Financial contracting under extreme uncertainty: an analysis of Brazilian corporate debentures

Economic volatility, high transaction costs, and fragile institutions hinder financial contracting in emerging markets. These conditions characterize the economy of Brazil, yet a nascent corporate bond marker thrives. I analyze 50 Brazilian indenture agreements and find that sample debentures are characterized by (i) features that mitigate inflation risk for investors, (ii) contingent-maturity mechanisms that provide periodic opportunities for exit or renegotiation, (iii) a paucity of covenants that restrict the debtor's investment, financing, and dividend decisions, and(iv) self-enforcement mechanisms that avoid reliance on inefficient institutions. Analysis of these features enhances our understanding of contracting in emerging economies. (C) 1999 Elsevier Science S.A. All rights reserved.