Corporate financing and the uniqueness of loan contracts: The Brazilian case in the 1980's

The debate about the uniqueness of bank loans has been around for sometime and in spite of that, no conclusive agreement has been drawn from empirical studies.Theoretically though, there is a fairly well established consensus that loans can avoid, or at least reduce a great deal, the problems associated with asymmetric information that can give rise to borrowers' moral hazard behavior. Bank loans can be considered as inside debt and, hence, similar to internally generated funds, as argued by Fama (1985). As inside lenders, banks would have access to private information that is not disclosed to the market. Banks would, therefore, represent an informational link between their borrowers and the capital market participants.In this thesis the discussion above mentioned is applied to the Brazilian economy. The conclusion drawn from my results is that development banks offering long-term funds act as sources of information to the capital markets. A sample of announcements concerning long-term fixed capital investment credit agreements between banks and corporations has been selected for a period of twelve years. For this matter, the Brazilian financial newspaper "A Gazeta Mercantil" has been researched on a daily basis and among the announcements found, the ones selected were those involving companies whose shares were traded on the Sao Paulo Stock Exchange, the biggest and most important one in Brazil.This method allowed me to determine the positive excess return attributable to the information conveyed, to the market, by the announcement of loan contracts to companies.The typical sources of companies' financing in Brazil is also determined in this study. The empirical evidence suggests that firms follow the stylized procedures, as far as financing is concerned, put forth in Stewart Myers' pecking order theory. Firms present a clear preference for internally generated funds. Finally, the process of financial innovation that flourished in Brazil during the past decade is analyzed. The main conclusion, in this respect, is that this phenomenon was triggered by the flight from the currency which, in turn, was due to the high and persistent inflationary process. The impact of inflation over business' management is also demonstrated in this work.U of I OnlyETDs are only available to UIUC Users without author permissio