Loide Priscila Cacheche
Universidade Adventista de São Paulo, Brazil
E-mail: eduardo-biagi@hotmail.com
João Almeida Santos
Universidade Adventista de São Paulo, Brazil
E-mail: professoralmeida@ig.com.br
Eduardo Biagi Almeida Santos
Universidade Nove de Julho, UNINOVE, Brazil
E-mail: eduardo-biagi@hotmail.com
Getulio Akabane
Universidade Anhanguera, Brazil
E-mail: getulio@akabane.adm.br
Submission: 28/07/2014
Revision: 03/09/2014
Accept: 02/10/2014
ABSTRACT
The purpose of this paper is to analyze the
importance of knowledge of managers about market capitals (in terms of benefits
and challenges) and the relevance of the inclusion of small business context in
this market. A case study was conducted by open questions interview with a CEO
of a small business in Sao Paulo. Results showed that despite the CEO has
knowledge about the capital market; the company was not structurally prepared
to accept the challenges of capital markets.
Keywords:
Market capitals, Case Study,
Small business
1. INTRODUCTION
Brazil
has been through a lot of transformations in the economic environment in the
last decade. One of these transformations occurs by the growth of SMEs (Small
and Medium Enterprises) companies that each day has been increasing
significantly in the Brazilian economy.
SMEs
have helped in strongest way the Brazilian economy. SMEs operates through a
various sectors, such as trade, industry, services, and online. These companies
are important for the local economy (i.e. creating jobs to local population).
It is remarkable that these companies also help in the evolution of large
business, making incomes that they don’t produce.
However,
many times SMEs cannot prosper for long in the local market, they eventually
stop to operate in a short period. This occurs by the lack of credit, absence
of technical support, deficiency of adequate management and also the deficiency
of qualified personnel (NAJBERG; PUGA; OLIVEIRA, 2000).
Several
companies have solved their financial problems through bank loans, which in
fact led to its increasing debt default rate. Bank loans can bring an immediate
solution, but in long term can cause a lot of problems for managers. Debts are
difficult to be resolved, also affecting the working capital of the company. To
solve these financial problems, many companies have sought a solution through
IPO. Given the difficulties that the SMEs seek strength in the financial sector
to get credit to consolidate their companies in the market. A new strategy
emerges, the IPO
The
IPO has benefits and challenges for a company to go public for the stock
market. But this strategy may be favorable since the company knows the right
moment to perform this action with a well-defined corporate structure and that
if it fits according to the rules of the CVM (Comissão de Valores Mobiliários
correspondent to Securities and Exchange Commission) following all the
procedures that must be performed. The objective of this research is to show
advantages and challenges of IPO by the methodology of case study with a small
enterprise.
2. STRUCTURE OF CAPITAL MARKET AND ITS IMPORTANCE
Even
before talk about the importance of the capital market is important to know its
definition. According to Pinheiro (2012) Capital markets can be defined as a
set of institutions and instruments relating to title and securities, in order
to direct resources to selling agents. This statement shows the financial
market dynamics in the sale and purchase of shares on the Stock Exchange which
reinforces their resources for the organization to achieve mobility and
liquidity of their securities with institutions and instruments for trading.
The
capital market has emerged in Brazil at 1964 when the government decided to
revamp the financial system thereby creating laws to better structure to the
Stock Exchange and authorized financial institutions
This
was a mark for the Brazilian economy, because from that moment the capital
market has more coordination and transparency to the shareholders who invested
in shares. This development was taking place so that the capital market to stay
well organized allowed investors to have more certainty and confidence to
invest their capital by the creation of Law No. 4.728/65 - Law of Financial and
Capital Market that actually are disciplined by the Conselho Monetário Nacional
brasileiro and supervised by the Banco Central brasileiro (BRANCO, 1965). This
law backs up and protects the investor from possible irregularities and fraud
within companies where they held their investments.
