Latin American Capital Markets

494 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESfirms, they face a risk, and sometimes near certainty, that the returnson their investments will never materialize because the controllingshareholders or managers simply keep them.Minority investors' rights are generally protected through disclosure and transparencyaccounting rules. If a company infringes these rights, then they are upheld byenforcement from the legal system, which in an ideal world would provide suitablemechanisms for redress for minority shareholders. Although a company would normallybe able to raise finance more cheaply via a capital market in which outsiders andminority interests are protected, the benefits to controlling shareholders or managersof expropriating the assets of outside investors are typically so large that corporationsare not ready to embrace reform that would require increased disclosure for the benefitof minority interests and other stakeholders. Lubrano (chapter 14, this volume) reviewsthe experience of implementing corporate governance reform in Latin Americaand the Caribbean and highlights the experience of Brazil and Colombia.La Porta and others (2002) summarize a central conclusion of the recent literatureas follows:Investor protection encourages the development of financial markets.When investors are protected from expropriation, they paymore for securities, making it more attractive for entrepreneurs toissue these securities. This applies to both creditors and shareholders.Creditor rights encourage the development of lending, and theexact structure of these rights may alternatively favor bank lendingor market lending. Shareholder rights encourage the development ofequity markets, as measured by the valuation of firms, the number oflisted firms (market breadth), and the rate at which firms go public.For both shareholders and creditors, protection includes not onlythe rights written into the laws and regulations, but also the effectivenessof their enforcement.The need to enforce the relevant laws and regulations is as important as establishinga sound legal basis for capital markets. Even in environments in which recourseto a country's legal system may not be a practical solution to redressing problemsin the securities markets, a regulator may be able to establish sanctions thatwork Properly designed securities market rules can work even in countries with quitedifferent legal systems.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub