some macroeconomic implications of alternative compensation systems a basic theme of this paper is the idea that some structural reform of employee compensation arrangements is necessary to make reasonable price stability compatible with reasonably full employment in this view even the best designed macroeconomic policies are much too aggregative to get at the heart of the stagflation problem the ultimate solution involves going inside the workings of a modern capitalist economy and correcting the underlying structural flaw directly on the level of the individual firm stagflation represents an especially intractable policy dilemma for macroeconomics without a decisive tendency of the economic system to remain near full employment there is a strong prima facie case for fighting recessions by exogenously stimulating aggregate demand but the usual keynesian expansionary policies tend to impart an inflationary inertia that is difficult to choke off and of course the basic strategy for fighting inflation is to cool down the economy by restrictive monetary and fiscal policy thereby increasing unemployment and closing the viscous circle because the practical macroeconomic policies for dealing with unemployment and inflation are so diametrically opposed stagflation is a pervasive structural problem when for whatever reason there is basically an unfavourable short run tradeoff between unemployment and inflation economic policy tends to vacillate between expansion of demand to fight unemployment and restriction of demand to fight inflation polarising the electorate and distracting society from dealing effectively with its underlying real economic problems even the difficulty of attaining external balance in foreign accounts is largely a spillover into the international payments arena of an inability to achieve an acceptable internal balance between full employment and price stability this paper takes what might be called a comparative systems approach to the problem of stagflation at the heart of modern industrial capitalism is an incredibly complicated system of overlapping monopolistic competitors 2 a starting point for the paper is the realisation that the coordination difficulty which can cause some systems to suffer involuntary unemployment is not inherent in laissez faire private enterprise per se it is closely tied to one particular property of a conventional wage payment system namely compensation of each firm s employees is stuck to an outside numeraire whether money or a cost of

absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth abstract this study examines the effects of foreign direct investment fdi and equity foreign portfolio investment efpi on economic growth using data on 80 countries from 1979 through 1998 the results largely suggest that lagged fdi and efpi do not have direct unmitigated positive effects on growth but some data are consistent with the view that the effects of fdi and efpi are contingent on the absorptive capacity of host countries with particular respect to financial or institutional development moreover extreme bound analysis eba of significant results indicates that the estimates are robust compared to other empirical studies on growth

new issues in corporate finance flow of funds data are used to compare methods of finance in 5 countries over the period 1970 to 1985 many of the problems associated with previous studies are avoided by estimating net instead of gross financing proportions the degree of consolidation of accounts reciprocal arrangements between borrowers and lenders and compensating deposit requirements on borrowers no longer distort financing patterns corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures significant variations in financing emerge these are not readily explained by traditional descriptions of corporate finance in particular taxation as an alternative the paper suggests that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long term finance the separation between investment and finance which has been the starting point of corporate finance theory is untenable in a multiperiod context in which terms of finance define future allocation of control

callable risky perpetual debt with protection period abstract issuances in the usd 260 bn global market of perpetual risky debt are often motivated by capital requirements for financial institutions we analyze callable risky perpetual debt emphasizing an initial protection grace period before the debt may be called the total market value of debt including the call option is expressed as a portfolio of perpetual debt and barrier options with a time dependent barrier we also analyze how an issuer s optimal bankruptcy decision is affected by the existence of the call option by using closed form approximations the model quantifies the increased coupon and the decreased initial bankruptcy level caused by the embedded option examples indicate that our closed form model produces reasonably precise coupon rates compared to numerical solutions the credit spread produced by our model is in a realistic order of magnitude compared to market data

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

a theoretical model for valuing preferred stock this paper develops a model of preferred stock value which includes the possibility of dividends on the preferred stock being omitted the analytical framework used is based on the option hedging methodology of black and scholes precise valuation formulae are obtained for cumulative and noncumulative preferred stock in a variety of contexts the values obtained are quite different from those for either riskless or risky perpetual bonds which have previously been proposed as being similar to preferred stock since 1970 an average of 3 billion dollars worth of capital has been raised annually by corporations in the united states in the form of preferred stock in spite of this impressive figure there has been very little theoretical analysis of preferred stock valuation while previous analysis e g merton 9 and ingersoll 7 has treated preferred stock as a corporate consol bond this view is not taken here for an essential feature of preferred stock is that omission of the dividend is permissible and does not precipitate bankruptcy whereas this would happen if a bond coupon payment were missed corporations can and do fail to pay preferred dividends from time to time particularly in times of severe economic depression herein is developed a theory of preferred stock valuation the return generating process for the firm is assumed to be a continuous time diffusion and the option hedging arguments of black and scholes 2 cox and ross 4 and other authors can be used to derive a functional form of preferred stock value in terms of firm value and dividend arrearage the key to the valuation theory lies in a particular assumption about the conditions under which preferred stock dividends are omitted this assumption is that all dividends are omitted whenever firm value falls below some critical amount all the theory is developed subject to this assumption section i of this paper discusses whether such an assumption is reasonable this section carefully examines conditions under which rational management seeking to maximize common shareholder wealth would pay dividends as suggested in section ii the basic model is described and solved some generalization is obtained in section iii where allowance is made for the possible coexistence of other claims such as bonds illustrative solutions to the model are provided

institutional determinants of capital structure adjustment speeds abstract many authors relate a firm s performance to legal and political features and the regulatory environment in which it operates this article compares firms capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds we find that legal and financial traditions significantly correlate with firm adjustment speeds more narrowly institutional features also relate to adjustment speeds consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm s leverage such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade off theory of capital structure choice