The
creation of the stock market was based on the following principles (PINHEIRO
2012, p 174.): Contribute to economic development, acting as a
driver of capital for investment, encouraging the formation of private savings;
Allow and guide the structuring a society based on a market economy, allowing
the collective participation broadly in wealth and economic results.
The
principles that guide the creation of capital markets foster and encourage
economic growth in the country, providing an opportunity for investors to
participate in the development of it through negotiations on the stock
exchange, and these principles also stimulate a form of security and financial
health for an organization which has private savings. The capital market
consists of two parts, Primary and Secondary Market. Figure 1 shows this
structure:
Figure 1 - Structure of capital market.
Source: Pinheiro (2012, p. 174)
In
the primary stock market, shares are traded by way of subscription, where
organizations finance their projects. The secondary stock market aims to
provide liquidity to investors, allowing a buyer and a seller to invigorate the
primary market. And it is noteworthy that the secondary market should have the
following attributes: Transparency, Liquidity and Efficiency (PINHEIRO, 2012).
Knowing
the structure and importance of the capital market is important for everyone,
especially for investors who are interested to enter in the stock market and
seek more knowledge about the functioning of the Brazilian economy. It is worth
emphasizing that the capital market has very important role in the economic
development of the country.
Importantly
this research with investments in the stock market the organization seeks
growth and sustainability in the local market, which in turn will create more
income generation for the population through employment.
The
entry of an organization in the stock market brings financial results for the
shareholders, be they positive or not. In the aspect of the damage of
organizations, many of them sighted many difficulties and barriers to their
inclusion in the stock market, but this strategy can be very profitable for
organizations with structure prepared for this new challenge (MODIGLIANI;
MILLER, 1958).
Therefore
the search for knowledge is essential for the new investor who longs to enter
this market, knowing the structure, the benefits it brings to society and the
economy and do an analysis of how it acts directly on the lives of individuals
and companies are required important for any investor to enter the stock
market.
3. BENEFITS AND CHALLENGES OF IPO
This
section will address some of the reasons that organizations decide to open its
capital to the securities market and also will analyze the disadvantages of
having shares on the Stock Exchange. Most organizations already passed or will
pass a financial crisis, as there are many factors such as acquisition of
machinery, investment in new projects, accumulation of losses and other reasons
that has large debts or expenses on tax charges that imposed by government,
which cannot fail with the operation and legality (HUBBARD, 1997).
For
these and other reasons managers seeking strategies to reverse this situation
and make the most profitable and established company in the market, thus
reducing the possibility of their mortality. And a strategy that has been
adhered to by many companies today is the opening of their capital in the stock
market.
This
idea is well placed as follows by Pinheiro: organizations must aim to make
financing of its investment or even restructuring of its liabilities have the
alternative of raising funds by securities also helped us with financing banks.
(PINHEIRO, 2012). The following Figure 2 shows some benefits and challenges of
opening the capital of a company.
By
observing this comparison chart you can see that there is a significant number
of disadvantages to going public, so the inclusion of organizations in the
stock market should not only be motivated to obtain funding, this action is
very costly and bureaucratic to companies. For it is evident that analyze along
with the benefits come responsibilities and obligations to be fulfilled.
However despite many obligations and a high cost to keep the organization in
the stock market is important to remember the advantages that the IPO may allow
an organization. With this action she has more opportunities to compete with
the competition making this opening a strategy which if managed effectively can
bring positive results for organizations (HARRISON, J., M.; KREPS, 1978).
