Latin American Capital Markets

108 VALERIANO F. GARCIA AND LUIS ALBERTO GIORGIOother things, substantially strengthen corporate governance. Rules should preventmanagers from acting in their own vested interest, avoiding insider control and agencyproblems; introduce transparent procedures regarding mergers and acquisitions; enactand enforce accounting standards; request timely disclosure of income statements andbalance sheets; reinforce external independent audits and protection of minority shareholders;and encourage independence of market analysts.At the same time, from the demand side, an increase in regulations implieshigher transaction costs. Also, when looking at the relation between transaction costsand the number of firms deciding to go to the market to tap resources, naturally, thelower the transaction cost, the higher the number of businesses willing to go public.These two sides of the same problem can be reconciled. Everything else beingconstant, the supply schedule for capital is upward sloping and the demand scheduleis downward sloping with respect to price. Any change in regulations increasing thetransaction cost of going public for the sake of increasing investors' confidence andprotection would cause the demand for public funds to shift to the left. It would alsoshift to the right the supply schedule for capital. The end result of this regulatorychange would indeed be a price reduction, that is, a fall in the cost of capital. Howeverwhatever happens to the quantities would depend on the relative elasticity betweenthe supply and demand schedules. If the general public and institutional investors arekeen regarding being protected, and firms do not see the regulatory change as affectingtheir transaction costs, the price reduction will be accompanied by an incrementin the quantity of capital intermediated in the capital market If the enterprises see theregulatory change as imposing significant costs, the market will shrinkSome Recent TrendsExternal factors derived from global trends that developed during the 1990s could affectthe design and implementation of an adequate institutional setup. Deregulation,globalization, institutionalization, dematerialization, and the sophistication of financialproducts are giving capital markets, even in developed economies, a new frameworkIn addition, the tailored approach to stock exchange listing is a promising trend forfacilitating the participation of particular business segments in the market.DeregulationThe 1990s will be heralded as the deregulation decade.The banking debt flows of the1970s and the dry season of the 1980s were followed by the capital flows revolutionCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub