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The Journal of Private Enterprise 30(1), 2015, 89–105
89
Darwinian Natural Selection or Political
Interference? A Political Economic History of the
Lisbon Stock Exchange
Maria Eugénia Mata
*
Universidade Nova de Lisboa
J. R. Costa
Instituto Superior de Ciências do Trabalho e da Empresa
David Justino
Universidade Nova de Lisboa
______________________________________________________
Abstract
This paper addresses the legal features of the Lisbon Stock Exchange. It
gives special attention to the trade networks, global performance, and
economic growth that have influenced that stock market over the centuries,
ultimately determining shareholder protection, market transparency, and
economic efficiency according to prevailing politics. Understanding the
prerequisites of stock markets will help to promote them in the future.
______________________________________________________
JEL Codes: N20
Keywords: government regulation of capital markets, transparency,
shareholder protection, Lisbon Stock Exchange
I. The Earliest Legal Aspects of the Lisbon Stock Exchange
Where did stock markets come from? Were they invented by
government or did they evolve over time? This article contrasts what
are essentially creationist versus Darwinian views of stock markets,
where the creationist view holds markets as suddenly invented by
government, and the Darwinian view considers them as a process of
market evolution. This article focuses on the evolution of stock
*
This paper belongs to our project “The Portuguese Cost of Capital,” and we
thank the Portuguese Science Foundation for support. We are also thankful for the
stimulus from António Manuel Hespanha to examine the juridical aspects of the
Lisbon stock market. We thank Rui Pinto Duarte for discussion, comments, and
assistance with references; João Amaro de Matos for assistance with references; and
John Huffstot for correcting our English. We also thank Joseph Love for
comments. Any remaining errors are our own.
90 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
markets in Lisbon and examines exchanges’ juridical features
throughout Portugal’s history. Although government was involved at
various points, a process of market selection determined many of the
outcomes.
There is much evidence that during the fifteenth century, at the
peak of the Portuguese discoveries, a rudimentary form of centralized
market existed in Lisbon as a response to two main problems:
mobilizing the large amounts of money necessary to finance the fleets
and the successive voyages, and dealing with the insurance premiums
to cover the associated risks (Santarém 1552; Amzalak 1958).
This market was not very organized, and all transactions were
conducted in the open air on a corner of a major downtown street,
Rua Nova, which most archival documents describe as the longest
and the noblest in the city. It served many professional
establishments, which made it vibrant, and it also connected the
many narrow and twisting medieval streets to the royal palace. The
presence of foreign merchants living in Lisbon or attending its
seaport explains why this rather informal market offered trading in
commodities, exchange letters, and foreign currencies. Milanese,
Genoese, and Florentines performed an important role in this kind of
financial business in Lisbon (Marques 1987, p. 176).
Additionally, the
traffic of commodities, in particular those brought from recently
discovered overseas regions, required funds for investment. At this
stage, one cannot yet speak of a specialized market, but of a business
center—a centralized market for freight, trade, insurance, and
negotiation—where extending credit and taking risk had to be
rewarded. As Stringham (2002, p. 14) writes about London, it was the
“need to attract business that allowed for discovery of better ways of
organizing and self-regulating.”
From the docks near the royal palace, fleets left for the
Mediterranean, France, Flanders, and Britain, and more and more
regularly for the Atlantic islands and Africa. In the 1500s, they also
sailed to India following da Gama’s voyage, which opened the Cape
sea route to that destination in 1498, and to the New World, crossing
the Atlantic, thanks to Columbus’s and Cabral’s voyages (Justino
1994, pp. 5–10; Ullrich 1906, p. 103). Local municipal authorities
oversaw trading in all these segments, with the operations on
exchange letters following Crown regulations (Justino 1994, p. 31).
The Lisbon Bourse also developed the professional expertise for
managing contracts, and the presence of brokers is documented in
archival sources on fourteenth-century municipal regulations for
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 91
urban provisioning businesses, and for maritime businesses thereafter
(Justino 1994, p. 11, quoting Oliveira 1891, pp. 92–94). In fact, the
law of August 23, 1342, compiled the rules for the exercise of the
brokerage profession and defined tabular data for the value of the
listing fees and intermediation commissions. This legal framework
represents the earliest known attempt to control transaction costs and
to provide for market transparency.