Benefits |
Challanges |
·
Increase cash for the
company and / or liquidity for shareholders in a secondary placement issue. ·
Creation of a currency
exchange in the acquisition or incorporation with another company. ·
Increased visibility,
allowing for possible fusions, acquisitions or mergers. ·
Diversification of
funding sources (including optimizing the profile of debt / equity) enabling
effect growth strategies. ·
Possibility of
differentiated remuneration of staff through the purchase of company stock
options. |
·
Relevant costs
related to the IPO and maintenance of Listed Company. ·
Increase in recurring
costs and compliance costs. ·
Need to establish a
structure Investor Relations. ·
Need for meeting
specific standards regarding disclosure of information, including material
facts that may affect the pricing of the action. ·
Path of no return:
close the capital of a public company is difficult and very costly. ·
Less flexibility in
decision making and performance pressure. ·
Restrictions of
negotiation with shareholders with privilege information. ·
Vulnerability to
hostile takeover attempts. |
Figure 2 - Benefits and challenges of IPO
Source: Alves e Clark (2011).
Moreover,
with the IPO organizations start to incorporate corporate governance, which is
defined as "the system by which organizations are directed, monitored and
encouraged, by relationships between owners, board of directors, management and
control bodies " (Instituto Brasileiro de Governança Corporativa, IBGC,
2009).
The
Corporate Governance allows for clarity and for monitoring its members leaving
them abreast of what happens in the organization, thus the decisions taken by
the managers should be based on compliance with good corporate governance
practices, thereby avoiding financial scandals involving them, with these
practices put into action there is an incentive for the organization to work
with more professionalism through a transparent and ethical work (GABAIX,
2005).
Corporate
governance has principles that guide them, they are: Transparency, which may help promote feelings of confidence both
internally and with third parties. Concerns information to guide management
actions and collaborate to create value; Equity,
to treat fairly all partners and stakeholders; Accountability, provided by agents of governance, which assume all
the consequences that their actions may have; Corporate responsibility, sustainability of the organization must be
preserved by the agents of governance, aiming his longevity in the business
definition incorporates considerations of social and environmental issues (IBGC, 2009).
These
principles were suggested by IBGC for a more effective and transparent within organizations
that open their capital management, thus enabling an alignment of interests
making the same manager to make decisions favorable for shareholders and not
their own interests. If indeed these principles are put into practice the
organization may have more longevity in the market becoming more sustainable
and consolidated. The challenges to go public in the stock market are different
even for large companies, but small investors should start thinking
strategically forward thinking, innovation and sustainability analyzing the
potential and possibilities of opening their resources for shareholders an
interest in their respective companies (JEGADEESH, N.; TITMAN, 1993).
4. THE IMPORTANCE OF SMES IN BRAZILIAN ECONOMY
As
already stated in the introduction of this paper, SMEs have a relevant role in
our society, because they have grown quite significantly help in the economic
growth of the country, so it's important to know as it has been this
development. Recognizing that these companies leverage the development of the
economy is important that they are consolidated in the market and it is
necessary to adopt strategies. And to emphasize the importance of SMEs in the
Brazilian economy SEBRAE highlights via IBGE (Brazilian Institute of Geography
and Statistics) surveys the significant number of small and midsize businesses.
Table
1 shows the size, the branch of activity and quantity that there are legal
firms in Brazil comparing the years 1996 to the latest survey published in
2002.
Table
1 clearly shows the development of small enterprises in Brazil from 1996 until
2002, primarily micro businesses, the numbers show that these companies have
much growth potential thereby helping the country's economic development and
providing opportunities not only for investors and shareholders, but also for
people generate income through their work. This growth comes to reflect the
economic reality presently lived in Brazil. It is a developing country with
people who want and need to achieve financial independence, thus associating
with a partner or even a family company and consolidating new business ventures
as a strategy formulation and also reaching personal goals and accomplishments.
