Abstract
ABSTRACT Purpose: To study the Brazilian bond and stock markets for testing the stock market development theory of Demirgüc-Kunt and Maksimovic (1996). Originality/gap/relevance/implications: This paper tests the substitution hypothesis of stock market development, from debt to stocks, in a context of improved corporate governance, by analyzing the data with cointegration techniques. The findings show that the rejection of substitution hypothesis, as the bond market has a positive and significant association with stock market improvements. The findings also show that improving the quality of corporate governance could lead equity capital and borrower capital sources to be complementary and not substitutes, suggesting that Brazilian stock market reform has created a virtuous development cycle. Key methodological aspects: Positivist research using quantitative methodology. Data from a sample of 171 firms during 20 years, analyzed with cointegration. The null was a negative association between bond and stock markets. Summary of key results: Null rejection, non-consistent to theoretical framework. The results have shown a positive and significant association between stock and debt in an improved corporate governance context. Key considerations/conclusions: Improving the quality of corporate governance could lead equity capital and borrower capital sources to be complementary, and not substitutes, suggesting that Brazilian stock market reform has created a virtuous development cycle.
Highlights
As a company’s growth leads to greater capital needs, managers can issue stocks
The NovoMercado was marked by higher growth and lower tangibility, as highlighted in Table 1, reinforcing the growth opportunities set as capital structure determinants
The findings of this research show that corporate governance reform in Brazil simultaneously stimulated the stock bond market, confirming the stock and bond complementarity hypothesis in the Brazilian companies that moved to or were created in the NovoMercado. Such results are contrary to those observed in other studies, but are consistent with the theoretical framework of capital structure irrelevance for NovoMercado
Summary
As a company’s growth leads to greater capital needs, managers can issue stocks. For this purpose, there is a dispersion of ownership and a consequent dilution of control among many agents. Managers or majority shareholders lose some control over the company’s decisions, but maintain control through other means when compared to minority shareholders. This can affect the return for minority shareholders or investors. Corporate governance has the main goal of diminishing the asymmetric information between managers and investors, which can be accentuated with the dispersion of capital ownership as a natural consequence of stock market development (Jensen & Meckling, 1976)
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