A World Bank Finance Research Feature, May 23, 2006
At a recent conference on the Financing of Corporations in Emerging Countries (organized by the World Bank, the University of Virginia’s Darden School of Business, and the Journal of Financial Economics), researchers highlighted the importance of good governance and institutions in improving access to finance in emerging countries.
New evidence presented at this March 2006 gathering at the World Bank’s headquarters in Washington, D.C. showed that financial development, stronger creditor and shareholder rights, and greater disclosure and transparency of financial data improved access to both debt and equity financing.
“The World Bank is interested in and concerned about emerging market finance for many reasons,” said World Bank economist Leora Klapper, a co-organizer of the conference. “Financial access can stimulate real economic activity, promote long-term growth, and reduce poverty and income inequality.”
The research presented at the conference focused on the importance of growth-promoting financial policies, which are a critical part of the investment climate facing firms and households.
Policies should enforce full disclosure of financial and ownership information
Research findings showed the importance of financial disclosure and transparency to improve access to credit. These findings highlighted the role of public policy in enforcing full disclosure of financial and ownership information to market participants.
However, researchers also emphasized the importance of private contracting and enforcement and found no evidence that strong government regulators promote market development.
Djankov, La Porta, Lopez-de-Silanes and Shleifer showed that equity market performance is related to better shareholder protection laws at the country level, including private enforcement mechanisms such as greater disclosure requirements and litigation options.
Using a comprehensive firm-level database of US overseas investment, Leuz, Lins and Warnock showed that firms with weaker governance and ownership structures are less likely to receive institutional investment.
Bertrand, Johnson, Samphantharak and Schoar collected detailed ownership data and constructed family trees for the 100 largest family-owned firms in Thailand. They showed that following the founder’s death, families with more sons have lower firm-level performance. This might be explained by dilution of ownership, the struggle for control among sons, and the incentive to tunnel resources before other family members do.
"An important outcome of the conference was that several researchers highlighted the importance of good country-level laws and firm-level governance decisions for the development of financial markets and private sector growth," said Asli Demirguc-Kunt, Senior Research Manager (Finance) at the World Bank.
Political patronage and corruption can distort access to finance
The World Bank is already engaged in efforts to improve government transparency and reduce government ownership in the financial sector. This was supported by research findings presented at the conference that showed how political patronage and corruption can have a distortionary effect on access to finance.
For instance, Claessens, Feijen and Laeven presented evidence that political donations in Brazil are associated with future preferential access to financing. Also, Chari and Gupta found that in India, state-owned firms and large firms in concentrated industries are more likely to prevent the entry of foreign competitors.
These two papers suggest that political influence might distort financing and entry decisions.
Being cross-listed on a foreign exchange can help local firms raise more capital
Does cross-listing on a foreign exchange hurt local exchanges by moving trading overseas or improve them by greater visibility and possible improvement in governance of cross-listed firms?
Evidence presented at the conference showed that internationalization might help the development of local exchanges and can help local firms raise more capital.
Gozzi, Levine, and Schmukler showed that cross-listing provides additional financing, but did not find evidence that internationalization improved the governance of local firms.
However, Ferreira and Matos showed that cross-listing increased foreign ownership of both American Depositary Receipts (ADR) shares traded in the U.S. as well as foreign ownership of shares traded on the local exchange.
Their finding that in some instances cross-listings might not be harmful to local exchanges is important for the policy debate over the effect of ADRs and overseas listings on the future of local exchanges.
Complete list of papers
For more information, contact Leora Klapper at the World Bank at firstname.lastname@example.org
Bertrand, Marianne, Simon Johnson, Krislert Samphantharak, and Antoinette Schoar, 2005, Mixing Family with Business.
Chari, Anusha and Nandini Gupta, 2005, The Influence of Domestic Firms on Foreign Direct Investment Liberalization.
Claessens, Stijn, Erik Feijen, and Luc Laeven, 2005, Does Campaign Finance Imply Political Favors? The Case of the 1998 Brazilian Elections.
Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2005, The Law & Economics of Self-Dealing.
Ferreira, Miguel and Pedro Matos, 2005, The Colors of Investors’ Money: Which Firms Attract Institutional Investors From Around the World?
Gozzi, Juan Carlos, Ross Levine and Sergio Schmukler, 2005,Internationalization and the Evolution of Corporate Valuation.
Leuz, Christian, Karl Lins, Francis Warnock, 2005, Do Foreigners Invest Less in Poorly Governed Firms?