Studies, 20(5), 1429-1460.	-
Size: AT - total assets; PL - equity; EBITDA.	- Logarithm of the company's total assets; - Logarithm of the company's equity; - Logarithm of profits before interest, taxes, depreciation and amortization.	Pedersen and Thomsen (1997)Pedersen, T., & Thomsen, S. (1997). European patterns of corporate ownership: A twelve-country study. Journal of International Business Studies, 28(4), 759-778.	+
Size: AT - total assets; PL - equity; EBITDA.		Klapper and Love (2004)Klapper, L. F., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance, 10(5), 703-728.	-
AL - leverage	$\begin{matrix} AL = \\ (\frac{Current liabilities + Non - current liabilities}{Equity}) \end{matrix}$	Jensen and Warner (1988)Jensen, M. C., & Warner, J. B. (1988). The distribution of power among corporate managers, shareholders and directors. Journal of Financial Economics, 20(1), 3-24.,Boubakri and Cosset (1998)Boubakri, N., & Cosset, J. C. (1998). The financial and operating performance of newly privatized firms: evidence from developing countries. Journal of Finance, 53(3), 1081-1110.,Brick et al. (2006)Brick, I. E., Palia, D., & Wang, C. J. (2006). Simultaneous estimation of CEO compensation, leverage and board characteristics on firm value. In AFA Boston Meetings Paper.	-
Law05 - Law 11,053 of December 29, 2004.	Dummy: 1 - Period of validity of the law (2005-2015); 0 - Years prior to 2005.	Colombo and Caldeira (2016)Colombo, J. A., & Caldeira, J. (2016). The Role of Taxes and the Interdependence Among Corporate Financial Policies: Evidence from a Natural Experiment. Working paper – SSRN.http://dx.doi.org/10.2139/ssrn.2804329 http://dx.doi.org/10.2139/ssrn.2804329...	+
FE - foreign pension funds	Dummy: 1 - If the pension funds that have control structure are foreign; 0 - OW^c c OW, otherwise.	Giannetti et al. (2015)Giannetti, M., Liao, G., & Yu, X. (2015). The brain gain of corporate boards: Evidence from China. Journal of Finance, 70(4), 1629-1682.	+
FU - state-owned pension funds	Dummy: 1 - If the pension funds that have control structure are state-owned; 0 - OW^c c OW, otherwise.	Becht et al. (2009)Becht, M. J., Franks, J., Mayer, C., & Rossi, S. (2009). Returns to shareholder activism: Evidence from a clinical study of the Hermes UK focus fund. Review of Financial Studies, 22(8), 3093-3129.	-
IGC - Corporate Governance Index	Dummy: 1 - If the company participates in the Corporate Governance Index; 0 - OW^c c OW, otherwise.	Almeida, Santos, et al. (2010)Almeida, M. A., Santos, J. F., Ferreira, L. F. V. M., & Torres, F. J. V. (2010). Evolução da Qualidade das Práticas de Governança Corporativa: um Estudo das Empresas Brasileiras de Capital Aberto Não Listadas em Bolsa [Evolution of the quality of corporate governance practices: A study of Brazilian corporations listed and unlisted on the stock exchange]. Revista de Administração Contemporânea - RAC, 14(5), 907-924.	+
IGC - Corporate Governance Index		Ferreira (2012)Ferreira, R. N. (2012). Governança corporativa e desempenho: uma análise em empresas brasileiras de capital aberto [Corporate Governance and performance: ananalysis of Brazilian publicly traded companies] Tese de Doutorado [PhD Dissertation]. Lavras, PR, Brazil: Universidade Federal de Lavras., 275 pp.,Macedo and Corrar (2012)Macedo, M. A. D. S., & Corrar, L. J. (2012). Análise comparativa do desempenho contábil-financeiro de empresas com boas práticas de governança corporativa no Brasil [Comparative analysis of the accounting and financial performance of companies with good corporate governance practices in Brazil]. Revista Contabilidade e Controladoria - RC&C, 4(1), 42-61.	-

