Confidence Building in Emerging Stock Markets

Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.http://deepblue.lib.umich.edu/bitstream/2027.42/39750/3/wp366.pd

Outside Finance, Dominant Investors and Strategic Transparency

This paper studies optimal financial contracts and product market competition under a strategic transparency decision. When firms seeking outside finance resort to actively monitored debt in order to commit against opportunistic behaviour, the dominant lender can influence corporate transparency. More transparency about a firm's competitive position has both strategic advantages and disadvantages: in general, transparency results in higher variability of profits and output. Thus lenders prefer less information dissemination, as this protects firms when in a weak competitive position, while equityholders prefer more disclosure to maximize profitability when in a strong position. We show that bank-controlled firms will be opaque, while shareholder- run firms prefer more transparency. In fact, we can predict a clustering of characteristics associated with bank dominance: opaqueness, low variability of profits, slightly reduced average profits, uncertainty about assets in place, and relatively high financing needs all should be observed jointly for bank controlled firms.corporate governance; transparency; bank finance; product market competition; capital structure

Confidence Building in Emerging Stock Markets

Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?

Dominant investors can influence the publicly available information about firms by affecting the cost of information collection. Under strategic competition, transparency results in higher variability of profits and output. Thus, lenders prefer less transparency, since this protects firms when in a weak competitive position, while equity holders prefer more. Market interaction creates strategic complementarity in gathering information on competing firms, thus entry by transparent competitors will improve price informativeness. Moreover, as the return to information gathering increases with liquidity, increasing global trading may undermine the ability of bank control to keep firms opaqu

The Circulation of Ideas in Firms and Markets

Novel early stage ideas face uncertainty on the expertise needed to elaborate them, which creates a need to circulate them widely to find a match. Yet as information is not excludable, shared ideas may be stolen, reducing incentives to innovate. Still, in idea-rich environments inventors may share them without contractual protection. Idea density is enhanced by firms ensuring rewards to inventors, while their legal boundaries limit idea leakage. As firms limit idea circulation, the innovative environment involves a symbiotic interaction: firms incubate ideas and allow employees leave if they cannot find an internal fit; markets allow for wide ideas circulation of ideas until matched and completed; under certain circumstances ideas may be even developed in both firms and markets.

Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance ?

Dominant investors can influence the publicly available information about firms by affecting the cost of information collection. Under strategic competition, transparency results in higher variability of profits and output. Thus lenders prefer less transparency, since this protects firms when in a weak competitive position, while equityholders prefer more. Market interaction creates strategic complementarity in gathering information on competing firms, thus entry by transparent competitors will affect price informativeness. Moreover, as the return to information gathering increases with liquidity, increasing global trading may undermine the ability of bank control to keep firms opaque.corporate transparency; corporate governance; financial markets; product market competition

Investment Financing in Russian Financial-Industrial Groups

We study whether Russian Financial-Industrial Groups facilitate access by Russian firms to investment finance. We compare firms which are members of official Financial Industrial Groups and/or are owned by a large Russian bank with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first. This is consistent with extensive reallocation of resources within the groups to overcome capital constraints. One interpretation is that group firms have an internal capital market which facilitate access to finance. We test this view against the alternative ossibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' absolute and relative investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. While investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), there is a negative significant correlation for bank-led firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Most intriguingly, the greater sensitivity of group firms' investment to Q is entirely attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.http://deepblue.lib.umich.edu/bitstream/2027.42/39628/3/wp242.pd