Embraer Novo Mercado Analysis

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Novo Mercado for Embraer
The migration of businesses to Bovespa’s Novo Mercado listing aims to make companies’ shares more attractive to investors due to higher standards of corporate governance, and consequently greater transparency and a higher degree of protection of minority shareholders.  

Among the main features of the Novo Mercado are: commitment to achieve in three years a minimum portion of 25% of shares in free float, and the conditions provided to majority shareholders in the disposal of the company’s control will have to be extended to all shareholders (Tag Along). In addition, companies listed in Novo Mercado must establish a two-year mandate for the entire Board of Directors, which must have five members or more, of which at least 20% (twenty percent) shall be independent members. It is worth noting that the Novo Mercado has a complementary relationship with Bovespa’s Levels 1 and 2 of corporate governance listings, but is different from these due to the requirement of all shares being ordinary.  

It is believed that the adoption of corporate governance best practices can increase the market value of the company as well as lower its risk. Greater transparency can stimulate a distinct perception of the market regarding the management of the company and a better interpretation of financial information, both for investors and for ratings agencies. This may result, respectively, in a more satisfactory level of liquidity and a better classification of company’s debt, therefore granting the company more access to credit with lower interest.

A study by Universidade Católica de Brasília (Catholic University of Brasilia) was developed to verify if corporate governance indeed makes a positive impact in companies’ market value and risk. It consisted in analyzing the companies that are listed in Ibovespa index and adopted corporate governance requirements by joining Bovespa’s corporate governance listings. The relationship of the impact of corporate governance on risk and market value was measured by registering the market value and beta of each company one day before the adoption of corporate governance (the day the company joined Novo Mercado or Levels 1 and 2). The market value and beta of the companies were registered again on September 19th of 2009 when a significant amount of time has passed to be able to make this analysis. With this data at hand, it was possible to evaluate the effect of governance on market value and company’s risk.

The study showed that 42% of researched companies experienced increase in market value and decrease of beta, after adopting corporate governance requirements. In addition, to 46% of researched companies, the market value grew and the beta also increased, but in a lower proportion when compared to market value growth. Corporate governance impact was negative to only 12% of the companies with a smaller market value and increased beta. The results found in this study confirm that corporate governance has a positive impact in market value and risk, and therefore more companies are willing to adopt its best practices.  

In the specific case of Embraer, prior to his admission to the Novo Mercado, preferred shares were trading about 40% higher than common shares. This discrepancy can be explained because common shares, although having voting rights, did not give any control power due to the existence of a Shareholders' Agreement that maintained control power among three shareholders. With shares being traded on Novo Mercado with a new standard of corporate governance, Embraer eliminated this discrepancy, while providing more liquidity to company’s shares, and therefore turning them more attractive.

Novo Mercado consequences for Embraer & Trading activities

Embraer has joined the Mercado Novo in 2006, after been listed in Bovespa since 1989 and In 2000, the Company’s ADRs (American Depositary Receipts) were launched at level 3 on the New York Stock Exchange (NYSE)....
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