Bercuson, Kenneth B. and Linda M. Koenig, “The Recent Surge in Capital Inflows to Asia: Cause and Macroeconomic Impact,” paper presented at the SEACAN/IMF Seminar, May 14-16, 1993, Seoul, Korea.
Blommestein, Hans J., and Michael Spencer, “The Role of Financial Institutions in the Transition to a Market Economy,” IMF Working Paper, WP/93/75, October 1993.
Brainard, Lawrence J., “Strategies for Economic Transformation in Central and Eastern Europe: Role of Financial Market Reform,” in Transformation of Planned Economies, ed. by Hans Blommestein and Michael Marrese, OECD, 1991.
Calvo, Guillermo A., Leonardo Leiderman, and Carmen Reinhart, “Capital Inflows to Latin America,” IMF Working Paper, WP/92/85, October 1992.
Calvo, Guillermo A., Leonardo Leiderman, and Carmen Reinhart, “The Capital Inflows Problem: Concepts and Issues,” IMF Paper on Policy Analysis and Assessment 93/10 (Washington: IMF, 1993).
Cho, Y.J., “Inefficiencies from Financial Liberalization in the Absence of Well Functioning Equity Markets,” Journal of Money, Credit and Banking, May 1986.
Claessens, Stijn and Moon-Whoan Rhee, “The Effect of Equity Barriers on Foreign Investment in Developing Countries,” NBER Working Paper No 4579, December 1993.
Chuppe, Terry M. and Michael Atkin, “Regulation of Securities Markets,” Policy Research Working Paper WPS 829, The World Bank, January 1992.
Dailami, Mansoor, and Michael Atkin, “Stock Markets in Developing Countries: Key Issues and a Research Agenda,” Policy Research Working Paper WPS515, The World Bank, October 1990.
Darrat, Ali, and Tarun Mukherjee, “Behavior of the Stock Market in a Developing Economy,” Economic Letters, Vol. 22, 1986, pp.273–78.
Demirguc-Kunt, Asli and Harry Huizinga, “Barriers to Portfolio Investment in Emerging Markets,” Working Paper 984, The World Bank, May 1992.
Diamond, D. W., “Monitoring and Repudiation: The Choice between Bank Loans and Directly Placed Debt,” Journal of Political Economy, Vol. 99, 1991.
El-Erian, Mohamed A., “Restoration of Access to Voluntary Capital Market Financing--The Recent Latin American Experience,” IMF Staff Papers, March 1992.
El-Erian, Mohamed A., “Comments on Globalization of Financial Markets,” in Teunissen (ed.), The Pursuit of Reform: Global Finance and the Developing Countries, 1993.
El-Erian, Mohamed A., “Selected Aspects of Developing Countries’ Evolving Relations with International Capital Markets,” Pakistan Business Recorder, January 1994.
Ekechi, Augustine 0., “On Testing For Stock Market Rational Speculative Bubbles: The case of LDC Markets,” Savings and Development, No. 3, 1990.
Errunza, Vihang, and E. Losq, “Capital Flow Controls, International Asset Pricing, and Investors’ Welfare: A Multi-Country Framework,” Journal of Finance, Vol. XLIV, No. 4, September 1989, pp.1025–1037.
Errunza, Vihang, Lemma Senbet, and Ishac Diwan, “Country Funds: Theory and Evidence,” Paper presented at the World Bank Symposium on Portfolio Investment in Developing Countries, World Bank, September 1993.
Flood, Robert P., “A Nontechnical Guide to Recent Academic Research on Stock-Market Volatility,” Mimeo, Research Department, IMF, March 1993.
International Monetary Fund, Private Market Financing for Developing Countries, World Economic and Financial Surveys, IMF, Washington D.C., December 1993.
Kapur, D. and M. Ravallion, “Rational Expectations and Long-Run Equlibria: Tests for Indian Securities,” Economic Letters, 1988, pp.363–367.
Kumar, Manmohan S., “Asset Price Developments in Emerging Markets: The Case of Hong Kong,” Draft Working paper, Research Department, IMF, January 1994.
Mayer, C.P., “Myths of the West: Lessons from Developed Countries for Development Finance,” Working Paper No 301, Policy, Planning and Research in Development Economics, The World Bank, November.
Mirakhor, Abbas, and Delano Villanueva, “Strategies for Financial Reforms,” Staff Papers, IMF, Vol. 37, September 1990, pp.509–30.
Papaioannou, Michael and Lawrence Duke, “The Internationalization of Emerging Equity Markets, Finance and Developemnt, September 1993.
Schinasi, Garry J. and Monica Hargraves, “Boom and Bust in Asset Markets in the 1980s: Causes and Consequences,” Chapter 1 in Staff Studies for the World Economic Outlook, IMF, December 1993.
Singh, Ajit and Javed Hamid, Corporate Financial Structures in Developing Countries, Technical Paper 1, International Financial Corporation, May 1992.
Shleifer, Andrei, and Robert Vishny, “Large Shareholders and Corporate Control,” Journal of Political Economy, Vol. 94, June 1986, pp.461–88.
Shiller, Robert J., “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends,” American Economic Review, June 1981.
Stiglitz, Joseph. E., and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, June 1981.
