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Regulatory Quality and Performance of Latin American Companies

Autoria: Paulo Roberto Arvate, David Kallás, Marina Amado Bahia Gama, Elias Pereira Lopes Júnior,
Rodrigo Bandeira-de-Mello


Institutional factors influence business environment and, therefore, companies’ decisions

and results. Regarding regulation, researches are ambiguous regarding its effect. We
developed a hypothesis that country regulatory quality affects firm performance. We used
a 10 year Economática data set of 1498 firms covering 31 industries in 7 Latin American
countries. We conducted two empirical strategies (hierarchical and fixed effects models)
and tree dependent variables (ROA, firm´s sales and operational profit). Our findings
show that improvements on regulatory quality reduce firm performance. Overall, our
results suggest that there should be a trade off regarding regulation between society well
fare and firm performance.

KEYWORDS: Regulation, Institution-based-view, Latin American countries,

Firms performance.



In august 2012, the Brazillian National Telecommunications Agency (ANATEL)

prohibited three of the largest players in country (Oi, Tim and Claro) of selling new
phone lines. The allegation was poor service quality, based on a set of quality indicators
and consumer scores. The penalty should endure until the companies submit and approve
an investment plan to improve service quality. Those companies got stuck for around a
month without new sales (Lima, 2012; Bächtold, 2012). This anecdotal fact brings an
interesting debate and called our attention. As developed economies, emerging markets
also face regulatory challenges. These economies have undergone deep institutional pro-
market changes over the last decades (Hoskisson et al., 2000, Dau, 2012). As a
consequence, the dispute between consumers and companies, mainly in regulated sectors,
have been intensified.
ANATEL’s decision did not achieve all companies in the industry. Additionally,
although this decision was bad for companies, it was expected to privilege customers. We
suggest in this paper that better market regulation may be good for society but bad for
business. However, if firms do not have a minimal profitability, there would not be
investments, and the consequences tend do be worse for all groups involved. Therefore,
there is a trade-off between privileging customers and fostering business growth.
Regulatory quality is a type of reform that turns to be difficult to evaluate.
Regulation is public economic face of industrial organization. It explores the ways
government interferes on industrial activities for the good or for the bad (Laffont, 1994).
The rationale of its existence depends on market failures: information asymmetry, non-
competitiveness, principal-agent problems, spillovers, and incomplete markets (Loayza &
Servén, 2010). Previous literature explores the benefits of the regulation on firm
performance (Havermann, Russo and Meyer, 2001;Prantl, 2010; Levisauskaite,
Konceviciene and Scerbina-Dalibaigine, 2012). Other studies found the damage of a
regulation in various industries (Caves, Christensen, and Swanson, 1981; Willig and
Baumol, 1987; Braeutigam and Noll, 1984; Winston and others, 1990; Caves and others,
1987; Morrison and Winston, 1995; Taylor and Taylor, 1993; Jarrell, 1984; Dajankov et
al., 2002).
Although regulatory institutions have been considered as pro-market on
developed countries, the literature is rich on describing its harmful consequences on
different industries. In developing countries, pro-market reforms involve a reduction of
government intervention in the economy and an improvement in national governance
(Williamson, 2004). Evidence of the impact of pro-market reforms on firms is limited and
mixed (Cuervo-Cazurra and Dau, 2009). Some studies have found that pro-market
reforms impact positively firm performance (Appiah-Adu, 1999; Katrak, 2002; Del-Sol
and Kogan, 2007; Cuervo-Cazurra and Dau, 2008; 2009; Dau, 2012). On the other hand,
some scholars have found negative impact of pro-market reforms on firm performance
(Okorafo, 1993; Katrak, 2000; Salim, 2003; Kimura et al., 2012).
Although the literature explores the regulation effects and the context of pro-
market reforms on different ways, we did not find any study that evaluates the effects of
regulation on firms performance indicators. Considering the “puzzle” between the pro-
market regulatory quality benefits for the population and its potential harmful damage on
firms in different industries, the purpose of this research is to analyze the impact of
regulation (captured in the World Bank index) on companies’ performance (firm´s sales,
return on assets and operational profit) on a representative group of Latin American


