CORPORATE GOVERNANCE AND CAPITAL STRUCTURE IN BRAZIL: STOCK, BONDS AND SUBSTITUTION

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.