Table
1: Brazil - Number of formal enterprises by size and sector: 1996 - 2002
|
Micro |
Small |
Medium |
Large |
Total |
|||||
1996 |
2002 |
1996 |
2002 |
1996 |
2002 |
1996 |
2002 |
1996 |
2002 |
|
Industry |
332.049 |
439.013 |
27.011 |
37.227 |
6.375 |
6.548 |
1.521 |
1.430 |
366.956 |
484.218 |
Construction |
81.923 |
116.287 |
7.177 |
8.282 |
1.473 |
1.694 |
205 |
221 |
90.778 |
126.484 |
Commerce |
1.608.521 |
2.337.889 |
68.411 |
105.891 |
4.376 |
4.862 |
2.896 |
2.846 |
1.684.204 |
2.451.488 |
Service |
934.256 |
1.712.418 |
78.516 |
122.609 |
8.303 |
10.548 |
8.850 |
10.605 |
1.029.925 |
1.856.180 |
Total |
2.956.749 |
4.605.607 |
181.115 |
274.009 |
20.527 |
23.652 |
13.472 |
15.102 |
3.171.863 |
4.918.370 |
Source:
IBGE, Diretoria de Pesquisas, Coordenação de Serviços e Comércio, Pesquisa
Anual de Serviços (2004).
5. METHODOLOGY
The
present study used an approach of investigation that is constituted as a case
study. This approach was well established by Yin says that in his writings the
same as a method of empirical research that investigates a phenomenon, usually
within a real contemporary context, when the boundaries between phenomenon and
context are not clearly defined (YIN, 2001).
The
source used for the basis of this paper was the literature review which in turn
is developed based on literature, consisting mainly of books and scientific
papers (GIL, 2002, p 44). Beyond this material were also used institutional
sites that helped with the research with updated information about the studied
subject.
This
method allows the researcher to make an analysis of a real situation with a
certain phenomenon, allowing him to clarify the distance between the phenomenon
and context. Case study was conducted through open questions interview with CEO
of a small company of trading business in the region Capão Redondo in São Paulo
was performed to assess knowledge of the topic proposed in this study. The
company was chosen by convenience of the authors. The company fit in small
business and its interest to IPO. This organization operates for 40 years in
Capão Redondo / SP region, offering their products to local customers.
This
research has a qualitative approach, which in turn, makes use of description,
understanding and interpretation of facts and analyzed deeply and intensely the
phenomenon (MARTINS; THEÓPHILO, 2007). Through this analysis it is possible to
know more about the reality of the company researched.
6. ANALYSIS AND INTERPRETATION OF DATA
The
authors conducted an interview with the CEO of a company from the commercial
sector in the region Capão Redondo in São Paulo. To achieve the proposed
objective of this study, a questionnaire containing nine open questions was
used to assess the knowledge and perception of the interviewee about market
capital.
6.1.
Have
you ever heard about capital market?
The respondent showed his knowledge
about capital market stating that know capital market and the stock exchange.
Through
this response can be noted that the CEO have knowledge of the stock market and
demonstrate always seek knowledge by newspapers and specialized courses which
aims to inform entrepreneurs about economics, politics and other issues.
As shown in this research, it is
extremely important that investors and managers of organizations to seek
information about the economy and also knowledge about the stock market, to
have a good foundation when deciding to enter this market.
6.2.
What
kind of benefits do you think the capital market can bring to the economy?
In the opinion of the interviewee
invest in the stock market can be a risk. But managers can be successful if
makes a constant monitoring of its investments, a necessary control because of
the market fluctuations.
The stock market can bring risks to
the investor, but its positively oriented to society, because as mentioned in
this study, through investments of companies there is a greater propensity for
economic development, Pinheiro (2012) confirms this idea in his work.
6.3.
Do
you think it interesting that small investors have a savings or some sort of
investment banking with Certificate of Deposit?
The respondent stated that it is
important that the company has a reserve for emergencies, and that this
reservation is not necessary an investment. He also knows the CD, but not found
very advantageous to your business.
It is true that having a financial
reserve for possible emergencies is a form of prevention in times of financial
distress of a company. Pinheiro (2012, p. 74) states that the capital market
has also the function of stimulating the formation of private savings.
6.4.
Have
you heard of IPO? If you could do an IPO do you believe it would be interesting
for your business?
The CEO of the company showed to
have knowledge about IPO and said it would not be interesting for your company
because it does not have enough structure to emerge in this strategy.