Summers, Lawrence H., “Does the Stock Market Rationally Reflect Fundamental Values?,” The Journal of Finance, Vol. XLI, No. 3, July 1986.
Tesar, Linda and Ingrid Werner, “U.S. Equity Investment in Emerging Stock Markets,” Paper presented at the World Bank Symposium on Portfolio Investment in Developing Countries, World Bank, September 1993.
Note that this is according to the classification used by the Economist which counts Hong Kong and Singapore as part of the emerging markets. The IFC regards both these countries as developed markets. It should also be noted that many other countries, including several former centrally planned economies, are in the process of developing equity markets.
Liquidity can be taken to mean the ability to move in and out of the market with low transaction costs. Transaction costs in this context include the ease and speed associated with buying and selling equity shares as well as the ability to transact at prices that are known reasonably well in advance.
Newly established markets in the former Soviet Union (like Belarus and the Ukraine) are also put in this group, recognizing that there may be significant differences between the operations of these markets and others in the group.
These shifts, even if small from the standpoint of the investing countries, may result in inflows and outflows which are rather large in relation to the size of the recipient equity markets.
The World Economic Outlook, October 1992, highlights important aspects of stabilization and structural reform policies in several developing countries.
As discussed in Section IV, benefits from portfolio diversification are also a factor behind these inflows.
This result is based on an analysis of a group of major developing countries composed of Argentina, Brazil, Chile, India, Korea, Malaysia, Mexico, Taiwan Province of China, and Thailand using panel data (breaking each country’s export growth performance and equity returns over 1976-91 into four four-year periods).
In a cross-country regression, Mullin regresses mean annual returns against cumulative growth rates for exports and dividends per share, as well as a commonly used measure of risk (beta coefficients). The fitted regression errors tend to be positive among the developing countries and negative among the developed countries. In addition, the coefficient on an added dummy variable for developing countries is positive and statistically significant.
For an assessment of factors affecting capital inflows into Asian countries, see Bercuson and Koenig (1993). For a discussion of the broader issues related to developing country access to international capital markets, see El-Erian (1993, 1994).
Antecdotal evidence also indicates that positions have been taken on the volatility of equity prices by using derivative instruments.
That is, of the fraction of the U.S. equity portfolio that is held in the form of international equities, roughly 12 percent is allocated to emerging stock markets, roughly their share in global capitalization.
For a detailed analysis of the pricing behavior and diversification benefits of country funds see, for instance, Errunza et al (1993).
In the last three years equity flows have largely taken place through American and Global Depository Receipts, country funds, followed by direct purchases and foreign country offerings (see Claessens and Rhee 1993). Depository receipts are receipts issued by financial intermediaries in industrial countries against shares held in custody by these intermediaries in the developing countries.
These constraints have been analyzed at length in the literature on financial liberalization in developing countries. See, for example, Mirakhor and Villanueva (1989), and Villanueva (1991).
In countries where there is a shortage of managerial talent, individual managers are less likely to suffer adverse consequences on their reputations, and future employment and earnings prospects, from having taken on riskier projects that failed. In this way, there would seem to be stronger incentives to take on higher-return-but-higher-risk projects in situations with relatively less stringent consequences on reputation.
It can, of course, be recognized that this section of the paper describes situations outside the realm of Modigliani-Miller (MM) models in which, under a specified set of assumptions, the value of a firm and its cost of capital are unaffected by its financing mix between debt and equity. MM assumes, inter alia, that capital markets are perfect, business risk can be measured, and all investors have identical expectations about future earnings. The MM-type world clearly doesn’t hold under the conditions being discussed in this section of the paper.
The issue here revolves around the “free-rider” problem: If individuals hold a tiny slice of the equity of any one firm, it gives them little incentive to incur the costs of monitoring management--since most of the benefit of their monitoring would accrue to other shareholders. For a discussion of the role of the takeover mechanism in enforcing managerial discipline, and how it too depends on dispersion of equity holdings, see Kumar (1984), and Shleifer and Vishny (1986).
The advantages of diversification may, however, be overstated to the extent that the observed low correlations reflect speculative bubbles in some of the emerging markets.
A few studies have also examined the relationship between stock market development and economic growth, and found a significant effect. For instance, for a sample of 40 industrial and developing countries, Atje and Jovanovic (1993) found that the higher the ratio of all stock market trades to GDP, the higher the growth of per capita income. Value of trades is regarded as more appropriate than capitalization because in some countries like Jordan, in spite of high capitalization, little trading takes place and the stock market seems to play a limited role in allocating funds.
For a discussion of this issue in the case of Hong Kong, see Kumar (1994). From a historical perspective, it is worth recalling the experience of several Latin American countries in the late 1970s and early 1980s when a sharp run up in equity prices was followed by a precipitous decline (see Calvo et al (1992)).
See Blommestein and Spencer (1993) for an overview of the importance of the banking system in the development of securities markets.
Cho (1986) makes the theoretical case for the need to foster equity markets as part of a comprehensive financial liberalization strategy when credit markets are characterized by imperfect information. He does so, however, under the implicit assumption that equity markets are well functioning.
See Demirguc-Kunt et al (1993) for an analysis of the significance of non-resident taxation in determining equity costs in emerging markets. They show that capital gains taxes on non-residents significantly increase required pre-tax equity returns.