We choose to develop our research in Latin America because the region is a

natural laboratory for studies on institution effects. The region has gone through profound
pro-market institutional changes in the last decades. Also, although the impact of
institutional factors on firms has been increasingly studied (Cuervo-Cazurra and Dau,
2008; 2009; Kimura et al., 2012; Dau, 2012), few studies have been done so far regarding
regulation and firm performance in Latin America. This paper sample is composed of
firms in seven countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela. These countries together represent 89% of Gross Domestic Product (GDP) in
the region, with an average growth of 9.9% during the 2000s. This period of growth was
driven by the performance of the Brazilian and Venezuelan economies, with average
growth of 14% and 14.3% respectively (World Bank, 2012). Another highlight among the
countries in the sample relates to the representativeness of Brazil and Mexico, which
together account for 60% of the GDP in Latin America.
Our most robust result suggests that improving the quality of institutions reduces
firms’ sales corroborating findings observed on developed countries where the pro-
market regulation is persistent. This result was achieved using two different empirical
strategies: hierarchical and panel model with different fixed effects. We decided to
present our results with two techniques because intra-class correlation on the three firm
performance variables (return on assets, firm´s sales, and operational profit) does not
clearly indicate a proffered methodology The firm´s sales are more robust because this
result occurs with both the techniques, such that 1% of improvement on the regulatory
index leads to a reduction of 14% on firm´s sales.


Institutional Factors
Institutions and organization interact dynamically; therefore both may change
over time. Institutions are the rules of the game in a society that govern the human
interactions (North, 1990). They also stimulate the relation between political, social and
economical aspects. Their function is to reduce the market instability setting a stable
structure that is not necessary efficient. As efficient we understand, a structure that
matches the private and social benefits in result of changes that occur in the economy.
Changes on institutions, however, are often slowly due to the informal constraints (North,
1990). Therefore, firm managers must analyze and respond to institutional changes in a
continuous basis. Based on this assumption, Peng (2002) disseminated the institutional
view of business strategy as an answer to the question about why strategies vary among
countries and regions. He argues that institutional frameworks interact with organizations
by signaling which choices are acceptable and supportable. Summarizing, institutions
interact dynamically with organizations (North, 1990), influencing strategic decisions
and, therefore, its performance (Peng, 2002).
The relevance of institutions is even bigger in emerging economies relative to
other regions for two reasons. First, these countries present differences on their
institutions, often called as “institutional voids” (Khanna & Palepu, 1997; Khanna,
Palepu & Sinha, 2005). Those voids are present on different dimensions, from openness
to property rights, from corruption to capital markets. Despite what the term “void”
suggest (if there are voids, there would be a best institutional arrangement), scholars point
out that there is not an optimal institutional arrangement (Hall, Soskice & Press, 2001).
Those differences on institutions determine firm choices and, consequently, its
performance. Two evidences are the fostering of business groups (Hoskisson et al., 2000;
Peng, 2002) where government influence is significant (Lazzarini, Xavier, 2011) and


non-market strategy is relevant (Bandeira-de-Mello & Marcon, 2005; Bandeira-de-Mello,

Marcon, & Alberton, 2008; Schneider, 2009; Camilo, Marcon, & Bandeira-de-Mello,
2012; Costa, 2012). Second, emerging countries have passed by profound institutional
changes on the last years (Hoskisson et al., 2000). Once institutional arrangements are
different among countries, manager’s decisions should be also different among them and
also among developed economies (Khanna, Palepu & Sinha, 2005).

Regulation Effects
Capacity of regulation is “the institutional arm” created by governments with
different characteristics varying among countries to solve problems when the markets
failure. However, the observed results of regulation can generate either better or worse
results for the industries. In this line of argumentation, Laffont (1994) affirmed that the
public intervention can worse or improve industrial activity.
Few works on literature shows the benefits of regulation on different sectors of
economy. Among them, Prantl (2010) observes that the regulation have a positive impact
in the technological progress and economic growth. Moreover, in the same line, the
OECD report (1997) confirms that although the cost of regulation as a fraction of GDP is
significant elevated for countries where such estimates are readily available, ranging from
7 to 19 percent, regulatory reforms could increase the long-run GDP by as much as 3.5
percent in the United Kingdom and by as much as 6 percent in France, Germany, and
Japan. Havemann, Russo and Meyer (2001) argue that after the changes on the regulatory
restrictions in the business operations, through the replacement of CEO, the firms have a
performance improvement. Marques and Barros (2011) conclude that the regulatory
procedures affect positively the efficiency of the European Airports decreasing costs.
Levisauskaite, Konceviciene and Scerbina-Dalibagiene (2012) argue that after the
corporate governance regulation, the capital markets in EU (European Union) have a
better performance.
The negative results of regulation are found on a higher number of studies. Guash
and Hahn (1999) show that regulation can have a significant adverse impact on economic
growth. Specifically, regulation aimed at controlling prices and entry into markets that
would otherwise be workably competitive is likely to reduce growth and adversely affect
the average standard of living. In addition, process regulation can impose a significant
cost on the economy. Nonetheless, social regulations may have significant net benefits
for the average consumer if designed judiciously. Moreover, they observe that two
decades had witnessed two trends in regulations.
First, there has been an unparalleled rise in new regulations related to health,
safety, and the environment. Second, there has also been substantial economic
deregulation of certain industries in some countries, including airlines, trucking railroads,
financial markets, energy and telecommunications. Djankov et al. (2002) found the
negative impact of regulation, by studying a major determinant of growth through the
regulation governing business activity. They describe the required procedures governing
entry regulation, as well as the time and the cost of following these procedures, in 85
countries and conclude that heavier regulation of entry is generally associated with
greater corruption and a larger unofficial economy, but not with better quality of private
or public goods. This research also finds that the countries with less limited, less
democratic, and more interventionist governments regulate entry more heavily, even
controlling for the level of economic development. The method used to test the negative
impact of regulation was OLS regression and panel data.
Birnbaum (1984) find that, after the regulation, with the increase of the instability
of consumers many small enterprises leave the market, increasing the concentration.


Djankov et al. (2002) shows that countries with heavier regulation of entry have higher
corruption and larger unofficial economies, but not better quality of public or private
goods. Countries with more democratic and limited governments have lighter regulation
of entry. Botero et al. (2004) investigate the regulation of labor markets through
employment, collective relations and social security laws in 85 countries, using panel
data. In this research heavier regulation of labor is associated with lower labor force
participation and higher unemployment, especially of the young. American studies yield
similar results on the adverse consequences of economic regulation in diverse industries
as railroads (Caves, Christensen, & Swanson, 1981; Willig & Baumol, 1987), trucking
industry (Braeutigam & Noll, 1984; Winston & others, 1990), airline (Caves & others,
1987; Morrison & Winston, 1995), Telecom (Taylor & Taylor, 1993; Wall Street Journal,
1991) and banking (Jarrell, 1984), just to mention some examples.
Although the literature explores the effects of regulation on different ways, we did
not find any study evaluating the effects of regulation on firms performance indicators.
Some studies emphasize prices, cost and competitiveness but not the traditional firm
variables as return on assets and firm’s sales. Based on some industries findings, we
propose that regulation affects negatively firms capacity to boost sales and profit.
Therefore, we formulated the following hypothesis:

H1: The country regulatory quality affects negatively firm performance


Latin America
While some countries in the world, like the U.S. and some in Europe, are in crisis,
most Latin American major countries are facing stability and growth. In the 2000s, Latin
America has implemented comprehensive social policies, redistributive and cultural
recognition that have been considered successful (Lopes-Calva, 2010), however, the
region still has high rates of income concentration and poverty, high violence rates and
requires an improvement in educational terms. National policies are increasingly market-
oriented and governments are opening their countries to foreign markets. Most of the
Latin America population occupies the primary sector, with some exceptions, where the
secondary sector is prominent. Few countries have an industrial activity, however, the
industrial belt of Brazil, Mexico, Argentina and Chile present high diversity and
sophistication, producing even high-technology items. The tertiary sector, in turn, is the
fastest growing in practically all countries of the region (Araújo; Trovão, 2009).
Despite of its importance, Latin America is a greatly understudied region in the
management literature when compared to East Asia and the developed world (Dau, 2012;
Perez-Batres, Pisani, and Doh, 2010; Vassolo, De Castro and Gomez-Mejia, 2011). A
review of the two leading international management journals, Journal of International
Business Studies and Management International Review, showed that fewer than 6
percent of the articles mentioned Latin America (Elahee & Vaidya, 2001).

Although studies on performance heterogeneity use market share (Schmalensee,
1985), Tobin Q (Wernerfelt & Montomery, 1988) and economic profit (Hawawini,
Subramanian & Verdin, 2003), most scholars consider Return on Sales (ROA) as the
main indicator for performance evaluation. It brings some advantages on Return on
Equity (ROE) for data clean up. ROE varies too much for high leveraged companies, and


sometimes companies present negative equity values, generating outliers that must be
removed from database.
However, some scholars question profitability as the best metric for firms’
competitive advantage, they argue that buyers and suppliers, and not only firms, can
appropriate of firms generated value. Brandenburger and Stuart Jr. (1996) define the firm
value created as the buyer’s willingness to pay minus supplier’s opportunity cost. There
is, however, a difference between willingness to pay and price. This is buyer’s value
share. Similarly, the difference between company’s cost and supplier’s opportunity costs
is the supplier’s value share. Then, a model should evaluate, along to company’s value,
also the buyer’s and supplier’s value. This approach is called VPC – Value, price and cost
(Hoopes, Madsen & Walker, 2003). Based on this logic, Brito & Vansconcelos (2009)
and Brito & Brito (2012) suggest the utilization of sales growth as on of the evidences of
competitive advantage.
The database of financial variables used in this paper was Economática. We
gather annual information from 1,498 firms covering 31 sectors of the economy from
seven Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Peru e
Venezuela). All variables are expressed in US dollars. The dependent variables we use
are ROA (return on assets), Firms Sales and Firms EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization – a proxy for operational profit). Sales and
EBITDA were expressed in logarithmic.
We control the following variables at the firm level: Leverage Finance, computed
as net profit per shareholders equity divided per net profit plus financial expenses per
assets, this variable is interpreted as the extent to which a company uses third-party
capital; Operating Leverage, calculated as the percentage change in the result divided by
the percentage change in sales, interpreted as the extent to which a company uses changes
in fixed costs to increase the effects of variation in sales on operating income; and capital
expenditures (Capex), calculated by subtracting the change in liabilities for the variation
of the asset, interpreted as the amount of funds used to purchase capital goods. We
control also economic variables at the country level. The data of Word Development
Indicators (WDI, 2012) was used to analyze the country economic performance. The
variables were gross domestic product (GDP); Trade (Export less Import/GDP); and
federal government expenditure/GDP. Finally, we also controlled institutional variables
at the country level. The institutional data has been used from Worldwide Governance
Indicators (WGI - Kaufmann, Kraay, & Zoido-Lobatón, 1999), and the variables were:
control of corruption, reflecting perceptions of the extent to which public power is
exercised for private gain, including both petty and grand forms of corruption, as well as
"the capture" of the state by elites and private interests; rule of law shows the perceptions
of the extent to which agents have confidence in and abide by the rules of society, and, in
particular, the quality of contract enforcement, property rights, the police, the courts, and
the likelihood of crime and violence; regulatory quality is a proxy for the government
ability to formulate and implement sound policies and regulations that allow and promote
private sector development; government effectiveness reflects perceptions of the quality
of public services, the quality of the civil service and the degree of its independence from
political pressures, the quality of policy formulation and implementation, and the
credibility of the government's commitment to such policies; voice accountability shows
the perceptions of the extent to which a country's citizens are able to participate in
selecting their government, as well as freedom of expression, freedom of association, and
a free media. These institutional rates vary from -2,5 to 2,5. In the case of assessing
corruption, for instance, the more negative the rate is, greater use of public power for
private gain is observed. When the institutional index is more positive, we observe a


lower use of public power for private purposes. In case of variable rule of law, an index
that approaches 2.5 implies a better sense of trust and respects the rules of society. The
values of the regulatory quality can be interpreted as, the greater tendency to negative,
there is a greater perception that the government use regulatory norms to the private
sector, and as value is positive, better as is less the regulatory norms to the private sector.
With respect to government effectiveness, if the rate is negative it will reflect the poor
quality of services and government credibility. Lastly, the analysis of voice accountability
shows that as it increases, there is a higher participation of population to choose the
government, as well as a higher degree of association and freedom of expression. All date
was collected between 2000 and 2010.
To classify the relevance of each country in our database, we calculated the
logarithm of the average gross domestic product (GDP) per company and per country.
Brazil obtained the highest GDP with 11,86. It was followed by Mexico with a GDP of
11,80, Argentina with 11.46, Venezuela 11.16, Colombia 11,05, Chile 10,97 and Peru
with 10,81. Based on these figures, there has been checked a difference of the variables
on firms between countries with the highest GDP in descending order: Brazil, Mexico,
Argentina and Venezuela. Based on t-test and Mann-Whitney test, we verified that the
means of variables from Brazil and Mexico do not present significant at the 1% level. As
ROA -0,02, Firms EBITDA 4,46, Firms Sales 5,33, Leverage Finance 2,61, Operating
Leverage 2,79 and capex 0,35. Also the same occur between Brazil and Venezuela, the
means of variables do not present significant at the 1% level, as ROA -0,03, Firms
EBITDA 4,42, Firms Sales 5,21, Leverage Finance 2,99, Operating Leverage-2,47 and
capex 0,33. Meanwhile, Brazil and Argentina present a different scenario, where the
means of variables ROA -0,03 and capex 0,34 do not present significant at the 1% level,
but observing the other variables – Firms Ebitda, Firms Sales, Leverage Finance and
Operating Leverage – present significant probably because they have same companies as
subsidiaries and head offices.