The insight in this response make it
clear that some small investors still fear to invest in the stock market, even
by structural problems facing by the company, and the fact that this strategy
has risks, but he agrees that the best companies structured as medium and large
ones may think about the possibility of opening its capital to improve your
business.
This thought of the interviewed can
be based on the obligations to be fulfilled by CVM (Comissão de Valores
Mobiliários correspondent to Securities and Exchange Commission) regulations.
6.5.
What
opportunities and difficulties do you think can happen when a company goes
public on the stock exchange?
The interviewee has mentioned the
answer of question 2, showing that investing in stocks can be a risk, where the
company or investor can make profit or not. There are many challenges, as
showed in figure 2, is evident that the disincentives for the IPO are higher,
but if the control actions are managed efficiently this strategy can bring
results favorable for organizations.
6.6.
Have
you already received guidance of SEBRAE (Serviço Brasileiro de Apoio as micro e
pequenas Empresas – Brazilian Support Service for Micro and Small Enterprises)
about IPO?
The interviewee responded
positively, saying he received guidance SEBRAE about capital market and other
issues. But he was not interested, because in his view SEBRAE provides guidance
only for the professionalization of the employees and for the company itself.
SEBRAE existed since 1972 and aims
to give support to Micro and Small Enterprises and intended to promote
competitiveness and sustainable development of small and micro enterprises.
6.7.
In
the economic context in which we live, how do you see the importance of small
and medium enterprises to the country's economy?
According to the respondent SMEs
give much profit to the government through the taxes they impose, he emphasized
that the government should implement a single tax rate to encourage the
longevity of companies. The interviewee's answer clearly that SMEs move large
part of the economy.
The opinion of the manager on a
single rate may be feasible in the sense that the result of this action is that
these companies become more sustainable in the market and lower your mortality
rate by several factors.
6.8.
Have
you ever heard about Corporate Governance? How these practices could help the
management of your company?
The interviewee reported that does
not know this term, but know this management structure. But he does not believe
that this administration would be interesting for your company. As mentioned in
previous issues the manager does not find interesting IPO.
Corporate governance is present in
the management of the companies, because this practice makes all the investments
and strategies clear for investors.
6.9.
With
the economic difficulties experienced by the country, do you believe that small
and medium-sized businesses may find the stock market a possible solution to
their mortality and financial problems?
According
to respondent, the IPO is not a good idea for sustainability of a small or
medium business. To him one of the strategies that can be taken is to make a
provision of that will be spent by the company through planning, and also a
government plan to reduce taxes thus creating a single-rate form of taxation.
For
the analysis of this interview and the basis of our study it can be seen that
there is a barrier at the opening of capital, mainly because of the risks. The
investor said during the interview that small businesses do not have to open
its capital structure; this is possibly the reason why he believes the IPO does
not solve the financial difficulties.
7. FINAL
CONSIDERATIONS
The
current economic environment has been changing every day, where only survive organizations
that adapt to the economic reality, so it is essential that organizations seek
consistent and innovative strategies to stabilize and consolidate in the
environment making it sustainable preserving their longevity.
There
are many factors that lead the organization to leave the market; however, there
is a crucial factor for many of them, which is the financial issue.
With
this organizations started to formulate strategies intended to expand their
business. One strategy adhered by large companies is the IPO, but currently
this strategy is not only large companies, some SMEs have adhered to this
strategy, which if managed effectively can bring good results for the
organization.
The
IPO is costly and bureaucratic; this fact was evidenced by the interview of the
CEO. The main difficulty faced by the company was the risk, although the theory
shows the positive points of this strategy, we note that in practice the
negative points are very relevant.
Knowledge
and innovation should be a form of survival for companies wishing to
consolidate in the market. And the manager who has no motivation for these two
items may lag in this increasingly competitive market. Currently there are
several strategies for companies to be consolidated and one that can be viable
is IPO. To develop this action, managers has to study and a mind focused on
innovation, because they have to make the process as much clear and
advantageous they can.
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