(How) Does Self-Regulation Work? Evidence from Brazilian Corporate Governance Listing Segments

Abstract

This paper examines the enforcement of the Brazilian Stock Exchange (B3) self-regulation on companies listed on its special corporate governance segments: Levels 1, 2 and the New Market. From the theoretical perspective, I discuss the main doctrines and international experiences on the subject. The legal analysis shows the contract between the B3 and listed companies being an instrument of this relation. This relation, in turn, is grounded on legal based disciplinary power aimed to be used in the public interest. From the empirical perspective, I analyze fourteen years of data of the sanctions applied by the B3 for companies listed on the special segments. The results show that: (i) sanctions imposed by the B3 have procedural nature instead of substantive; (ii) the number of sanctions did not grow proportionally to the number of listed companies; (iii) there is a negative correlation between the number of fines and the stock market momentum (“bear” or “bull market”); and (iv) on average, companies that receive more fines are smaller, younger, with lower profitability, lower stock returns and higher indebtedness. I present solutions to increase public oversight of the enforcement of the listing segments’ rules, such as: enhancing transparency and accountability; strengthening the state supervision over the private regulator’s enforcement activities; and, implementing mechanisms to mitigate the risks of under-enforcement caused by conflicts of interests. The Brazilian case is relevant to the global debate because its results suggest responses to the following issues: (i) the limitations of Stock Exchanges to enforce its own rules; (ii) the discussion whether listing rules lead to a “race to the bottom” or “race to the top”; and, (iii) whether “bull” or “bear markets” are related to the enforcement activity. These results highlight the relevance of more research and debates on this issue in the academic world. Taken together, the debate and proposals have the ultimate goal of improving investor protection and strengthen the credibility of the stock markets in order to contribute to greater economic and social development.