Regulatory Dualism as an Alternative Trust‐Enhancing Mechanism for Dividends and Debt: Evidence from Brazil

We test whether a market‐level corporate governance reform in Brazil influences the behavior of firms. To do so, we first verify whether the Novo Mercado (NM)—the segment applying more stringent corporate governance practices—impacts specific firms’ financial characteristics. We also investigate if it impacts firms’ dividends and leverage, two well‐known mechanisms for mitigating agency problems. Results show the NM impacts many firms’ characteristics and reduces firms’ dividends and leverage. We thus claim that market‐level reform may be an effective trust‐enhancing mechanism and may improve minority investor protection, thus providing evidence that a country's institutional setting can evolve over time.