Strengthening Brazil's Securities Markets

An important challenge for all economies, at which only a few have succeeded, is creating the preconditions for a strong market for common stocks and other securities. A strong securities market rests on a complex network of legal and market institutions that ensure that minority shareholders (i) receive good information about the value of a company's business, and (ii) have confidence that a company's managers and controlling shareholders won't cheat them out of most or all of the value of their investment. This short paper summarizes this theory (which I develop in a separate paper on The Legal and Institutional Preconditions for Strong Securities Markets), and discusses the strengths and weaknesses of Brazil's institutions along these two dimensions. My goal is to offer a tentative roadmap for future reform of Brazilian institutions.