Empirical Strategy
The hierarchical model (HM) is enough used on investigation in international
business research (for instance, see Peterson, Arregle & Martin, 2012). The tradition of
these models is consider different random-coefficients as can be showed on equation
below including observable characteristics such as firms as from countries (Cameron &
Trivedi, 2005):
Where is the variable representative of performance (ROA, firm´s net
revenue, and firm´s operational profit) of firm i which is in the sector j, in the country k
and in the year t; is a set of covariates controls like finance variables of firm
(leveraged finance, operating leverage, capex, and return on sales), country´s economic
performance (gross domestic product, trade, and federal government expenditure), and
country´s institutional variables (control of corruption, rule of law, regulatory quality,
government effectiveness, and voice and accountability) in the year t; is the random
effect of firm; is the random effect of sector, is the random effect of country; each
one of random effect have one constant (which can be interpreted as average of each one
variable) and one error like which are i.i.d. errors.
A pre-established rule, which justifies the choice of this technical procedure,
depends on two results: the interclass correlation (if the interclass correlation approaches


to zero then it is better to use a linear estimative) and LR test (test of hypothesis of
random effects is equal to zero).
Although we do not have doubt on LR test, our results are not conclusive on the
interclass correlation. The idea is that if the interclass correlation (IC) approaches 0 then
the groupings by counties (or entities) are of no use (you may as well run a simple
regression). The majority of our results is lower than 0.5. Thus, we solve to show (as
robustness section) also the results on panel with different fixed effects (FE) as showed
the equation below:


where is the variable representative of performance (ROA, firm´s net revenue,

and firm´s operational profit) of firm i in the year t; is a constant term (average
performance of i firms); is a set of covariates controls like finance variables of firm
(leveraged finance, operating leverage, capex, and return on sales), country performance
(gross domestic product, trade, and federal government expenditure), and institutional
country variables (control of corruption, rule of law, regulatory quality, government
effectiveness, and voice and accountability) in the year t; is the firm fixed effect; is
the sector fixed effect; is the country fixed effect and is the error; is i.i.d. errors.
Moreover, for helping on choice of the best model, we added measure of the
relative goodness of fit: Akaike Information Criterion (AIC) and Bayesian Information
Criterion (BIC) or Schwarz Criterion.

Tables 1, 2, and 3 (presented at the end of document) are the results for both HE
and Fixed effects for ROA, firm’s sales and firm´s Operational Profit (EBITDA),
respectively. Each Table has four columns for each model. Regarding the HE model, the
first column of each table, the result does not have any control. The second column
includes some observable heterogeneous of firm. The third column additions to them
economic observable heterogeneous of countries and, in the last column, include
institutional observable heterogeneous of countries.
Considering the criterions of goodness fit (AIC, BIC, and Likelihood), in all HE
tests, the best models are even those in the column [4]. Thus, our main investigation is on
the correct way. The institutional heterogeneous of Latin-American countries affects the
performance of firms (ROA, firm´s sales, and firm´s EBITDA). The most constant result
with institutional variables suggests that Latin American countries with better regulatory
quality index reduce firm performance. Considering that the regulatory quality coefficient
varies between -2.5 and 2.5, looking the descriptive statistics, the group of countries into
our sample is positive (see the minimum value). Any regulation per se is source of
reduction in the revenues and worse on performance of firms. Each 1% of better on the
Regulatory Quality index reduces 3.92% of return of firms on its total assets, 24% of
Firms´ sales, and 33% of Firms’ EBITDA.
Columns 5 to 8 present the results of FE. In each one, we included progressively
the different fixed effects. The last column [8] is the most complete model (with firm,
sector, country fixed effects, and dummy time). We show again the criterions of goodness
fit in the last lines of columns [8]. Comparing with the results of model HE, the criterions
show that the performance of firm with firms´ sales is a better model with FE. The other
variables are better with the model HE. In the FE model, only for Firms´ sales, the
regulatory quality index is significant, with the same signal (negative) and lower (14%).


Each 1% of better on the regulatory index reduces 14% of firm’s sales. For the other
variables of firm performance (ROA and firm´s EBITDA) are influenced by the
government effectiveness index: ROA (6.86%) and firm´s EBITDA (36%).

