Capital Structure in Brazil: Review of Studies During the Period of 1988-2003

William Eid Jr. and Alexandre Kazuma Matsuo

http://papers.ssrn.com/abstract=1435347

Abstract:     
A systematic review was made of studies regarding the capital structure in Brazil during the period of 1988-2003. The recurring themes relate to the static tradeoff and pecking order in various moments of the economy, the fiscal benefits of indebtedness and interest on privately-owned capital, and the inefficacies of the stock market. The Brazilian companies enjoy little leverage as compared to other emerging markets. BNDES is responsible for 5% of the gross formation of fixed capital. The funding of resources occurs at opportune moments, and the financing decision may precede that of investment. Efficacy of the judiciary system and company transparency positively affect access to credit.

Keywords: Brazil, Capital Structure

The Influence of Macroeconomic Factors on Primary Issues in the Brazilian Market

William Eid Jr. and Alexandre Kazuma Matsuo

http://papers.ssrn.com/abstract=1435345

Abstract     

This research analyses the influence of the macroeconomic factors on the primary issue of stocks and debentures in the Brazilian market. Previous studies have agreed on the importance of aspects of the economic situation on a company’s capital structure, but have not established a relationship between the macroeconomic variables and the level of aggregate debt; we can mention Procianoy and Caselani (1997) and Terra (2003) as examples of this. According to Leal (2000), the limitations of the Brazilian capital market suggest that management takes advantage of moments of euphoria in the market - whether caused by a reduction in the rate of interest or by the return being offered by the equity market - to raise funds at rates that are more advantageous to the company. This characterizes the first evidence we have of opportunistic behavior influencing a company’s financing decisions. Eid Jr. (1996) provides us with the first evidence of this opportunistic behavior in his research in which 47% of those interviewed said that they chose fund sources that are economically more advantageous.

Keywords: Brazil, Macroeconomic factors, primary issue, stocks, debentures

The Sao Paulo Stock Exchange and the Economic Stabilization

William Eid Jr.

http://papers.ssrn.com/abstract=1435325

Abstract  

The inflationary stabilization recently observed in Brazil brings a lot of changes in all aspects of the country’s economic life. In this work we look at the impacts on the stock market, specifically at Bovespa - the São Paulo Stock Exchange. We analyze the leading variables and statistics that describe Bovespa’s behavior, such as volatility and systematic risk, comparing the four years preceding and the four years after 1994, when the Real Plan was implemented. In order to eliminate exogenous influences, we use control series made with international Stock Exchanges Indexes. The results show that after 1994 there was reduced volatility, increased trade volume, reduced efficiency of the Bovespa Index and no changes in systematic risk.

Keywords: Brazil, Economic Stabilization, Stock Exchange

Does Active Management Add Value? The Brazilian Mutual Fund Market

William Eid Jr. e Ricardo R. Rochman

http://papers.ssrn.com/abstract=1435323

Abstract    

Does active management add or destroy value? With a sample of 699 with four different main categories: stocks, fixed income, hedge and exchange rate mutual funds we conclude that the active management add value to investors in stocks and hedge funds. But in fixed income mutual funds the evidence is against the active management. We also analyze the determinants of significant alphas. For stocks and hedge funds the evidence suggests that old, big and active funds generate biggest alphas. In fixed income funds the evidence is not clear, only a positive relationship between size and alphas could be found.

Keywords: Mutual funds, Brazil, Active and Passive Management

The Influence of the Tag-Along Rights in the Value of Companies: An Event Study of the Effects on the Market and Service Companies

William Eid Jr. and Ricardo R. Rochman

http://papers.ssrn.com/abstract=1435300

Abstract    

The aim of this work is to check the effect of granting tag-along rights to stockholders by analyzing the behavior of the return of the stock. To do so we carried out event studies for a group of 21 company stocks, divided into service provider companies and others, who granted this right to their stockholders after Law 10,303 was passed in October, 2001. In the test we used two models for estimating abnormal returns: adjusted to the market and adjusted to the risk and market. The results of the tests we carried out based on these models did not capture abnormal returns (surpluses), telling us that the tag-along rights did not affect the pattern of daily returns of the stocks of companies traded on BOVESPA (The Sao Paulo Stock Exchange). We did not expect this result because of the new corporate governance practices adopted by companies in Brazil.

Keywords: Brazil, Tag-along, event study

Options Listing and the Volatility of the Underlying Asset: A Study on the Derivative Market Function

Marc Chesney and William Eid Jr.

http://papers.ssrn.com/abstract=1435298

Abstract    

There is a lot of misunderstanding about derivative markets. Many people believes that they are a kind of casinos and have no utility to the investors. This work looks on the effects of options introduction in the Brazilian market, seeking for another benefit for this introduction: changes in the stocks risk level due to this introduction. Our results are the same found in the US and other markets: the options introduction reduces the stocks volatility. We also found that there is a slight indication that the volatility became more stochastic with this introduction.

