Limitations of Legal Transplants and Convergence to Corporate Governance Practices in Emerging Markets: The Brazilian Case

Little is known about the outcomes of legal transplants carried out by emerging economies aiming to develop their securities markets. This chapter contributes to fill this gap by analyzing the effectiveness of investor protection rules of the Novo Mercado, a self-regulatory transplant created in 2000 in Brazil to distinguish companies committed to higher governance standards. Employing the institutional autopsy approach through an in-depth qualitative analysis of two controversial cases, I conclude that the legal transplantation generated mixed results. On the one hand, Brazil greatly developed its capital markets after the Novo Mercado’s creation. On the other hand, the Novo Mercado did not work as expected regarding investor protection due to deficient enforcement and rule’s interpretation. I argue that these problems may derive from conflicts of interests of the stock exchange, the formalistic interpretation of rules and a lack of adequate oversight structure. The Brazilian case demonstrates that cultural, political, economic, and institutional elements permeate entire markets and that the transplant did not alter the main agency problem between controlling and minority shareholders that still characterizes Brazilian companies, even those listed on the Novo Mercado. I believe that this result should be considered for any legal transplantation.