This research has important innovations regarding some aspects. First, we used
two different empirical strategies (hierarchical and fixed effects). Second, we also tested
the model considering tree different dependent variables (return on assets, firm’s sales
and operational profit). Our objective was to improve robustness of results.
From our results, the introduction of institutional variables increases the
explanatory power of both models. This is consistent with the institutional based view
literature (North, 1990; Peng, 2002) and the notion that “country matters” (Makino et. al,
2004). If the institutions affect the rules of the game, it also affects firm’s decisions. As
firm decisions impact performance, the overall set of institutional variables may affect
firm performance. The regulatory quality variable was relevant on all models. Firm
performance decreases as regulatory quality increases. The literature is ambiguous
regarding those effects, and also there is not much on this issue regarding Latin America.
Some studies show that the regulation on developed countries has a positive impact on
the firm’s performance (Prantl, 2010; Havemann, Russo and Meyer, 2001; Marques and
Barros, 2011; Scerbina-Dalibagiene, 2012). Nevertheless, the majority of studies present
harmful consequences of regulation, as market instability (Birnbaum, 1984), reduced
economic growth (Guash and Hahn, 1999), higher costs (Guash and Hahn, 1999;
Djankov et al., 2002), corruption and larger unofficial economy (Djankov et al., 2002),
and unemployment (Botero et al., 2004). Private firms do not like regulations, which
limit their operations. (Djankov et al., 2002). Our findings are consistent with the studies
that present negative impacts of regulation.
However, we suggest that the impact of regulation results may vary according to
countries developing level and to the stakeholders involved. Some of the prejudicial
impacts of regulation mentioned on cited studies, mainly on development economies, are
related to corruption, firm’s costs and unemployment. By the other side, studies on Latin
American emergent countries (Cuervo-Cazurra & Dau, 2009; Dau, 2012) suggest that
pro-market reforms are beneficial for firms operating in this environment, as well as for
society as a whole. The question that arises is: will emergent economies face the same
regulation problems as developed economies as its institutions evolve? Should be an
optimal regulation level?

Our proposal is that there is a trade off between well fare and firm performance
concerning regulation. If the state exaggerates on regulation efforts, firms may see
themselves not stimulated to invest on regulated industries. This may turn back to be
harmful in the long term for well fare and society. Therefore, public policy makers must
be aware that there should be an optimal point regarding regulation. The
telecommunications sector in Brazil attracted our attention because government is
struggling to foster overall quality while still stimulating companies do develop their
operations, guaranteeing an acceptable return on their investments. Identifying the
optimal point of regulatory quality that enhances society interests and preserve firm
investments is likely to pose new and interesting puzzles to researches.



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Table 5: The Effect of Regulatory quality on Return on Assets (ROA)

Dependent Variable: Firms´ Return on Assets (ROA)
Hierarquical Models Fixed Effect models
[1] [2] [3] [4] [5] [6] [7] [8]
Regulatory - - - -0.04*** -0.03** -0.007 -0.007 -0.007
Quality - - - (0.01) (0.01) (0.01) (0.01) (0.01)
Control of - - - 0.03* 0.06** 0.03 0.03 0.03
Corruption - - - (0.02) (0.02) (0.02) (0.02) (0.02)
- - - -0.02 -0.04** -0.002 -0.002 -0.002
Rule of Law - - - (0.01) (0.01) (0.02) (0.02) (0.02)
Government - - - 0.01 0.01 -0.07** -0.07** -0.07**
Effectiveness - - - (0.02) (0.02) (0.03) (0.03) (0.03)
Voice and - - - -0.01 -0.01 0.01 0.01 0.01
Accountability - - - (0.01) (0.01) (0.02) (0.02) (0.02)
Gross - - 0.04** 0.04* 0.06 0.14* 0.14* 0.14*
Product - - (0.01) (0.02) (0.04) (0.08) (0.08) (0.08)
Trade(Export - - 0.07* 0.10** 0.06 0.13** 0.13** 0.13***
less - - (0.03) (0.05) (0.05) (0.05) (0.05) (0.05)
Federal Gov. - - -0.008*** -0.008*** -0.01*** 0.001 0.001 0.001
Expenditure/G - - (0.002) (0.002) (0.003) (0.004) (0.004) (0.004)
- - -
Levegered - -0.0007*** -0.001*** -0.0008*** 0.0007* 0.0007* 0.0007*
Finance * * *
- (0.0001) (0.0002) (0.0002) (0.0003) (0.0003) (0.0003) (0.0003)
Operating - -0.0001 -8.46e-06 1.71e-07 -0.00008 -0.00009 -0.00009 -0.00009
Leverage - (0.0001) (0.0002) (0.0002) (0.0002) (0.0002) (0.0002) (0.0002)
- -0.09*** -0.09*** -0.06*** -0.12*** -0.11*** -0.11*** -0.11***
Capex - (0.01) (0.01) (0.01) (0.04) (0.04) (0.04) (0.04)
0.0001* 0.0001* 0.0001*
- 0.0001*** 0.0001*** 0.0002*** 0.0001**
Return on * * *
sales (0.00007 (0.00007 (0.00007
- (0.00003) (0.00003) (0.00004) (0.00007)
) ) )
0.01 0.04*** -0.36* -0.34 -0.52 -1.65* -1.65* -1.65*
Constant (0.01) (0.01) (0.21) (0.26) (0.50) (1.00) (1.00) (1.00)
Number of
1,492 1,443 1,375 1,371 - - - -
Number of
164 164 163 163 - - - -
Number of
7 7 7 7 - - - -
Intraclass 0.14031346 0.14631916 0.17735916 0.38014949
- - - -
correlation 3 3 7 7
5729.23 5429.27 4138.35 4568.16 - - - -
AIC -11428.48 -10820.54 -8236.71 -7046.68 - - - 11514.7
BIC -11317.89 -10681.39 -8094.87 -6879.42 - - - 11382.3
LR test 7517.76*** 7015.65*** 4939.80*** 4568.16***
Number of
- - - - 7,857 7,857 7,857 7,857
- - - - 1,371 1,371 1,371 1,371
by group
Dummy time? - - - - No Yes Yes Yes
Firm Fixed
- - - - Yes Yes Yes Yes
Sector Fixed
- - - - No No Yes Yes
Country Fixed
- - - - No No No Yes
Note: Significant at ***1%; ** 5%; *10%