Keywords: Option introduction, volatility, volatility of volatility, GARCH

Asymmetric Preferences in Investment Decisions in the Brazilian Financial Market

Luiz Augusto Martits and William Eid Jr.

http://papers.ssrn.com/abstract=1435314

Abstract     

The main objective of this article is to test the hypothesis that utility preferences that incorporate asymmetric reactions between gains and losses generate better results than the classic Von Neumann-Morgenstern utility functions in the Brazilian market. The asymmetric behavior can be computed through the introduction of a disappointment (or loss) aversion coefficient in the classical expected utility function, which increases the impact of losses against gains. The results generated by both traditional and loss aversion utility functions are compared with real data from the Brazilian market regarding stock market participation in the investment portfolio of pension funds and individual investors.

Keywords: Utility maximization, loss aversion, risk aversion, Brazilian stock market, prospect

Do Insiders Get Abnormal Returns? Event Studies on the Trades of Insiders of the Firms with Differentiated Corporate Governance of the São Paulo Stock

Ricardo R. Rochman and William Eid Jr.

http://papers.ssrn.com/abstract=1435295

Abstract

The subject insider trading is controversial. This paper presents series of event studies carried through on the trades with stocks of the firm carried by insiders with the objective to detect abnormal returns, based on the access to privileged information. The sample is composed by trades performed by insiders of the companies with stocks negotiated in the São Paulo Stock Exchange, that are classified as firms with differentiated corporate governance. Indication that trades performed by insiders resulted in abnormal returns compared to the statistically significant expected ones, as in the purchases of common shares; or for selling of preferred stocks.

Keywords: Insider trading, Brazil, Corporate Governance

Volatility of Returns, Variations in Prices and Volume Traded: Evidence from the Main Stocks in Brazil

Cesar Nazareno Caselani and William Eid Jr.

http://papers.ssrn.com/abstract=1435309

Abstract:     
We study the relationship between the volatility and the price of stocks and the impact that variables such as past volatility, financial gearing, interest rates, stock return and turnover have on the present volatility of these securities. The results show the persistent behavior of volatility and the relationship between interest rate and volatility. The results also showed that a reduction in stock prices are associated with an increase in volatility. Finally we found a greater trading volume tends to increase the volatility.

Keywords: Brazil, stock price determinants, volatility

The Effect of Guia Exame’s Ratings on the Brazilian Fund Industry: An Analysis of Net-Worth Flows

William Eid Jr. and Ricardo R. Rochman

http://papers.ssrn.com/abstract=1435293

Abstract  

This paper infers the impact the publication “Guia Exame” (the guide) has on the Brazilian fund industry, more specifically on the ability the concerned funds develop on attracting new investment. The impact is measured using the event-study analysis based on the variation of net worth subsequently to the event of being rated, according to the methodology applied by the guide to rank the funds. We used five years of fund ratings according to Guia Exame (2000-2004) and analyzed the changes of these funds’ net worth. We also compared the event amongst different categories of funds. The results found confirm the expected effects according to star rankings and asset manager size in all years.

Keywords: Brazil, event-study, mutual funds, asset flow, fund ratings

Financial Guarantees in Brazilian Life Insurance and Pension Plans

Antônio Simões Pereira and William Eid Jr.

http://papers.ssrn.com/abstract=1435292

Abstract  

Recently regulated Brazilian life and pension products offer a benefit structure composed of minimum guaranteed annual rate, inflation adjustment according to a price index and participation on an investment fund performance. We present a valuation model for these products. We establish a fair condition relationship between minimum guarantees and participation rates, and explore its behavior over a space of maturities, interest rates, and also fund and price index volatilities and correlation. Besides consistency to reference models, we found that the effect of the fund volatility is conditioned to the price index volatility level and the correlation between them.

Keywords: Brazil, Life-Insurance, Financial, Guarantee

Analysts’ Recommendations in Brazil: Do They Add Value?

Ricardo R. Rochman and William Eid Jr.

http://papers.ssrn.com/abstract=1435302

Abstract     
This paper examines the value of analysts’ recommendations in Brazilian Stock Market. We studied a sample of 294 weeks of recommendations make public by the best seller newspaper in Brazil with six different investment strategies and time horizons. The main conclusion is that it is possible to beat the Brazilian market indexes Ibovespa and IBrX following the analysts’ stock recommendations. The best strategies are buying only the recommended stocks, buying the recommended stocks whose target and market prices difference is bigger than 25% and lesser or equal than 50%. The performance of the six strategies is analyzed through the use of bootstrap and Monte Carlo techniques.

Keywords: Brazil, Stock Market, analyst, recommendation