Bovespa's Novo Mercado: Can Voluntary Reforms Promote Efficient Corporate Governance?

Antonio Gledson de Carvalho*
Department of Economics
University of São Paulo

and

George G. Pennacchi**
Department of Finance
University of Illinois

This version: January 25, 2005

ABSTRACT

In many countries, legal reforms to improve minority investor rights often face stiff opposition and, therefore, are difficult to implement. Alternatively, some countries have attempted to reform their capital markets through the creation of private stock market segments whose members voluntarily commit to more stringent investor protections. In this paper we examine the “premium” stock market segments created by Brazil’s São Paulo Stock Exchange, Bovespa. Bovespa’s initiative was the first that allowed previously exchange-listed companies to migrate to one of three new premium markets. The voluntary migration of companies to these markets constitutes a natural experiment for analyzing the effects of an improvement in corporate governance and disclosure. In this study we find that migration brings positive abnormal returns to non-voting shares, a reduction in the voting (control) premium, and an increase in share trading volume. These results suggest that a premium market listing can substitute for cross-listing on a U.S. exchange as a mechanism for committing to improved corporate behavior.