**2. Literature review**

for the same company, to compare companies from the same country within a sector or to compare a sector in different countries. Regional analysis is interesting because it allows us to

Using financial information from different items of companies' assets, liabilities and earnings allows us to analyze profitability ratios, returns persistence, debt ratios and companies solvency [2, 3]. The return ratio on equity is usually considered by investors and analysts, since it measures profitability of the resources contributed by the owners. There is a perception that the higher the return on equity, the better will be the performance of share prices. However, this hypothesis is not proven by previous empirical research since high values of ratios do not

For the purpose of measuring the size of a company, we use the concept of stock market capitalization, defined as the market value of an enterprise. This provides an interesting fact because it is the capital of the company multiplied by the price of it equities in the stock market, and therefore, it is a way of quantifying the size of the capital market. The total market capitalization is the sum of all companies' capitalizations that quoted at a certain date.

It is important to measure market capitalization in absolute terms and in relative terms related to the gross product of each country in order to observe its behavior and draw conclusions [1]. Now that capital is owned by different shareholders, with different characteristics. Nevertheless, there is no doubt that the ownership structure of traded shares in markets can have its effects [5].

Hardouvelis and Karalas (2016) [6] mentioned the importance of the presence of institutional investors in markets and the impact of this on prices. They remarked that the percentage owned by institutional shareholders increased dramatically from about 45% average in the mid-90s to about 80% in recent years. Then, different authors [7] asserted that the intervention of governments affects the liquidity in markets because of different measures adopted that are

In the case that the shareholders are state agencies, decisions are taken differently from institutional investors in general because they do not act freely in the market. They have to com-

In Argentina, it is observed in companies listed that in addition to the concentration observed in the capital by majority shareholders, there exists the Sustainability Guarantee Fund (FGS) created in 2009 after the National Senate approved the reform of the Argentine Pension System, which implied the disappearance of private retirement and the Retirement and Pension Funds Administrators (AFJP). In 2016, Law No. 27260 in a National Program of Historical Reparation affects the resources of the Sustainability Guarantee Fund of the Argentine Social Security System for Retirees and Pensioners. Therefore, this fund can generate an offer of shares in the market but not with periodicity, affecting market liquidity. For this reason, it is possible to

consider the adjusted floating capital by subtracting the holding portion of the FGS.

Other studies quantify the performance of the company as of its accounting profitability, in relation to the property concentration [5], but in this chapter, the analysis is oriented to the magnitude of the floating capital. The aim is to demonstrate the effect of floating capital on the

detect different behaviors within the companies that operate in similar environments.

always lead to higher returns on shares [4].

34 Firm Value - Theory and Empirical Evidence

related to the countries economical evolution.

plete with certain standards in each country.

Çalişkan y Kerestecioğlu defined free float as the number of outstanding shares minus shares that are restricted from trading. The free float ratio is the quantity of shares available for public trading. Shares that are restricted from trading are called stable shareholdings, and include shares held by a parent company for control of a subsidiary, shares held by the government, and cross-shareholdings among companies. It has been said that the relationship between ownership structure and corporate performance has been a popular subject for researchers recently. Ownership structure studies mostly focus on firm performance, which is typically defined by accounting profit, or other metrics based on financial statements.

On the other hand, free float ratio studies examine the market performance of stocks. Free float ratio gives information about the ownership structure of a company. A low free float ratio indicates a concentrated ownership structure as well as a small and shallow market for stocks of that company. Free float ratio can affect stock prices in two ways. First, if the free float ratio is low, investors will tend to avoid that stock. Secondly, lower free float ratio means that there is less amount of shares in the market, which might cause low liquidity in the market for that stock. Investors dislike illiquidity. The authors examined the effect of free float ratio on market performance of stocks in Turkey. They attempt to answer the following questions; first, how much do free float ratios affect stock prices of selected firms? Second, do free float ratios affect daily trading volume? Third, do free float ratios affect price volatility? For that research, 194 firms were selected from Istanbul Stock Exchange Market for the period from 25.02.2011 to 09.03.2012. The statistical method applied was linear regression. Results showed that there is no evidence of relationship between price return and free float ratio. In other words, investors did not pay more or less for stocks depending on whether free float ratio was considered to be high or low. On the other hand, there seems to be a positive relationship between free float ratio and price volatility. Finally, free float ratio is directly related to trading volumes. In other words, higher free float ratio results in higher liquidity in the market.

intervention affected the liquidity of the Hang Seng Index (HIS) stocks. On the other hand, they

Effect of Free Float Ratio on the Behavior of Shares Valuation in Companies Listed in Latin…

http://dx.doi.org/10.5772/intechopen.76421

37

O'shee et al. focused their studies on showing the level of ownership concentration in Latin American companies and explained the impact of this characteristic in the performance of the enterprises. For this, they analyzed 271 companies listed in five South American emerging markets with the methodology of panel analysis. They observed that in global markets, near 46% of a company's stock is concentrated in the hands of the three main shareholders and, for companies that operate in South American markets that percentage rises up to 70%. In the chapter, they concluded that, on an average, a stock portfolio conformed by companies with the greatest concentration of holdings generates higher yields than the yields produced by portfolio conformed by companies with less concentration of shareholdings. This indicates that stock investors require a higher yield, due to the greater risk they face as minority shareholders in companies with an elevated concentration of holdings. The investigation carried out for emerging countries, seem to show more homogeneous results; likewise, the positive interdependence between the concentration of ownership and the returns of the companies

Hardouvelis and Karalas studied the relation of expected stock returns with fund style concentration in stock ownership over the period 1997–2015. Their sample consists of common stocks trading on the NYSE, AMEX and NASDAQ between the first quarter of 1997 and the fourth quarter of 2015. The econometric results confirm the positive association and are robust to the inclusion of known risk-factors as determinants of expected stock returns, the returns of the investment styles themselves, plus a set of style-related control variables like liquidity,

Ginglinger and Hamon [10] investigated how ownership concentration and the separation of ownership and control affect secondary-market liquidity in France. They found that firms with a large insider block holder exhibit significantly lower liquidity. However, different methods of enhancing control affect liquidity in different ways. Pyramidal structures impair market liquidity. Double voting right shares, a French specific method to control enhancement rewarding long-term shareholders and restraining insiders from trading their shares, lead to increased liquidity, especially for small firms. Their results suggest that by using double voting rights to enhance their control, a more transparent decoupling mechanism, rather than pyramidal methods, a more doubtfully decoupling mechanism, block holders

The objective of this chapter is to show if there is a relationship between floating capital ratios and volumes operated in stock markets, volatility of prices and performance of shares. For this, data compiled include Latin American companies at the end 2016. The total number of enterprises studied is 181 and they belong to Argentina, Brazil, Chile, Peru and Colombia. Data were obtained from Thomson Reuters Eikon platform. (For detail, see

did not find a relationship between free float ratio and price variations of the stocks.

appears to be clearer.

size, or volatility characteristics of stocks.

**3. Data and methodology**

Appendices).

offer higher secondary-market liquidity to outside investors.

Bostancı and Kılıç examined the free float ratios effects on market performance of stocks in Turkey. Their research includes 199 listed firms on Istanbul Stock Exchange Market for the year 2007. The relationship between free float ratio and the dependent variables average daily closing price, price volatility and average daily trading activity is measured by regression models. Findings suggest that the market rewards higher floating ratio, that is, average daily closing price and trading activity is significantly higher for stocks with higher free float ratio. They also notice that price volatility, which is associated with the risk of a stock, increases with free float ratio. Finally, the effect of free float ratio on these variables is measured by controlling size of firms through a multivariable regression model. According to regression results, effects of floating ratio do not increase or decrease as the firm size increases or decreases. As a conclusion, these results are compatible with the previous studies and prove that free float ratio does matter for investors. Higher floating ratio implies higher market value for stocks, higher liquidity in the market and lower financial costs for corporations. They support suggesting initiatives to corporations and policy makers to increase floating ratios that will result on the decrease of financial costs and ensure capital market development. Although the regression results of the study are robust, the regressions depend on 1 year data, which contain all the sectors and eliminate the free float variations within a stock.

Chan et al. asserted that the intervention of the Hong Kong government offers a clear case for examining how market liquidity is affected by a substantial decline in free float. For many companies listed in Asian and emerging markets, government, controlling companies affiliated companies, and majority owners control a large percentage of the shares. As a result, the amount of shares outstanding considered available for trading could be relatively small. When investigating the liquidity of these markets, it is possible to determine the amount of free-floating shares available. The author also indicates that the amount of free-floating shares is often difficult to define, as it is not easy to determine the identity of ultimate beneficial owners. Sometimes, the trail becomes tangled and it is not possible to accurately monitor ownership across thousands of securities.

The same topic is addressed by other authors [8, 9] saying that in August 1998, after an intervention in the stock market by the Hong Kong government, there was a dramatic decrease in the amount of the shares in the market and this caused a decline on the free floats. The intervention of the Hong Kong government in the stock market offers a natural experiment to examining how the market liquidity was adversely affected by a substantial decline in free float in the market. The trading volume of the stocks listed in the Hang Seng Index (HSI) decreased substantially in 1999, while trading volumes of the group of control stocks did not decline. Also, stocks listed on the HSI experienced price increases. This showed that the government intervention affected the liquidity of the Hang Seng Index (HIS) stocks. On the other hand, they did not find a relationship between free float ratio and price variations of the stocks.

O'shee et al. focused their studies on showing the level of ownership concentration in Latin American companies and explained the impact of this characteristic in the performance of the enterprises. For this, they analyzed 271 companies listed in five South American emerging markets with the methodology of panel analysis. They observed that in global markets, near 46% of a company's stock is concentrated in the hands of the three main shareholders and, for companies that operate in South American markets that percentage rises up to 70%. In the chapter, they concluded that, on an average, a stock portfolio conformed by companies with the greatest concentration of holdings generates higher yields than the yields produced by portfolio conformed by companies with less concentration of shareholdings. This indicates that stock investors require a higher yield, due to the greater risk they face as minority shareholders in companies with an elevated concentration of holdings. The investigation carried out for emerging countries, seem to show more homogeneous results; likewise, the positive interdependence between the concentration of ownership and the returns of the companies appears to be clearer.

Hardouvelis and Karalas studied the relation of expected stock returns with fund style concentration in stock ownership over the period 1997–2015. Their sample consists of common stocks trading on the NYSE, AMEX and NASDAQ between the first quarter of 1997 and the fourth quarter of 2015. The econometric results confirm the positive association and are robust to the inclusion of known risk-factors as determinants of expected stock returns, the returns of the investment styles themselves, plus a set of style-related control variables like liquidity, size, or volatility characteristics of stocks.

Ginglinger and Hamon [10] investigated how ownership concentration and the separation of ownership and control affect secondary-market liquidity in France. They found that firms with a large insider block holder exhibit significantly lower liquidity. However, different methods of enhancing control affect liquidity in different ways. Pyramidal structures impair market liquidity. Double voting right shares, a French specific method to control enhancement rewarding long-term shareholders and restraining insiders from trading their shares, lead to increased liquidity, especially for small firms. Their results suggest that by using double voting rights to enhance their control, a more transparent decoupling mechanism, rather than pyramidal methods, a more doubtfully decoupling mechanism, block holders offer higher secondary-market liquidity to outside investors.
