Impact of Bankruptcy Law Reform on Capital Markets in Brazil

Abstract

New bankruptcy laws which give greater protection to creditors were signed into law in Brazil on Feb 9, 2005. The paper tests whether greater protection to creditors led to growth in capital markets in Brazil as predicted by La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 2002 and 2006). Our analysis shows that the money market responded positively with a drop of 600 basis points in the Selic, the benchmark interest rate, after the new law went into effect. Aggregate stock market indexes reacted positively when the new rules were signed into law. Long-term returns to stock market indexes consisting of firms which offer greater protection to shareholders, are positive, which strongly supports the La Porta, et al predictions.