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Financialisation and Investment Behaviour Among Non-Financial Corporations in Brazil Since the Global Crisis

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The Brazilian Economy since the Great Financial Crisis of 2007/2008

Abstract

Over the past few decades, the world has seen a shift towards finance-driven globalisation and financialised investment strategies . At the corporate level, the shift towards such strategies has been associated with the so-called shareholder primacy , along with the fragmentation of productive processes in global value chains and a refocusing of activities towards “core business”. This chapter examines the financialisation of corporate strategies and recent investment patterns in Brazil. It will show that Brazil’s growing integration in global financial markets, followed by financial shocks and associated macroeconomic instability, has been a critical factor behind financialised practices, including carry trade activities. Against this backdrop, corporate investment as a proportion of total capital stock has declined since the global crisis despite the rapid increase in corporate indebtedness, to which natural resource-based industries have been the largest contributors.

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Notes

  1. 1.

    Indeed, restructuring also served the purpose of paying out shareholders through stocks repurchases financed with the asset sales (Krier 2005).

  2. 2.

    Institutional investors are financial institutions that accept funds from third parties for investment not under their own name but on such parties’ behalf. They include pension funds, mutual funds and insurance companies.

  3. 3.

    See also Lazonick (2013), particularly on the practice of stock repurchases by cash-rich companies.

  4. 4.

    Focusing on European Union countries, Tori and Onaran (2015) highlight a number of stylised facts that show a declining investment to profit ratio, a growing ratio of financial assets to total asset, rising financial payments and income, and stagnant investment rates. They suggest that financialisation has hit the manufacturing sector in the UK particularly hard.

  5. 5.

    The Brazilian Law of Corporations, or Lei das Sociedades. Anônimas in Portuguese, Law No. 6404 of 15 December 1976, was amended by Law No. 10.303 of 31 October 2001.

  6. 6.

    The new listings created were: Level 1, Level 2 and Novo Mercado . The following were among the requirements all three listings had to meet: minimum free float of 25% of capital, share dispersion efforts and enhanced disclosure of quarterly financial statements. In addition, Level 2 and Novo Mercado listings included: 20% of independent board directors, two-year term for board members, compliance with IFRS or US GAAP reporting standards, mandatory recourse to private arbitration and six-month lock-up period following an IPO. Finally, Novo Mercado had to follow the one share one vote principle (Habbard 2010, pp. 17–19; Gottschalk 2001, p. 36).

  7. 7.

    See BM&FBOVESPA, available at http://www.bmfbovespa.com.br/en_us/listing/equities/listing-segments/about-listing-segments/. Accessed 17 November 2016.

  8. 8.

    The paradox is that, despite a considerably larger financial system whereby domestic credit expanded from 64% in 1996–2000 to 101% in 2011–2014 and stock market capitalisation grew from below 4% in 1989–1992 to 43% in 2011–2014, real capital accumulation as a proportion of GDP did not pick up as one might have expected.

  9. 9.

    See Chap. “New Features of the Brazilian External Sector Since the Great Global Crisis” in this book. Also, for an early account of country experiences with capital inflows and outflows since the early 1990s, see Gavin et al. (1995); for a more recent analysis, see Akyüz (2013).

  10. 10.

    On the role of confidence-building policies in explaining macroeconomic outcomes, see Bresser-Pereira (2001).

  11. 11.

    See Grabel (2000) for an extensive discussion on the relations between policy credibility and confidence building in emerging markets.

  12. 12.

    The MSCI EM is a market capitalisation index created by Morgan Stanley Capital International (MSCI) to measure performance of equity markets. It consists of indices from 23 emerging economies, including Brazil.

  13. 13.

    According to AGF Investments (2016), Brazil had a weight of 7.4% in the MSCI EM index in September 2016, with a share of 57% within the subgroup of Latin American countries.

  14. 14.

    As Demir (2009) noted, these practices were common among several emerging economies that underwent external financial liberalisation in the 1980s and 1990s.

  15. 15.

    The Worldscope database provides detailed historical financial statement contents for corporations.

  16. 16.

    Entities considered here as firms distributing dividends systematically are those that have done so in five consecutive years at least once over the period 1995–2015.

  17. 17.

    Indeed, Brazilian corporations engaged in derivatives carry trade before and after the global crisis, and incurred large losses when the Real depreciated sharply in the final quarter of 2008 (see Prates 2015, p. 116).

  18. 18.

    Executives may also make bets with financial assets trying to push up the company’s earnings to make some extra profit when they think the opportunity arises and to boost the firm stock price and thus the value of their own stock holdings.

  19. 19.

    IBMEC stands for Instituto Brasileiro de Mercado de Capitais.

  20. 20.

    Brazil's CPI-IGP DI was used as a deflator.

  21. 21.

    The sectorial breakdown corresponds to the Industry Classification Benchmark (ICB), an industry classification taxonomy. The ICB uses a system of 10 industries, partitioned into 19 supersectors, which are further divided into 41 sectors, which then contain 114 subsectors. This chapter calls “sector” what the ICB refers to as supersectors.

  22. 22.

    Debt growing at faster rates than investment could also reflect a strategic choice in terms of the funding mix for the expansion of the firm or higher requirements in terms of working capital.

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Authors and Affiliations

  1. Division on Globalisation and Development Strategies, UNCTAD, Geneva, Switzerland

    Ricardo Gottschalk & Edgardo Torija-Zane

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  1. Ricardo Gottschalk
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  2. Edgardo Torija-Zane
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Correspondence to Ricardo Gottschalk .

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Editors and Affiliations

  1. Department of Land Economy, University of Cambridge, Cambridge, United Kingdom

    Philip Arestis

  2. Institute of Economics, University of Campinas, Campinas, São Paulo, Brazil

    Carolina Troncoso Baltar

  3. Institute of Economics, University of Campinas, Campinas, São Paulo, Brazil

    Daniela Magalhães Prates

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Gottschalk, R., Torija-Zane, E. (2017). Financialisation and Investment Behaviour Among Non-Financial Corporations in Brazil Since the Global Crisis. In: Arestis, P., Troncoso Baltar, C., Prates, D. (eds) The Brazilian Economy since the Great Financial Crisis of 2007/2008. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-64885-9_7

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  • DOI: https://doi.org/10.1007/978-3-319-64885-9_7

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