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Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882-1950 (Studies in Macroeconomic History) Hardcover – September 14, 2009

ISBN-13: 978-0521518895 ISBN-10: 052151889X Edition: 1st

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Editorial Reviews

Review

"Aldo Musacchio has drawn upon a sophisticated analysis of numerous archival sources and many firm records to provide an interesting history of Brazilian banking over the course of seven decades. This study is used to deal with important issues relating to legal and institutional factors influencing management structure and performance. Given our current discussions of the role of institutions on the desired form of bank behavior, this study has a much broader significance for understanding economic considerations in other parts of the world." - Stanley L. Engerman, University of Rochester

"Many scholars have theorized about the links between law and economics. In this marvelous book, Aldo Musacchio uses meticulous historical research to reveal how these links actually operated in practice. He shows how, in Brazil a century ago, corporate governance was ahead of national law when it came to offering protection to investors in both bonds and stocks. This monograph is a major contribution not just to the field of Brazilian history but to the much larger social science literature on institutions and economic growth." - Niall Ferguson, Harvard University and author of The House of Rothschild, The Cash Nexus, and The Ascent of Money

"This thought-provoking book convincingly demonstrates the value of historical case studies for our understanding of the processes of economic development. More than any work I know it shows how misleading inferences from cross-country growth regressions can be. Musacchio challenges in one fell swoop both the law-and-finance and the colonial-origins theories of economic development by showing that Brazil's economic problems have their roots in its response to the world wars and macroeconomic shocks of the twentieth century." - Naomi Lamoreaux, University of California, Los Angeles

"Aldo Musacchio has written an insightful study of Brazilian financial history. Disconcerting perhaps to a law professor, and to others who see legal institutions as primary and determinative, Musacchio shows that the ups and downs of finance in Brazil over nearly a century do not tie in nicely to legal change. Rather, he argues, they tie more closely to broad-based change in the economic demands on business enterprise, such as changes in cross-border capital flows or inflationary shocks. Moreover, within a single nation's legal system, the legal modes - from legislation to contract to regulation - change over time. Musacchio's book, although focused on Brazilian financial history, is not just for Brazilianists." ― Mark J. Roe, Harvard Law School

"If you thought that the dismal state of corporate governance in Latin America is a direct product of its colonial or civil law heritage, Experiments in Financial Democracy will make you think again. Based on painstaking archival work, Aldo Musacchio demonstrates that in the late nineteenth century, investors in Brazilian corporations were better protected than they were in the late twentieth century. The law secured the claims of bondholders while many firms protected minority shareholders in their corporate charters. The work convincingly demonstrates that even poor countries can create and implement institutions favorable to capital markets. This optimistic historical finding is fully relevant to our troubled financial times." - Jean-Laurent Rosenthal, California Institute of Technology

"This carefully and intelligently constructed book is the latest installment in detailed archival research by Brazilian economic historians that challenge conventional wisdom on the determinants of economic growth and development...With this book, Musacchio adds a rich new layer to our understanding of the forces behind both Brazilian dynamism and malaise."
EH.net, Anne Hanley, Northern Illinois University

Book Description

This book is a detailed historical description of the evolution of corporate governance and stock markets in Brazil in the late nineteenth and twentieth centuries. The analysis details the practices of corporate governance, in particular the rights that shareholders had to restrict the actions of managers, and how that shaped different approaches to corporate finance over time.

More About the Author

Aldo Musacchio has been in the faculty of Harvard Business School since 2004. He is currently an associate professor in the Business, Government, and International Economy Unit (BGIE) and a Faculty Research Fellow at the National Bureau of Economic Research (NBER).

Professor Musacchio's first research projects focused on how companies can adopt corporate governance practices that protect investors in relatively adverse legal and institutional environments. His book, Experiments in Financial Democracy (Cambridge University Press, 2009) studies the mechanisms Brazilian firms used to follow high corporate governance standards before 1950, when the legal protections for investors were relatively weak. He argues that companies are not trapped in the legal systems in which they operate. They can overcome their institutional environments through better practices and designing bylaws that compensate for the weak legal environment.

In his new book, Reinventing State Capitalism, co-authored with Sergio G. Lazzarini, they study the evolution of corporate governance arrangements that governments have adopted for their state-owned enterprises (SOEs) in the last 20 years. They show that the process of privatization and liberalization of the 1990s and early 2000s created two new forms of state capitalism, in which Leviathan acts a majority or minority investor in publicly-listed corporations. We then argue that governments have transformed the governance of flagship SOEs in a way that has mitigated many of the agency and political problems that were pervasive in these firms throughout the twentieth century. The book describes how this transformation of state capitalism occurred globally and then performs statistical tests of the implications of these new forms of state capitalism in Brazil.

When governments act as majority shareholders in publicly traded firms, we find that they have reduced agency and political problems commonly associated with SOEs. Large SOEs, we find, tend to have either pay for performance or other mechanisms to incentivize managers; they have boards of directors, sometimes with external members; they follow international accounting standards and report financials often (usually quarterly); they also have large institutional investors as shareholders, which are effective in monitoring managers; and these firms are commonly rated by credit rating agencies. In the Leviathan-as-a-minority-shareholder model, which is also increasingly common, agency problems associated with state ownership have been tamed. Through this minority ownership model, governments around the world keep cash-flow rights in key industries, they play the role of large shareholders monitoring management, often having a seat on the board, but they do not run the companies themselves.

The book also emphasizes the fact that governments use development banks to prop up selected firms, the so-called "national champions." For instance, in Brazil the government uses the national development bank to invest in equity and provides subsidized loans to companies. In the book we use detailed data on loans of Brazil's National Development Bank, known as BNDES, to over 200 publicly listed corporations and find that since 2002 most firms are not using the loans they get from this bank to increase capital expenditures or for projects that increase profitability.

We do not argue that the new models of state capitalism have solved all of the agency and political problems of the old forms of state capitalism. The argument is that while these new models have partially mitigated agency conflicts, there are still obstacles and political temptations to intervene in SOEs or in private firms where the state is a minority shareholder or lender. That is, these new models of state capitalism are perhaps a second best solution, yet a solution that is the product of the complex political economy of emerging and developed countries after the fall of the Berlin Wall.

Aldo Musacchio has a Ph. D. in Economic History of Latin America from Stanford University. He is a faculty associate at the Weatherhead Center for International Affairs and a member of the Brazil Studies Committee and the Mexican Studies Committee, all at Harvard University. In 2013 he won the Manuel Espinosa Yglesias Prize for research on the Mexican banking system (for work joint with Stephen Haber), the Gerry Feldman Young Scholar Prize awarded by the European Association of Banking and Financial History (shared with André C. Martínez Fritscher), and the Prize for Academic Merit, awarded by the alumni association of ITAM, Mexico City (his alma mater)! Other awards and honors include the 2008 Arthur H. Cole Prize for the best paper in the Journal of Economic History. In 2007 he was selected as one of the "30 most promising professionals in their thirties (30 promesas en los treintas)" by Mexican business magazine Expansion.
Musacchio has been a visiting teacher and guest lecturer at Ibmec Business School, Fundacao FGV, University of Sao Paulo, in Brazil; the Instituto Tecnologico Autonomo de Mexico (ITAM), in Mexico; Universidad de los ANdes and INALDE, in COlombia; IEEM, in Uruguay; ESE, in CHile; and University of Reykjavik, in Iceland. He lives in Boston, Massachusetts.

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