The Substitute Model of Dividends at Work: a change in minority shareholder protection

The Brazilian company law reform of 1976, which improved the minority shareholders protection but preserved the corporate power structure concentrated, provides an experiment to test the Substitute agency theory of dividends. Are dividends a substitute for the legal protection of shareholders? In the pre-reform low-legal-protection Brazilian market, growth firms issuing equity in the future used to signal proper governance through higher dividends. With the reform protecting minority shareholders, dividend payouts do not generally increase but decrease from unrestricted firms, mature firms' payouts do not increase but decrease for growth firms. All these according to the Substitute narrative of dividends.