This study examines how uncertainty affects ownership concentration in firms in Latin America. It develops a multi-dimensional framework to analyze different sources of uncertainty, including firm-specific risk, governance structures, and formal and informal institutions. The study finds that firm risk increases ownership concentration up to a point, while strategic owners and private investors concentrate more ownership than institutional investors. Foreign owners transfer governance from their home countries, and uncertainty avoidance and rule of law also impact ownership concentration. Robustness checks support the findings.

2. Top 3 shareholders Source: Authors calculations from OECD

6. How about Latin America?

10. Uncertainty awareness framework Uncertainty dimension Hypotheses Proxies Effect on Ownership Concentration Agency Uncertainty H1: Control Potential Firm-risk Non-Monotonic Governance Uncertainty H2a: Cost and Benefit of Ownership Type of owners Positive Institutional Duality H2b/c: Governance Transplant Origin of owners Positive (A/S) Neutral (c. Europe) Informal Institutions H3: Propensity to Uncertainty Uncertainty avoidance Positive Formal Institutions H4: Quality of formal institutions Rule of Law Negative

11. H1: Control potential Ownership Concentration Uncertainty 0% 100% 50% Control Potential Demsetz & Lehn, 1985 Cost of Liquidity and Diversification Bolton & Von Thadden, 1998 Rubin, 2007 Faccio, Marchica, & Mura, 2010

12. Hypothesis 1. The firm-specific uncertainty is expected to have a non- monotonic relationship with ownership concentration.

13. H2a: Cost and benefit of ownership Type of Owner Examples Strategy Ownership Concentration Institutional Investors Mutual, pension and hedge funds, insurance firms, other non-banking financial organizations Investment portfolio: trade-off b/w risk and return of shares and liquidity concerns Low Strategic Block-holders Industrial firms, banks and government agencies Differing and sometimes conflicting strategies Industrial firms: transfer pricing, and empire building Banks: getting back their loan, long-term business relationships Governments: employment generation and strategic sectors High Private Investors Individuals, families, and private equity funds Families: long-term orientation, succession plans, etc. Private equity funds: acquire control or take joint control position to ensure strategy implementation, turn-around process, and spill-over strategies. High

14. Hypothesis 2a. Strategic block-holders and private investors, when they are the largest shareholders, are expected to have higher ownership concentration than institutional shareholders.

15. H2b/c: Governance transplant Anglo-Saxon Model Continental Europe Model Common law Civil law High investor protection Low investor protection Prevalence of institutional investors Prevalence of strategic block-holders Widely held firms High ownership concentration

16. Hypothesis 2b.When the largest shareholder comes from a foreign country with the outsider model, this foreign shareholder is expected to have lower ownership concentration than when the largest shareholder is domestic. Hypothesis 2c. When the largest shareholder comes from a foreign country with the insider model, this foreign shareholder is not expected to have significantly different ownership concentration than when the largest shareholder is domestic.

17. H3/H4: Informal and formal institutions Uncertainty dimension Hypotheses Proxies Effect on Ownership Concentration Agency Uncertainty H1: Control Potential Firm-risk Non-Monotonic Governance Uncertainty H2a: Cost and Benefit of Ownership Type of owners Positive Institutional Duality H2b/c: Governance Transplant Origin of owners Positive (A/S) Neutral (c. Europe) Informal Institutions H3: Propensity to Uncertainty Uncertainty avoidance Positive Formal Institutions H4: Quality of formal institutions Rule of Law Negative

18. Hypothesis 3. The higher the degree of uncertainty avoidance in a country the higher the ownership concentration of the largest shareholder in the firms in that country. Hypothesis 4. The higher the degree of rule of law in a country the lower the ownership concentration of the largest shareholder in the firms in that country.

20. Independent variables Hypotheses Variable Description H1 Firm risk Standard deviation of annual accounting rate of return on assets, 2004-2008. Source: Economatica, Compustat Global, Osiris H2a Type of owner Strategic Block-holders take value 1 if the largest owner is a (BANK) Banks, (IND) Industrial Firms, or a (GOV) and 0 otherwise; I nstitutional Investors equals 1 if the largest shareholder is an (INV) Institutional Investors, and 0 otherwise and, Private Investors is equals 1 if the largest shareholder is a (FAM) Individuals or Families, or (PRIV) Private Equity and 0 otherwise H2b/c Origin of owner Domestic, Latin American, Anglo-Saxon, Continental Europe, and Others takes value 1 if the largest owner is a Domestic, Latin American, Anglo-Saxon, Continental Europe, and Others firm and 0 otherwise, respectively H3 Uncertainty avoidance Measures the extent to which the members of a culture feel threatened by uncertain or unknown situations. Source: Hofstede (1980, 2001), http://www.geert-hofstede.com/ H4 Rule of law Measures the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. Source: Kauffman, Kraay, and Mastruzzi (2010), The World Bank.

22. Results † p<0.10, * p<0.05, ** p<0.01, *** p<0.001 , z-scores in parenthesis. Controls: (a) Firm-Level: Firm Size | Leverage | Performance (ROA), (b) Country-Level: Ln GDP Capita | Market Capitalization, Country and Industry Dummies

25. Robustness (Part 1) Model A: Logit C3 Model B: Herfindahl Model C: Interaction type x origin Model D: Interaction industry Model E: Embeddedness Model F: Law & Order