	AP	TPA	CPA	FP^b b Excluding companies that did not have common shares belonging to pension funds.	MB	ROA	ROE	Q	Tang.	AL	AT^a a In thousands.	EBITDA^a a In thousands.	PL^a a In thousands.
Obs.	3008	3014	3014	3006	5002	4580	5000	5002	4573	4598	5002	4381	5002
Aver.	44.03	66.89	73.82	19.41	1.78	0.06	0.04	1.03	0.23	1.12	6557.71	881.35	7275.04
p50	43.73	70.01	76.77	13.29	1.34	0.06	0.09	0.77	0.23	0.57	2513.47	168.05	1507.25
p10	14.03	34.38	46.41	3.05	0.42	-0.06	-0.14	0.13	0.00	0.04	588.38	-76.52	282.77
p25	24.05	51.10	59.16	6.77	0.79	0.01	0.01	0.4	0.03	0.19	1183.01	38.81	652.73
p75	58.41	85.04	89.87	23.90	2.38	0.12	0.19	1.41	0.38	1.26	8565.44	595.36	4224.26
p90	77.55	94.89	97.35	46.86	3.67	0.19	0.26	2.39	0.48	2.16	38,115.14	2234.77	20,392.31
Var.	526.66	495.74	392.53	376.83	2.10	0.01	0.14	0.82	0.04	4.74	9 × 10¹⁴	4.37 × 10⁶	2.48 × 10⁸
Min.	0.00	0.00	0.00	0.01	0.06	-0.43	-2.35	0.00	0.00	0.00	48.95	-680.19	9.36
Max.	100.00	100.00	100.00	100.00	7.58	0.37	0.59	4.21	0.67	19.84	1.44 × 10⁸	10,704.23	72,466.66
SD	22.95	22.27	19.81	19.41	1.45	0.12	0.37	0.91	0.19	2.18	3 × 10⁷	2090.53	15,744.26
Asym.	0.37	-0.38	-0.72	2.25	1.42	-0.95	-4.41	1.67	0.32	6.01	4.36	3.48	3.24
Kurt.	2.35	2.25	2.92	8.88	4.77	6.73	26.88	6.05	1.88	46.80	20.04	15.28	13.00

Year^a a For 1995 there are only data for one company, and for 1996 there are no data, so these years are not included in the table.	Obs.	Average	Median	p10	p25	p75	p90	Variance	Min.	Max.	SD	Asym.	kurt.
1997	25	35.91	32.93	7.62	11.17	49.00	74.71	811.54	5.21	100.00	28.49	1.03	3.52
1998	91	22.73	15.76	5.39	8.33	33.69	49.03	449.79	0.33	100.00	21.21	1.76	6.29
1999	136	22.23	14.82	5.41	8.33	32.18	49.00	423.85	1.65	99.99	20.59	1.81	6.43
2000	136	21.44	14.82	5.49	8.54	27.36	48.98	402.23	0.92	100.00	20.06	1.99	7.15
2001	134	22.27	15.14	5.51	10.06	29.48	49.00	407.45	0.92	100.00	20.19	2.00	7.18
2002	131	22.66	16.44	5.56	10.08	29.52	49.00	404.37	0.92	100.00	20.11	1.99	7.17
2003	136	22.85	15.20	5.75	10.07	27.67	49.00	417.94	5.08	100.00	20.44	2.01	7.08
2004	147	22.91	15.29	5.92	10.09	26.98	49.00	415.28	1.59	100.00	20.38	1.97	6.93
2005	148	22.49	14.90	5.92	10.07	26.29	49.00	425.25	1.59	100.00	20.62	1.94	6.77
2006	163	18.91	12.14	1.63	6.71	23.89	47.90	370.80	0.01	100.00	19.26	2.13	8.40
2007	214	19.37	13.92	1.67	6.51	25.38	46.81	352.03	0.01	100.00	18.76	1.96	8.15
2008	224	18.02	12.75	1.36	5.73	22.64	46.81	322.29	0.01	100.00	17.95	2.18	9.58
2009	232	17.61	13.93	1.80	8.33	22.54	39.02	273.87	0.01	100.00	16.55	2.52	12.16
2010	249	17.27	13.12	3.04	5.79	22.24	39.22	284.76	0.08	100.00	16.87	2.48	11.68
2011	256	17.47	11.79	2.47	5.80	21.15	39.22	372.50	0.08	100.00	19.30	2.70	11.47
2012	266	17.28	10.48	2.29	6.20	20.00	35.81	371.11	0.08	100.00	19.26	2.68	11.38
2013	265	16.13	10.06	2.29	5.37	19.74	33.11	342.21	0.48	100.00	18.50	2.80	12.26
2014	43	15.59	10.04	1.76	5.02	19.85	33.11	328.68	0.04	100.00	18.13	2.90	13.40
2015	10	16.26	10.04	2.68	5.28	20.00	33.00	374.80	0.47	100.00	19.36	2.98	13.04

Variable	ROA (1)	ROE (2)	Q (3)	MB (4)
L1	0.20 ^ Significant at 5%.	-0.02	0.18	0.14
Z Test	(2.16)	(-0.23)	(1.48)	(1.42)
FP	-0.02 ^* ***** Significant at 1%.	-0.03 ^* ***** Significant at 1%.	-0.66 ^* * Significant at 10%.	-0.63 ^* * Significant at 10%.
Z Test	(-4.50)	(-5.38)	(-1.65)	(-1.67)
EP	-0.06	-0.15	1.48	0.10
Z Test	(-0.77)	(-1.16)	(0.70)	(0.15)
Tang.	0.52 ^* * Significant at 10%.	1.01 ^* * Significant at 10%.	4.91 ^ Significant at 5%.	2.71 ^ Significant at 5%.
Z Test	(1.79)	(1.89)	(2.11)	(2.00)
AL	-0.01	-0.09 ^* ***** Significant at 1%.	-0.10	-0.24
Z Test	(-1.00)	(-4.53)	(-0.19)	(-1.04)
Size	0.00	0.01	-0.22	-0.21
Z Test	(0.72)	(0.46)	(-0.35)	(-0.82)
Law05	0.11 ^* ***** Significant at 1%.	0.19	0.70	0.01
Z Test	(2.96)	(1.61)	(0.55)	(0.04)
FU	-0.04	-0.10	1.25 ^* ***** Significant at 1%.	0.61 ^* ***** Significant at 1%.
Z Test	(-0.73)	(-0.95)	(3.04)	(2.90)
FE	-0.06	-0.08	-3.91	-3.95
Z Test	(-0.50)	(-0.39)	(-0.75)	(-0.84)
IGC	-0.04	-0.05	-0.37	-0.31 ^* * Significant at 10%.
Z Test	(-1.56)	(-1.03)	(-1.07)	(-1.72)
Const.	-0.33	0.58	-30.10	-4.80
Z Test	(-0.45)	(0.28)	(-0.23)	(-0.09)
EF Temp.	Yes	Yes	Yes	Yes
EF Ind.	Yes	Yes	Yes	Yes
Chi²	783.94	1130.78	512.44	991.93
p -Value	0.00	0.00	0.00	0.00
Hansen	31.93	24.04	17.68	26.08
p -Value	1.00	1.00	1.00	1.00
Ar1	-2.31	-1.71	-2.19	-1.74
p -Value	0.02	0.09	0.03	0.08
Ar2	0.68	0.84	-1.06	-0.90
p -Value	0.49	0.40	0.29	0.37

Variable	ROA (1)	ROE (2)	Q (3)	MB (4)
L1	0.20 ^ Significant at 5%.	-0.19 ^* * Significant at 10%.	0.18	0.14
Z Test	(2.16)	(-1.67)	(1.47)	(1.40)
FP²	-0.01 ^* ***** Significant at 1%.	-0.01 ^ Significant at 5%.	-0.17 ^* * Significant at 10%.	-0.16 ^* * Significant at 10%.
Z Test	(-4.59)	(-2.16)	(-1.63)	(-1.70)
EP	-0.06	-0.84 ^* ***** Significant at 1%.	1.49	0.10
Z Test	(-0.77)	(-3.62)	(0.71)	(0.15)
Tang.	0.52 ^* * Significant at 10%.	0.70	4.91 ^ Significant at 5%.	2.71 ^ Significant at 5%.
Z Test	(1.79)	(1.33)	(2.10)	(2.00)
AL	-0.01	-0.09 ^* ***** Significant at 1%.	-0.10	-0.25
Z Test	(-1.00)	(-3.12)	(-0.19)	(-1.05)
Size	0.00	0.31 ^* ***** Significant at 1%.	-0.22	-0.22
Z Test	(0.72)	(2.92)	(-0.36)	(-0.83)
Law05	0.11 ^* ***** Significant at 1%.	0.18	-0.78	0.01
Z Test	(2.95)	(1.49)	(-0.91)	(0.04)
FU	-0.04	0.12 ^* ***** Significant at 1%.	1.25 ^* ***** Significant at 1%.	0.61 ^* ***** Significant at 1%.
Z Test	(-0.73)	(2.97)	(3.04)	(2.90)
FE	-0.06	0.21	-4.13	-4.13
Z Test	(-0.51)	(1.21)	(-0.76)	(-0.84)
IGC	-0.04	-0.16	-0.37	-0.32 ^* * Significant at 10%.
Z Test	(-1.56)	(-1.56)	(-1.07)	(-1.72)
Const.	5.79	-2.29	-28.80	1.37
Z Test	(0.51)	(-0.22)	(-0.22)	(0.08)
EF Temp.	Sim	Sim	Sim	Sim
EF Ind.	Sim	Sim	Sim	Sim

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[1] * Corresponding author at: Rua Venâncio Aires, 1686 apto. 702, Centro, CEP: 97010-002, Santa Maria, RS, Brazil. E-mail:igorsonza@gmail.com