By the end of the fifteenth century, the royal law of February 15,
1492, reduced the number of brokers from twenty-five to twelve in
order to promote the implementation of a policy of professional
privileges to reward the king’s twelve most trusted aristocrats for
relevant services provided to the Crown (Justino 1994, p. 13). This
law reveals that the profession was upscale and profitable. It also
means that the profession was honorable in a society based on clear
social cleavages between common laborers and the highest strata,
which comprised respectable merchants and traders. Financial
business was not considered an unsavory way of life for the
Portuguese nobility (Godinho 1980). The warrior-merchant was a
gentleman, coupling military activities in Portugal or overseas with
benefits and profits, a noble condition of life.
All the revenues from listing fees and commissions on financial
businesses in that market were pooled together and shared equally
among all brokers, according to a 1458 resolution of the municipal
senate (Justino 1994, p. 22). As some brokers were more agile than
others in dealing with and negotiating the operations, two years later,
some of them complained to the king, but the equal division of the
revenues prevailed, and the new law of July 15, 1473, consecrated
that principle and even forbade competition among them (Justino
1994, p. 22). These facts illustrate that the government saw the
bourse, and the services it provided to trade and to long-distance
markets, as a public good whose dominant role was to fuel the
implementation of a geopolitical project for the nation. The original
1485 regulations (Regimento de 1485) also required that all operations
be recorded by a clerk in a single ledger as a corporation so that the
profits collected by the receiver could be equally divided among the
brokers, even though some of them had a larger portfolio of clients
and operations (Justino 1994, pp. 25–26). This means that a division
of labor within the corporation created specialized tasks among the
brokers. Penalties collected for disrespectful behavior were also
registered in the book, as well as some common costs of the
corporation (such as funeral expenditures upon a broker’s death).
92 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
The elevated esteem of the profession was clearly expressed in the
law of November 11, 1491, which stipulated that brokers should take
a leading position in the rank-structured file of Lisbon’s annual
Corpus Christi procession, which wandered from the cathedral
throughout the main streets of the capital city (Ullrich 1906, p. 102).
Market trust and confidence were decisive features, but they did
not prevent the authorization for the subestablishment of the
brokerage privilege, which was consecrated in the royal law of August
20, 1500. This meant that the brokerage function belonged to a
restricted number of nobles, who could delegate the practice of this
function to a specialized clerk under his responsibility, as clearly
registered in the regulation book for the profession (Livro do Regimento
dos Corretores).
There are four cases of individual brokers whose names are
followed by another name (Justino 1994, p. 13, quoting the Livro do
Regimento dos Corretores, follium 31 Vº). This regulation reveals that the
profession required technical abilities that only trained people could
provide, was very honorable from a social perspective, was in high
demand for the high revenues it could provide to the entitled person,
and was very conspicuous with the political authorities in order to
provide financial help to them, both at the central and local
(municipal) governmental levels. To implement market transparency
and maximize rewards for the regulatory authority, in 1500 it became
routine for the municipal senate to award those broker positions to
the highest bidder, thereby discontinuing the monopoly aristocratic
condition for applicants, because the condition of trader and
merchant could also lead to a personal nobility entitlement to attain
the warrior-merchant status (Justino 1994, p. 15).
Political authorities inspected the business of exchange letters to
apply penalties for usury behavior, but overlooked those penalties
against the opportunity of obtaining loans for the king and the
government. For example, in January 1443, the government bought
armaments in Bruges with the credit granted by local merchants and
paid by letters of exchange issued by Lisbon traders and merchants,
who lent to the central state (Justino 1994, pp. 33, 34). Then, brokers
could deal in maritime transportation, insurance, freight, credit,
exchange letters and currency exchanges, international trade, and
lending to government.
Domestic public debt (short-run floating debt and long-run
redeemable public debt) also became a financial business in the
Lisbon stock market because the Crown developed entrepreneurial
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 93
merchant (retail) activity in the Cape of Good Hope route shipping.
