Latin American Capital Markets

THE IMPACT OF THE MACROECONOMIC ENVIRONMENT ON CAPITAL MARKETS111Markt and in the Paris, Bruxelles, and Amsterdam Nouveau Marche.The last to jointhe group in 1999 was Milan's Novo Mercato.The EuroNM is a network of European stock exchanges associated with traditionalbourses.These exchanges target the financing of medium enterprises searchingfor venture capital, primarily in the innovative high-tech industries.The idea is toreplicate the U.S. market, which is rich in venture capital financing. It is widely acceptedthat venture capital has made a significant contribution to the economic success andleadership of the United States.Brazil has followed that lead with a novel three-tier regulatory framework.The Brazilian approach is interesting because it caters to the risk preferences of differentcapital market actors.The first tier, the Novo Mercado, imposes a significant regulatoryburden and high transaction costs on corporations seeking funds from themarket. In this tier, only companies committed to the highest standard of accountingnorms, disclosure, and corporate governance are allowed to list. Such companies ensurethe maximum protection of minority shareholders, granting full voting rights forall shares based on the principle of one share, one vote.Companies in the Novo Mercado have to disclose a wealth of information,including quarterly statements in Portuguese and English, audit reports, cash flowstatements and projections, transactions with related parties, and trading of shares bymanagers and controlling shareholders. The change in controlling interest has to bedone through a tender offer to all shareholders. Retail distribution of new shares isrequired, as is the issue of a full prospectus complying with international standards.There is a minimum "lock-up period" for controlling shareholders and many otherrules regarding arbitration of disputes, surveillance, and enforcement of regulations byBovespa.The second tier is special corporate governance level 2. Companies in thissegment must comply with all the requirements of the Novo Mercado, but they maycontinue to issue nonvoting shares (the so-called preferred shares). Currently, 52companies meet the conditions required by this level, holding almost 60 percent ofthe Bovespa market capitalization.The third tier corporate governance level 3, caters to those corporations thatwould not list if the regulatory burden were very costly and demanding. It is the placefor more risk-inclined investors because it does not require companies to complywith the strict standards of the Novo Mercado.The Amman Stock Exchange (ASE) is another successful stock market thatfollowed a split approach to regulation. Jordan is one of the developing countries thathave a tradition of equity financing.The ASE, created recently as a result or restruc-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub