corporate governance practices, such as disclosure, transparency, and accountability.<sup>6</sup> According to Bhojraj and Sengupta (2003) and Shleifer and Vishny (1997), good governance practices increase investor confidence as they tend to reduce agency and information risks. Therefore, companies are likely to have access to capital at lower costs and better conditions, to increase the value and liquidity of their shares, and to improve their operating performance and profitability.<sup>7</sup> In fact, since then, equity markets have become more liquid and less concentrated, and a greater number of firms have been issuing equities; hence, larger amounts are being raised in Brazil (figure 16). These trends suggest that the improvements in the investor protection environment might have indeed paid off.

In spite of a timid beginning, due mostly to a number of external shocks, the Novo Mercado had taken off by the mid-2000s. The number of companies listed in these new corporate governance segments of Bovespa rose steadily, while the number of companies listed in the traditional segment of Bovespa decreased during the 2000s. By December 2010, 168 companies were listed in the three segments: 38 companies in Level 1, 18 in Level 2, and 112 in Novo Mercado. These trends suggest a migration from the traditional segment to the corporate governance segments.<sup>8</sup> According to Gorga (2009), by 2007 the large, established, and successful corporations with alternative sources of financing tended to migrate to segments that required small changes in corporate governance (Levels 1 and 2), while the vast majority of companies listed in the Novo Mercado were new entrants looking at the equity market as a viable option to raise capital.<sup>9</sup> Moreover, the improved corporate governance segments of Bovespa have gained market participation, in 2010 representing more than 65 percent of market capitalization and almost 80 percent of value traded (figure 17).

The implementation of the Novo Mercado has been well received by foreign investors as well. During 2004–06, on average, foreign participation in the improved corporate

> 6 Glaser, Johnson, and Shleifer (2001) and La Porta et al. (1997) show that protection of minority shareholders is fundamental to the development of a country’s capital market. In addition, Klapper and Love (2004) show that good governance practices are more important in countries with weak investor protection and inefficient enforcement.

> 7 Ashbaugh-Skaife, Collins, and LaFond (2006), for example, find that better corporate governance practices improve corporate credit ratings and reduce bond yields. De Carvalho and Pennacchi (2011) argue, for the case of Brazil, that migration from traditional markets to the Novo Mercado brings positive abnormal returns to shareholders and an increase in the trading volume of shares. Klapper and Love (2004) find that better corporate governance is associated with higher operating performance and higher Tobin’s Q. Joh (2003) concludes that firms with a higher control-ownership disparity exhibit lower profitability.

> 8 It is important to note that some firms with a traditional Bovespa listing have public debt but not public equity. 9 This argument is consistent with data on the financial reports of Bovespa’s listed companies that show that companies listed in the corporate governance segments, on average, are larger than companies in the traditional market but that companies listed in Levels 1 and 2 are larger than firms listed in the Novo Mercado.

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