As public revenue was not enough to manage the huge colonial
empire that the government dared to build, the central state’s
participation in maritime shipping provided funding for new
undertakings (Godinho 1971, pp. 244–64). The nonspecialization of
the brokerage in each of these businesses may result less from the
small development of each one of these financial branches and much
more from the strong ties and interconnections among all of them,
which produced positive externalities and synergies to tackle all of
them simultaneously.
In the seventeenth century, complaints against the “impure
blood” of some individuals approved for the position of broker were
coupled with the compulsory character of their intervention in all
transactions, as they should encourage businesses rather than hinder
them. The royal law of October 28, 1718, defended their business
assistance as an important social mission to assure safety and
confidence, and also referred to their meetings in a house close to the
main downtown Lisbon location. The complaints may reveal a
decrease in the relative importance of the Lisbon Exchange in the
European context, as other countries developed powerful trade
companies as assertive and successful business organizations
(Stringham 2002, p. 4; Kindleberger 1984, p. 196).
The destructive earthquake that struck Portugal in 1755 forced a
thoughtful prime minister—the Marquis of Pombal—to tackle the
huge problems created by that catastrophe, especially the rebuilding
of a significant part of downtown Lisbon. Destruction, disruption of
trade, social turmoil, and deregulation of economic life led a group of
important Lisbon traders and merchants to ask for the use of a
collective donation to rebuild the customs house and the bourse (a
physical place for negotiation, dealing, and financial operations). The
decree of January 2, 1756, granted the collective donation, the decree
of May 28, 1926, created its rules as a disguised tax, and the decree of
January 16, 1758, ordered the reconstruction of the stock exchange
house. Pombal also founded in Portugal the first three limited liability
corporations, funded by shares, which led him to construct a proper
place within the Ministry of Finance, on the eastern side of the rebuilt
central square, to headquarter the Lisbon Stock Exchange. He also
decreed rules for that market to function properly on a daily
schedule.
94 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
These corporations brought a new business to the stock market,
1
leading some authors to define this moment as the birth of the
Lisbon Stock Exchange. In fact, economic functions propel stock
markets, and stock markets develop when larger enterprises require
large amounts of capital (Roe 2006, p. 1). This is the reason to
consider the first day for operations on January 1, 1769, as the
inaugural date for the Lisbon Stock Exchange (Justino 1994). The
issue of bonds with the character of exchange letters may be
considered as the first loan of the modern public debt, according to
the decree of October 29, 1796. These two features point to
corporate finance and bonds issuing as the criteria for defining the
existence of a real stock exchange (Brealey and Myers 2009).
Increased by the law of March 13, 1797, public debt was also a new
financial business and a very successful one in the conversion of
earlier public loans. Military expenditures, aggravated by the
Napoleonic invasions, obliged the exchequer to seek financial
innovation, particularly the issuing of paper money in the stock
market, according to the law of July 13, 1797.
II. The Plural Stock Markets Phase in Portugal
More recently, and in the northern part of Portugal, another
centralized market was put in place in the city of Porto, probably
following the spirit that Napoleon brought to the country as a result
of the three invasions of his army from 1808 to 1811. This second
market was necessary because of the local merchant community’s
needs: exports of port wine to Britain and elsewhere created
specialized farming and a large, wealthy merchant class. As Stringham
(2002, p. 2) writes, a stock exchange provides buyers and sellers a
location to meet in an orderly atmosphere. Spain established its first
exchange in Madrid, which opened on January 28, 1811, following
the royal decree of October 14, 1809, when Napoleon’s brother,
Joseph, ruled the country. The regulation of the decree of July 20,
1810, was clearly inspired by the Parisian model (Rojo 1977). The
Spanish War of Independence interrupted this market’s operations
for two decades, and the law of September 10, 1831, is now
considered as the juridical foundation of the Madrid Stock Exchange
(Cagigal 2009, p. 41).
1
The law of June 6, 1755, created the Companhia de Grão Pará e Maranhão; the
law of September 10, 1756, created the Companhia Geral da Agricultura e das
Vinhas do Alto Douro; and the law of August 13, 1759, created the Companhia de
Pernambuco e Paraíba.
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 95
The February 28, 1825, Portuguese regulations for the profession
(Livro do Regimento dos Corretores) mention twelve brokers in Lisbon, as
usual, and eight in Porto. It was a very liberal system of regulation.
The municipality of Lisbon lost the right of decision in the provision
of these positions in the capital city, as only technical abilities were
required, independently of conditions of birth. The bourse was no
longer conceived of as a corporation. Each broker would receive
compensation according to his own operation, and the revenue from
listing fees and commissions was no longer pooled. Moreover,
traders were not obliged to use the brokers’ intervention, something
that had been in practice for two decades: businesses were free to
devise anticompetitive strategies.
Two more things helped to modernize the financial sector in
Portugal. One was the emergence of the first bank in Portugal, the
Bank of Lisbon, authorized by the law of December, 31, 1821. The
other was the first commercial code of September 18, 1833, authored
by José Ferreira Borges. He acknowledges his inspiration in the
Prussian, Flemish, and French codes, which, once again, gives a
corporate character to the stock exchange (Ullrich 1906, p. 111). The
important legal framework for all commercial activities deserved
detailed regulations, and stock exchange businesses found them in
Code Title II, seeking to avoid volatility provoked by deregulation
(Borges 1856, pp. 7, 57, 106).
A different perspective prevailed in Spain, where Pedro Sainz de
Andino, the 1829 code’s author, avoided including any regulations on
stock markets, choosing to devote to this new market a separate law,
the law of September 10, 1831, that could be adjusted independently
of the commercial code. According to some interpretations, this
decision reflects a strong need for a stock exchange in Madrid to
issue public debt to support the construction of a state bureaucracy,
but at the same time it reflects great hesitation about the success of
an official market strongly regulated by government (Cagigal 2009, p.
41).
In Portugal, this was not the model, and the consequent
regulation book for brokers resulting from the first commercial code
of September 18, 1833, was approved much later by the decree of
January 16, 1837, which fixed the commissions for each kind of
operation and allowed for different rewards for the brokers. Public
debt had become an important segment of stock market operations,
because in spite of the abolition and withdrawal of paper money by
the decree of July 23, 1834, new debt was issued throughout the
96 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
1832–34 civil war. Specialization among the brokers was
recommended for Lisbon (into bill brokers, exchange brokers,
shipping brokers, stock brokers, insurance brokers, and custom-
house brokers) but not for Porto, meaning that the dimensions of the
two markets were very different. A room for brokers’ meetings was
also provided in Lisbon, contiguous to the trading floor, while in
Porto, only later did the law of June 19, 1841, give a building (the old
convent of São Francisco) to the city stock market.
The municipal archives preserve the books registering the
operations, exchange rates, and quotations for bonds, shares, and
securities in Lisbon dating back to 1837. The books list companies
and new banks, as well as more and more public debt, which was
issued for public works and for the military costs of the 1846–47 civil
war. A general conversion of all public debt (into a single 3 percent
consolidated loan), authorized by the decree of December 18, 1852,
simplified bond operations and created confidence in a central state.
Accelerated construction of railways from the mid-1850s onward also
contributed to new stock operations, and the law of June 22, 1867,
liberalized the creation of domestic limited liability companies and
regulated the entrance of foreign companies to operate in Portugal
(Mata 1998). Foreign enterprises needed to apply for government
authorization (from the Ministry of Public Works, Commerce, and
Industry) after submitting their statutes and pledging to abide by
Portuguese law and court rulings. Foreign companies were coming
more and more into sectors such as mining, insurance, engineering,
railway construction, urban gas illumination, and water provision to
urban centers (Mata 2008). Listings in the two stock exchanges of
Lisbon and Porto increased, and companies were to be audited
according to the same law of June 22, 1867. Listing was an important
step into foreign direct investment capital flows and global business
for Portugal.
Global business cycles afflicted the market in periods such as
1875–76, when the 1875 euphoria developed options, futures, and
warrants, and gave place to crisis and panic in 1876, particularly for
the owners of some bank securities. Inducing contractual
performance, financial behavior did not rely on law (Stringham 2003).
Transactions outside the official stock market worried government in
the aftermath of the crisis, as may be detected in the law of May 7,
1878, where the reasons for the creation of an additional percentage
to the stamp tax mention the existence of private bourses (bolsins)
whose transactions escaped transaction costs (brokers’ fees, bank
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 97
commissions, and taxes). Such a worrying attitude reveals the desire
to tax the provision of such services and also government’s vision for
the stock exchanges as a public good, calling for a legally defined
environment to ensure a seal of trust and confidence to the users to
avoid bad practice.
Private stock exchanges were a common situation in some
European countries whenever the initiative of merchants and traders
created self-regulated bourses under competitive intermediation,
some of which became large markets (even in the same city). “It is
choice that allows groups of freely associating individuals to discover
new ways of governing their conduct,” writes Stringham (2002, p. 2).
In Spain, the Barcelona Stock Exchange, whose operations date back
to the 1840s, and the Casino Mercantil, a local bourgeois club, are
good examples (Cagigal 2009, pp. 42, 43). The main difference is
their organization as free associations under private initiative (and not
as corporations), enjoying autonomy from government, under the
management of a commission of brokers.
In spite of long-rooted
experience in trade and insurance affairs (particularly in the
Netherlands, Belgium, and France), most stock exchanges are
recognized as nineteenth-century developments (New York, London,
Berlin, Milan, and Vienna), according to Ullrich (1906, pp. 64–69,
153–70, 414–16). And today, prominent differences in corporate
finance literacy may be due more to political events (such as the
differing participation in the world wars) than to differences between
the civil law and the common law systems for their legal environment
(Roe 2006, p. 1).
The first Portuguese commercial code (1833) could not cover
every kind of transaction and operation, and in the government’s
perspective it became obsolete after serving for fifty-five years. The
recovery from the 1870s crisis, which raised the Portuguese GDP to
a peak in 1875, brought the opportunity for more businesses, as well
as fears of herd behavior in a new speculative bubble, which could
lead to subsequent firm and bank failures in the downturn following
the burst. The enactment of a new code, published in the law of June
28, 1888, and known by the name of its author, Veiga Beirão, was an
attempt to regulate and to avoid bad practice.
2
This code did away
with the freedom to create new stock exchanges, official or not, and
forbade the existence of more than one stock market in the same city
2
The new code was published in the official journal Diário do Governo on September
6, 1888.
98 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
(Article 85).
3
Regarding foreign companies, the new code confirmed
all the features established in the law of June 22, 1867: decisions on
listing belonged to the Chamber of Brokers, domestic bonds were
automatically listed, and bonds from foreign countries needed
authorization from the Portuguese government to be listed.
Soon, however, a new global crisis affected both exchanges in
Portugal. The Baring crisis afflicted the kingdom not only because of
the traditional heavy dependence on public borrowing from these
bankers, but also because of their influences on the Portuguese
economy via Brazil. The crisis triggered the abandonment of the gold
standard in 1891 and the national treasury bankruptcy in 1892 (Mata
1993).
In this historical context, the exchange regulation from the decree
of October 8, 1889, was revised: in spite of giving the surveillance of
the stock markets in the kingdom to the government (to the Ministry
of Public Works, Commerce, and Industry, in particular), the issuing
of debentures did not require any authorization.
4
In the aftermath of
the crisis, even in banking, through the decree of July 12, 1894 (which
was converted into a law on April 3, 1896), the issuing of debentures
became subject to government authorization.
Despite the publication of the stock market regulations, the
regulation on brokers was missing. Among investors, the need for
more flexible rules on limited liability corporations was also felt for
the recovery.
5
The regulation on brokers was published only in this
same year, by the decree of October 10, 1901, and it would last until
1974. This means that the period from the Veiga Beirão code of
1888 to the 1901 regulations was a real first package of state
regulation, a genuine founding structure. Using the call-auction
system, assets were traded in the Lisbon stock market five days per
week, and once per day the brokers established the binding price of
all matched orders. Transparency was assured in this law-based
system, and a daily bulletin was issued with the equilibrium prices.