Table 1: The Effect of Regulatory quality on Sales

Dependent Variable: Ln Firms´ Sales
Hierarquical Models Fixed Effect models
[1] [2] [3] [4] [5] [6] [7] [8]
Regulatory -0.23 -0.14 -0.14 -0.14
- - - -0.25***
*** *** *** ***
Quality - - - (0.02) (0.04) (0.05) (0.05) (0.05)
Control of - - - 0.12*** 0.17*** 0.13 0.13 0.13
Corruption - - - (0.04) (0.06) (0.10) (0.10) (0.10)
- - - 0.01 0.002 -0.09 -0.09 -0.09
Rule of Law - - - (0.04) (0.07) (0.10) (0.10) (0.10)
Government - - - 0.22*** 0.10** -0.02 -0.02 -0.02
Effectiveness - - - (0.04) (0.05) (0.05) (0.05) (0.05)
Voice and - - - -0.14*** -0.09** 0.01 0.01 0.01
Accountability - - - (0.03) (0.04) (0.06) (0.06) (0.06)
Gross Domestic - - 2.44*** 2.35*** 2.43** 1.24** 1.24** 1.24**
Product (GDP) - - (0.07) (0.09) (0.16) (0.36) (0.36) (0.36)
Trade(Export less - - -1.04*** -0.87*** -0.32 -0.32 -0.32
Import/GDP) - - (0.09) (0.12) (0.18) (0.22) (0.22) (0.22)
Federal - - -0.02*** -0.02*** -0.01* -0.001 -0.001 -0.001
Government - - (0.005) (0.006) (0.009) (0.01) (0.01) (0.01)
- -0.0005 0.0001 -0.0003 0.0002 0.0002 0.0002 0.0002
Levegered Finance - (0.0004) (0.0004) (0.0004) (0.0005) (0.0005) (0.0005) (0.0005)
0.001 0.001 0.001
Operating - 0.0008* 0.0007 0.0008* 0.001 **
** ** **
Leverage - (0.0004) (0.0004) (0.0004) (0.0005) (0.0005) (0.0005) (0.0005)
- -0.10*** 0.16*** 0.25*** 0.21 0.22* 0.22* 0.22*
Capex - (0.03) (0.03) (0.03) (0.13) (0.13) (0.13) (0.13)
- 0.0008*** 0.001*** 0.0009*** 0.0005 0.0005 0.0005 0.0005
Return on sales - (0.0001) (0.00009) (0.0001) (0.0007) (0.0007) (0.0007) (0.0007)
4.89 4.93 -22.06 -21.00 -22.24 -9.14 -9.14 -9.14
Constant *** *** *** *** *** ** ** **
(0.10) (0.10) (0.88) (1.10) (1.91) (4.17) (4.17) (4.17)
Number of firms 1,287 1,285 1,222 1,219 - - - -
Number of sectors 164 164 163 163 - - - -
Number of
7 7 7 7 - - - -
0.436922 0.434920 0.650899 0.657579 - - - -
Log Likelihood -5571.94 -5488.17 -3254.45 -3142.94 - - - -
AIC 11173.89 11014.36 6548.91 6333.89 - - - 584.25
BIC 11282.06 11151.00 6688.14 6497.99 - - - 714.15
17848.27 17375.25 14869.50 12574.14
LR test *** *** *** ***
Number of
- - - - 6,885 6,885 6,885 6,885
Observations by
- - - - 1,219 1,219 1,219 1,219
Dummy time? - - - - No Yes Yes Yes
Firm Fixed Effect? - - - - Yes Yes Yes Yes
Sector Fixed
- - - - No No Yes Yes
Country Fixed
- - - - No No No Yes
Note: Significant at ***1%; ** 5%; *10%


