Abstract
Economic volatility, high transaction costs, and fragile institutions hinder financial contracting in emerging markets. These conditions characterize the economy of Brazil, yet a nascent corporate bond market thrives. I analyze 50 Brazilian indenture agreements and find that sample debentures are characterized by (i) features that mitigate inflation risk for investors, (ii) contingent-maturity mechanisms that provide periodic opportunities for exit or renegotiation, (iii) a paucity of covenants that restrict the debtor's investment, financing, and dividend decisions, and (iv) self-enforcement mechanisms that avoid reliance on inefficient institutions. Analysis of these features enhances our understanding of contracting in emerging economies.
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