The bid and ask prices per asset were also available in the bulletin,
3
In Spain, the 1885 commercial code already included regulation for all Spanish
stock markets but recognized the existence of private stock markets. Valencia,
Santander, and Seville had their own stock markets, and in 1915, a fourth stock
market was created in Barcelona (Cagigal 2009, p. 45).
4
For a general view on the available concepts for economic life, see Duarte (1880).
5
The stock market regulations were published in the Livro do Regimento dos Corretores.
A synthesis on commercial law is available in Saldanha (1896).
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 99
which was released to the press for inclusion in leading daily
newspapers.
The twentieth century was a “stepmother” to the Portuguese
capital market due to a number of events that negatively affected its
development, if not its very survival. The new century came on the
heels of the Portuguese government’s bankruptcy in 1892. In 1908,
the king and the crown prince were both assassinated in an assault on
the royal carriage by two gunmen, and in 1910, a military coup
established a republic, ending a monarchic regime that had lasted
since the country’s birth in the twelfth century. The stock market was
very small at the beginning of the century: the 3:00 p.m. to 5:00 p.m.
schedule was enough for all transactions in 1901, and in 1910 was
even reduced to 2:00 p.m. to 3:30 p.m. In 1901, telegraph facilities
connected the Lisbon market to Paris, London, and Berlin, thanks to
a contract established with the Havas agency intended to allow the
following of European markets’ behavior, at a monthly cost of
46,130 reis. The most important companies listed were the banks,
water, urban gas and electricity provision, and companies having
colonial businesses.
6
The fact that the October 10, 1901, regulation
on brokers prevailed until 1974 shows that the volume and diversity
of businesses did not require legal adjustments.
For a short time, a decree of April 13, 1911, required the
disclosure of more accounting information from listed companies
and their surveillance by government.
7
The First World War
interrupted normal operations in businesses and financial markets
and introduced restraints, while “British capital controls helped New
York displace London as the world’s largest market” (Hennart 1998,
p. 84). As in any war, financial distress reduced asset prices in foreign
markets and increased transaction costs (Amihud and Mendelson
1986, pp. 223–49). In Portugal, decree 1645 of June 15, 1915,
authorized the creation of privileged shares in limited liability
companies, but it was suspended by law 340 of July 30, 1915, to be
reintroduced by decree 4118 of April 18, 1918. The postwar recovery
was brief and abruptly interrupted. The confusion that followed the
first republic led to the revolution of May 28, 1926, which established
an authoritarian regime lasting until 1974. The Great Depression
(1929–1939) was severe globally, but drew attention to the need for a
6
These companies were listed in Bulletins, Euronext historical archive.
7
The Repartição Técnica de Fiscalização das Sociedades Anónimas, created by the decree
of January 14, 1911, as a mixed direction for statistics, also.
100 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
separate housing for the commodity exchange (Associação Industrial
Portuguesa 1930).
Following the Depression, stock-market trading volumes could
only increase until 1939, then dropped again until the end of the
Second World War, when historical sources indicate that transactions
of real estate and securities from nonlisted companies were helping to
support the stock market.
8
In many nations, even wealthy ones such
as France, Germany, and Italy, “the polity did not support capital
markets in the immediate post-war decades” (Roe 2006, p. 2).
Perhaps the same can be said of Oliveira Salazar’s government.
Although nationalizations did not occur (as in those countries),
public capital penetrated many companies in sectors such as
electricity, water provision, transport, and communications. Portugal
remained a neutral country throughout the war, and export
opportunities, war refugees, and capital inflows brought some
prosperity, paving the way to a golden age of economic growth in
Portugal in the 1950s and 1960s.
