Financial constraints in the Brazilian capital market: A natural experiment of CVM Instruction 476

Abstract

The study analyzes the impacts of Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários [CVM]) Instruction n. 476, January 16^th, 2009 on the financing of Brazilian companies. This regulatory change may have reduced financial constraints by lowering the costs of issuing debentures in the domestic capital market, increasing the speed of access to capital, and removing a regulatory barrier for private corporations, which were previously prevented from issuing debentures in the domestic capital market. There are few studies that analyze specific frictions in the domestic capital market, and none that focus on this particular regulatory change and its differential impact on private corporations. The introduction of CVM 476 is treated as a natural experiment capable of provoking an exogenous shock to reduce the financial constraints faced by Brazilian corporations. Difference-in-differences models are used to identify the causal effects of interest, using limited liability companies as a control group and examining the differential effects between public and private firms. There is a growing academic and social interest in the effects of market frictions on firm decisions and performance. In this context, it is particularly relevant to assess the impact of regulatory changes such as the one focused on in this research. The results are relevant for regulators and other capital market agents interested in understanding the relevance of market frictions for access to external financing and how they can be mitigated through regulatory change, potentially contributing to the optimization of firms’ capital structure. The results indicate that CVM 476 was able to increase the total leverage and especially the long-term leverage of corporations, with the effect being greater for private corporations, which is unprecedented in the literature.