Table 2: Effect of Regulatory quality on operational profit

Dependent Variable: Ln Firms´Operational Profit (EBITDA)
Hierarquical Models Fixed Effect models
[1] [2] [3] [4] [5] [6] [7] [8]
- - - -0.33*** 0.007 0.007 0.007
Regulatory Quality ***
- - - (0.05) (0.09) (0.14) (0.14) (0.14)
Control of - - - -0.01 0.21* 0.31** 0.31** 0.31**
Corruption - - - (0.08) (0.11) (0.16) (0.16) (0.16)
- - - 0.26** 0.72*** 0.16 0.16 0.16
Rule of Law - - - (0.08) (0.13) (0.13) (0.13) (0.13)
Government - - - -0.07 -0.24** -0.36** -0.36** -0.36**
Effectiveness - - - (0.08) (0.11) (0.15) (0.15) (0.15)
Voice and - - - 0.31*** 0.20* 0.24** 0.24** 0.24**
Accountability - - - (0.07) (0.12) (0.12) (0.12) (0.12)
Gross Domestic - - 2.55*** 2.15*** 2.35*** -1.41** -1.41** -1.41**
Product (GDP) - - (0.12) (0.15) (0.29) (0.69) (0.69) (0.69)
Trade(Export less - - -0.28 0.35 -0.08 1.04* 1.04* 1.04*
Import/GDP) - - (0.21) (0.27) (0.47) (0.59) (0.59) (0.59)
Federal Government - - 0.01 0.01 0.05*** 0.02 0.02 0.02
Expenditure/GDP - - (0.01) (0.01) (0.01) (0.02) (0.02) (0.02)
- - - -0.004 -0.004 -0.004 -0.004
Levegered Finance 0.006*** 0.005*** 0.004*** *** *** *** ***
- (0.0007) (0.0007) (0.0007) (0.0009) (0.0009) (0.0009) (0.0009)
-0.005 -0.005 -0.005 -0.005 -0.005 -0.005 -0.005
Operating Leverage *** *** *** *** *** *** ***
- (0.0007) (0.0007) (0.0007) (0.001) (0.001) (0.001) (0.001)
- 0.03 0.35*** 0.41*** 0.18 0.20 0.20 0.20
Capex - (0.04) (0.05) (0.05) (0.14) (0.14) (0.14) (0.14)
-0.0003 -0.0004
- -7.90e-07 -0.002 -0.002 -0.002 -0.002
Return on sales *** ***
- (0.0001) (0.0001) (0.0001) (0.002) (0.002) (0.002) (0.002)
4.17 4.19 -24.97 -20.97 -24.03 18.96 18.96 18.97
Constant *** *** *** *** *** ** ** **
(0.10) (0.11) (1.37) (1.70) (3.14) (7.91) (7.91) (7.91)
Number of firms 1,337 1,281 1,233 1,218 - - - -
Number of sectors 157 152 151 151 - - - -
Number of countries 7 7 7 7 - - - -
0.232267 0.23850 0.365330 0.347299 - - - -
Log Likelihood -8110.56 -7371.42 -5642.65 -5077.17 - - - -
AIC 16251.14 14780.85 11325.31 10202.35 - - - 8051.14
BIC 16357.86 14915.2 11462.18 10363.75 - - - 8178.91
11607.92 11784.12 8859.32 7637.29
LR test *** *** *** ***
Number of
- - - - 6,153 6,153 6,153 6,153
Observations by
- - - - 1,218 1,218 1,218 1,218
Dummy time? - - - - No Yes Yes Yes
Firm Fixed Effect? - - - - Yes Yes Yes Yes
Sector Fixed Effect? - - - - No No Yes Yes
Country Fixed
- - - - No No No Yes
Note: Significant at ***1%; ** 5%; *10%