Joining the Marshall Plan and the Organisation for European
Economic Co-operation in 1948 brought considerable cooperation
with European partners and brought Portugal into close contact with
global stock markets. The postwar period was the most successful
growth period in Portugal’s history, with sustained economic growth
of 2–5 percent annually in the 1940s and 1950s, and 5–7 percent
annually in the 1960s, following Portugal’s participation in the
European economic integration process. A genuine economic
modernization and urbanization occurred (Amaral 2003; Maddison
2001). The period witnessed the formation of conglomerates through
firms’ affiliation under the government’s development policy. This
policy may have been a critical survival mechanism for small firms by
allowing them to benefit from homeland and colonial markets in a
wild and inhospitable international business environment. The most
important were family groups and venture capital firms.
9
Within the context of the European Free Trade Association
(EFTA), Portugal converged with its partners in regulations on
corporations and the issuing of shares and debentures in decree
8
Daily Bulletins, 1940–45, Lisbon Stock Exchange Historical Archive.
9
These groups and firms were the CUF (Mello family), the Sommer group
(Champalimaud family), the Fonsecas and Burnay, and the Espírito Santo Martins.
Maria Belmira, Sociedades e Grupos em Portugal (Lisbon: Estampa, 2nd ed., 1975), pp.
21–65.
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 101
44652 of October 27, 1962, and in the new Civil Code of 1966.
Thanks to the development of agricultural cooperatives in the
context of the EFTA, decree-law 49184 of August 11, 1969, created
the legal background for group agricultural associations.
Concerning the financial sector, a decree-law of January 6, 1969,
quoting the 1967 British Companies Act, regulated associations’
ownership in establishing the rules for the securities market. The
reason was the domain of companies in case of divergent views or
conflicts of interest between boards of directors and auditing
committees (Duarte 2008, pp. 42, 43).
10
Mergers and crossed-capital
participations (groups of companies that invest in one another’s
businesses) strengthened several economic groups. Listing flourished,
and corporations greatly increased their equity. In many companies,
ownership separated from control, and corporate governance became
powerful.
11
Although corporations often relied on the firm’s reserves
and provisions in funding increases of capital, and venture capital
firms frequently used bank loans, this period witnessed considerable
issuing of share capital in the stock market. Enthusiasm increased,
and decree-law 1/72 of January 3, 1972, regulated the profession of
official auditors, their professional chamber, and the auditing firms in
order to guarantee transparent accounting and a clear appraisal of
corporations’ financial situations.
As legal uniformization of procedures was underway in the
European Economic Community, the Portuguese regulation on
mergers dating from the old 1888 commercial code was considered
to be insufficient, in spite of Portugal’s participation in the EFTA
and not in the European customs union. Regarding mergers and
demergers, decree-law 598/73 of November 8, 1973, adopted the
European laws in advance (Duarte 2008, p. 55, quoting Ventura
1972). Just before the first oil shock (in the last quarter of 1973),
which greatly affected the Western world, decree 8/74 of January 14,
1974, was a real novelty in promoting a more stimulating background
for the stock exchange. In the decree’s preamble, the legislator states
that the stock market’s impact on economic growth critically
10
The motivation for decree-law 1/71 was to prevent the merger of Bank Pinto &
Sotto Mayor related to an economic group (Champalimaud) with another
successful bank, Banco Português do Atlântico, revealing government fears about
large concentration and economic power.
11
On the criteria for historians to discover this separation, see Hilt (2008, p. 652)
and Ullrich (1972).
102 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
depended upon the old legal, regulatory, and political environment
prevailing in the country since “the archaic decree of October 10,
1901.”
12
If it was already a constraint to the number of operations in the
exchange when its pace was slow, it was “a real blockade against the
spectacular growth” the exchange was experiencing then.
13
The
decree prepared the juridical environment of stock markets in the
country for a sizeable multiplication of operations and negotiation, in
the context of the highest GDP growth rates ever experienced in
Portugal. Strongly influenced by the finance secretary of state, Luís
Sapateiro, it opened the possibility of creating autonomous exchanges
in any Portuguese city where the volume, frequency, and expectations
of transactions should require a market. Autonomous exchanges
should be under the surveillance of one of the two exchanges (Lisbon
or Porto), and the whole market was to be coordinated and overseen
by the Ministry of Finance for conflict arbitrage, with the help of a
consulting board comprising the governor of the central bank, the
president of the public debt general office (Junta do Crédito Público),
representatives of the banking and insurance sectors, and
representatives of firms and exchanges.
