Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882-1950 (Studies in Macroeconomic History)

"This book is a detailed historical description of the evolution of corporate governance and stock markets in Brazil in the late nineteenth and twentieth centuries. The analysis details the practices of corporate governance, in particular the rights that shareholders have to restrict the actions of managers, and how that shaped different approaches to corporate finance over time. The book argues that companies are not necessarily constrained by the institutional framework in which they operate. In the case of Brazil, even if the protections for investors included in national laws were relatively weak before 1940, corporate charters contained a series of provisions that protected minority shareholders against the abuses of large shareholders, managers, or other corporate insiders. These provisions ranged from limits on the number of votes a single shareholder could have to restrictions on the number of family members who could act as directors simultaneously. The investigation uses the Brazilian case to challenge some of the key findings of a recent literature that argues that legal systems (e.g., common vs. civil law) shape the extent of development of stock and bond markets in different nations. The book argues that legal systems alone cannot determine the course of stock and bond markets over time, because corporate governance practices and the size of these markets vary significantly over time, while the basic principles of legal systems are stable"--Provided by publisher. Half-title......Page 3 Series-title......Page 5 Title......Page 7 Copyright......Page 8 Contents......Page 11 Figures and Tables......Page 13 Preface......Page 17 Acknowledgments......Page 23 1 Introduction......Page 29 Law and Financial Development......Page 31 Argument of the Book......Page 33 Agency Costs and Investor Protections According to the Law and Finance Literature......Page 34 Challenges to the Law and Finance Literature......Page 41 The Brazilian Case: Time Present and Time Past......Page 44 Structure of the Book......Page 52 2 Financial Development in Brazil in the Nineteenth Century......Page 56 Financial Underdevelopment in Nineteenth-Century Brazil......Page 57 The Debate around Regulation of Entry......Page 60 Stock Market Growth Post-1882......Page 67 The Anatomy of a Boom: Equity Markets from 1882 to 1915......Page 68 The Republic and the First Crisis of Confidence in Stock Markets......Page 70 Trading after the 1890–1891 Reforms......Page 72 Bond Markets in Brazil......Page 73 Financial Development under Favorable Macroeconomic Conditions......Page 78 Methodology for Estimating Equity Market Capitalization......Page 81 Description of Gross Domestic Product Figures Used to Normalize the Stock Market Data......Page 83 Detailed Note on the Brazilian Currency......Page 84 Exchange Rates......Page 85 3 The Stock Exchange and the Early Industrialization of Brazil, 1882–1930......Page 86 Why not Banks?......Page 88 Finance and Development......Page 94 The Size and Importance of the Rio de Janeiro Stock Exchange......Page 98 The So Paulo Stock Exchange......Page 107 Conclusion......Page 110 4 The Foundations of Financial Democracy......Page 112 Investor Protections in Brazils Company Laws, 1882–2001......Page 114 What National Laws Matter for the Protection of Shareholders?......Page 117 Investor Protections in Company Bylaws......Page 122 Government Guarantees......Page 123 Voting Rights......Page 126 Where Did These Bylaws Come From?......Page 130 Conclusion......Page 132 5 Voting Rights, Government Guarantees, and Ownership Concentration, 1890–1950......Page 133 The Data to Study Ownership Concentration before 1950......Page 134 Voting and Concentration of Ownership and Control, 1890–1940......Page 135 Implications of the Statistical Relations between Shareholder Protections and Ownership Concentration......Page 144 Widely-held Corporations in Brazil......Page 145 Voting Caps in Other Countries......Page 148 Family-owned Corporations in Brazil......Page 151 The Aggregate Evidence on Ownership Concentration in the Long Run......Page 152 Conclusion......Page 154 6 Directors, Corporate Governance, and Executive Compensation in Brazil, c. 1909......Page 163 Boards of Directors, Incentive Structure, and Director Compensation......Page 164 Directors' Compensation in Brazil, the United States, and England......Page 169 Implications of These Findings......Page 173 Director Compensation and Corporate Governance......Page 174 Conclusion......Page 181 7 Bond Markets and Creditor Rights in Brazil, 1850–1945......Page 183 The Scope of Corporate Bond Markets......Page 185 Measuring Creditor Rights in Brazil......Page 190 Evidence of Creditor Rights in Bankruptcy Laws......Page 193 International Influences and the Politics behind Creditor Rights......Page 194 An Exploration of Court Enforcement of Creditor Rights in Brazil, 1850–1945......Page 198 Bankruptcy Procedures and Court Enforcement of Creditor Rights in Brazil, 1850–1945......Page 199 Bankruptcy Cases in the National Archive of Brazil......Page 201 Court Enforcement of Creditor Rights......Page 203 The Sorocabana Railway Scandal......Page 206 The Long Tradition of Court Enforcement of Creditor Rights, 1850–1889......Page 207 Explaining Judges Attitudes toward Creditors......Page 209 Conclusions......Page 212 8 Were Bankers Acting as Market Makers?......Page 214 Bank-Corporate Interlocks: Theory and Evidence......Page 216 Bankers as Market Makers: The Case of the United States......Page 218 Bank Ties to Corporations in Mexico: Market Makers and Insider Lending......Page 221 Reasons to Compare Brazil with Mexico and the United States......Page 223 The Number of Connections between Banks and Corporations......Page 225 Measuring the Centrality of Banks in the Networks of Corporate Interlocks......Page 230 Multivariate Analysis of Bank Connections in Mexico and Brazil......Page 237 Conclusion......Page 241 Explanations of the Reversal in Financial Development after World War I......Page 243 Beginning of the End: The Decline of Capital Flows after 1915......Page 246 Inflation, Investor Returns, and Financial Development after World War I......Page 252 The 1945 Bankruptcy Law and Decline of Creditor Rights......Page 257 The Decline of Shareholder Protections......Page 259 Preferred Shares and the Decline of Shareholder Rights......Page 261 Conclusion......Page 262 10 The Rise of Concentrated Ownership in the Twentieth Century......Page 264 Inflation and the "Reversal" in Corporate Finance: Government Banks versus Markets......Page 265 The Rise of Concentrated Ownership......Page 268 Family Ownership and the Rise of Business Groups......Page 270 Investor Protections and Government Control......Page 276 Conclusion......Page 279 Companies Are Not Bound by the Legal Environment in which They Operate......Page 281 Voting Rights Matter......Page 282 Disclosure Matters......Page 284 The Limits to Corporate Bylaws......Page 285 Different Corporate Governance Practices Lead Firms to Select Different Financial Structures......Page 286 No Signs of Persistent Effects of Brazils Legal Institutions......Page 287 Politics Matter......Page 289 Might a "Great Reversal" Such as That Experienced after World War I Occur Again?......Page 290 Brazil’s National Archive, Rio de Janeiro......Page 295 Company Documents Available at the São Paulo State Archive, São Paulo......Page 297 Other Primary Documents and Data Sources......Page 299 Secondary Sources......Page 300 Index......Page 317 This book provides a detailed historical description of the evolution of corporate governance and stock markets in Brazil in the late nineteenth and twentieth centuries. The analysis details the practices of corporate governance, in particular the rights that shareholders have to restrict the actions of managers, and how that shaped different approaches to corporate finance over time. In the case of Brazil, even if the protections for investors included in national laws were relatively weak before 1940, corporate charters contained a series of provisions that protected minority shareholders against the abuses of large shareholders, managers, or other corporate insiders. The investigation uses the Brazilian case to challenge some of the key findings of a recent literature that argues that legal systems (e.g., common vs. civil law) shape the extent of development of stock and bond markets in different nations. Machine generated contents note: 1. Introduction; 2. Financial development in Brazil in the nineteenth century; 3. The stock exchange and the early industrialization of Brazil, 1882-1930; 4. The foundations of financial democracy: disclosure laws and shareholder protections in corporate bylaws; 5. Voting rights, government guarantees, and ownership concentration, 1890-1950; 6. Directors, corporate governance, and executive compensation in Brazil, c. 1909; 7. Bond markets and creditor rights in Brazil, 1850-1945; 8. Were bankers acting as market makers?; 9. What went wrong after World War I?; 10. The rise of concentrated ownership in the twentieth century; 11. Conclusion.