Decree 8/74 of January 14, 1974, also imposed many duties on
the corporations listed in the stock market, particularly regarding
their admission. Shareholder protection, fixed fees, and strong
enforcement were key features.
14
All of this was meant to result in
greater stock market capitalization, initial public offerings, and a
greater number of publicly traded companies (La Porta et al. 1997; La
Porta et al. 1998). The decree also regulated term operations and
brokerage firms headed by the duly authorized stockbrokers. The
daily schedule was divided into specialized operations,
15
administrative practices were detailed according to brokers’
specializations, and brokers elected appointments to the specialized
positions (on bonds, commodities, insurance, etc.).
The decree promised a large and multiplied transaction system
that would be long lasting, but it was suddenly interrupted by the
1974 military revolution and is recalled as an interim package of
12
Decree 8/74 of January 14, 1974.
13
Ibid.
14
Penalties for disrespectful behavior were also established (articles 53, 133, and
134 of decree 8/74, published in the official newspaper Diário do Governo, I Série,
no. 11, January 14, 1974, p. 42-(12) and (22).
15
An example of specialized operations was options and primes in the first hour.
Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105 103
regulation. Portugal experienced a military coup (the Carnation
Revolution) on April 25, 1974, with strategic consequences for the
domestic economy (and therefore the domestic stock exchange as
well).
In Portugal, the aftermath of the Carnation Revolution put an
end to centuries of business and Darwinian-selective legal and
organizational improvement. Political reasons must be included to
explain the close convergence of juridical features to other countries.
Joining the European Union in January 1986 brought a new
credibility to the country’s future, which led to a progressive opening
of borders to financial investment from abroad (adding upward
pressure to the price of any Portuguese asset). This upward pressure
also occurred because the market was so small that even small
influxes of cash fueled discussions on the juridical background.
Coupled with the privatization program during the 1990s, the
country executed an unexpected miracle that was so impressive it
drew the attention of several other European exchanges, a fact that
led in February 2002 to the merger of Portugal’s markets with others
in what was then called the Euronext Group. Institutional
convergence assured that in a few years, it was possible to overcome
most of the fears regarding small size and establish a “normalized”
capital market that is open to foreign investors and mature enough to
accommodate the overreaching aims of capital-free circulation in a
global perspective.
III. Summary and Conclusions
The Lisbon Stock Exchange is a special example that other
countries have looked at to gain insight. Market stability, harmony
according to convenience, and guidance according to behavioral aims
have been the main concerns in the legal framework in the one
hundred years of the Lisbon Stock Exchange. The promotion of
more perfect market interactions was implemented over the centuries
in preserving rational methods and collective intelligence in stock
markets. Established as a reference system, the regulations on the
Lisbon exchange survived according to a Darwinian natural selection
process.
Portugal seems to be a singular case of response to concrete
market challenges due to two special characteristics of its own
history. On the one hand, the pressures stemming from the
discoveries in the endeavors of the fifteenth century dictated the
centralization of a market in Lisbon, where commodities, financing,
104 Mata, Costa, & Justino / The Journal of Private Enterprise 30(1), 2015, 89–105
and insurance could be traded in order to cope with the needs of
those discoveries. On the other hand, domestic and geopolitical
aspects of the following centuries disturbed the smooth development
of such centralized markets in Portugal. Since then, the role of the
Portuguese trade and financial services in the global network of
financial operations has been reflected in the special legal rules and
settings that framed the Lisbon Bourse.
Stock markets underpin advanced markets, and there is a debate
about how to best promote them. Legal origins and frameworks
affect finance, but politics and globalization dictate the tools to build
markets and advance economically. Depending on political
conditions, exchanges may disappear under unfavorable polity or
flourish suddenly in a stimulating political environment. Although
centralized markets, like any other economic activity, were born out
of and responded to the economic needs of their “clients,” recent
years have seen profoundly important legal and organizational
changes in most stock markets around the world.
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