employment effects of minimum and subminimum wages panel data on state minimum wage laws using panel data on state minimum wage laws and economic conditions for the years 1973 89 the authors reevaluate existing evidence on the effects of a minimum wage on employment their estimates indicate that a 10 increase in the minimum wage causes a decline of 1 2 in employment among teenagers and a decline of 1 5 2 in employment for young adults similar to the ranges suggested by earlier time series studies the authors also find evidence that youth subminimum wage provisions enacted by state legislatures moderate the disemployment effects of minimum wages on teenagers

the role of debt and perferred stock as a solution to adverse investment incentives we analyze the optimal mix of debt common equity and preferred equity in a model with an investment opportunity and asymmetric information about its quality and show that an all equity financed firm will overinvest issuing the appropriate amount of debt before the project becomes available resolves this overinvestment problem introducing a second motive for debt such as taxes leads to a role for preferred stock as a means of enhancing the firm s debt capacity by creating additional incentives to invest we derive an opti mal capital structure involving debt preferred stock and common stock this paper examines the ifnpact of a firm s capital structure on its subsequent investment decisions we assume that a firm s equityholders receive private information about the quality of a project that must be funded externally before the project becomes available and before the information asymmetry exists however the equityholders can choose a capital structure from among debt preferred stock and common stock we show that a subsequent informational asymmetry about project quality induces fully equity financed firms to overin vest that is to accept some negative net present value investments this overin vestment will be reflected in security values prior to the investment we then demonstrate that an appropriate initial debt issue eliminates this suboptimal in vestment behavior and results in an optimal initial debt equity ratio not based upon taxes bankruptcy costs or other exogenous factors we then allow for a corporate tax advantage to debt that leads the firm to issue additional debt however the additional debt creates an underinvestment problem we demonstrate that preferred stock has features that generate incen tives for equityholders to invest and so preferred stock enhances the firm s debt capacity i e the firm can issue more debt in conjunction with preferred stock without creating an underinvestment problem

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

debt versus equity under asymmetric information in a world of asymmetric information in which only the insiders know the quality of the firm it is claimed that debt even if it is risky is more advantageous than outside equity because issuance of debt is less attractive to inferior firms the advantage to debt arises from the fact that it can keep unprofitable firms out of the market thus improving the average quality of firms in the market this advantage exists even if the firms cannot be perfectly sorted in the signaling equilibrium

bank runs in emerging market economies evidence from turkey s special finance houses recent banking crises in emerging market countries have renewed debates about deposit insurance because insurance erodes banks incentives to manage risks prudently some argue that its elimination would improve bank stability yet eliminating insurance could be de stabilizing if it recreates risks of self fulfilling runs this paper examines dynamics of depositor behavior during a set of runs on turkey s special finance houses an uninsured sub sector of islamic banks detailed data on withdrawals are analyzed in a vector autoregressive framework that enables us to distinguish between informational and self fulfilling elements of runs we found that both types of dynamics were at work during the runs suggesting a role for deposit insurance judiciously used in ruling out expectational problems that fuel tendencies to run

the impact of the minimum wage on other wages in this paper i explore how changes in the minimum wage affect various occupational wages i postulate that other wages increase for two reasons first firms try to mitigate the deterioration in a worker s relative wage which would cause him to reduce his work effort and second there is an increase in the demand for nonminimum wage workers wage adjustment patterns are examined to ascertain whether wage comparisons play a role in the adjustment process the empirical work shows a short run wage compression among white collar occupations which is consistent with the wage comparison model however large standard errors make inferences weak

where the minimum wage bites hard introduction of minimum wages to a low wage sector between 1993 and april 1999 there was no minimum wage in the united kingdom except in agriculture in this paper we study the effects of the introduction of a national minimum wage nmw in april 1999 on one heavily affected sector the residential care homes industry this sector contains a large number of low paid workers and as such can be viewed as being very vulnerable to minimum wage legislation we look at the impact on both wages and employment our results suggest that the minimum wage raised the wages of a large number of care home workers causing a very big wage compression of the lower end of the wage distribution thereby strongly reducing wage inequality there is some evidence of employment and hours reductions after the minimum wage introduction though the estimated effects are not that sizable given how heavily the wage structure was affected

the impact of minimum wages in mexico and colombia there are diverging views about how minimum wages affect labor markets in developing countries advocates of minimum wages hold that they redistribute resources in a welfare enhancing way and can thus reduce poverty improve productivity and foster growth opponents on the other hand contend that minimum wage interventions result in a misallocation of labor and lead to depressed wages in the very sectors the rural and informal urban sectors where most of the poor are found with the effect of wasting resources and reducing the growth rate data from colombia and mexico for the 1980s provide an opportunity to evaluate the impact of minimum wages in mexico in the 1980s the minimum wage fell in real terms roughly 45 percent by 1990 mexico s minimum wage was about 13 percent of the average unskilled manufacturing wage during the same period the minimum wage in colombia increased at nearly the same rate reaching roughly 53 percent of the average unskilled wage the author charts how the mandated minimum wage affected the demand for skilled and unskilled labor in both countries during that decade findings are as follows in mexico minimum wages have had virtually no effect on wages or employment in the formal sector the main reason the minimum wage is not an effective wage for most firms or workers in the informal sector in turn there is considerable noncompliance with the mandated minimum wage especially among part time and female workers as a result significant numbers of workers are paid at or below minimum wages in colombia minimum wages have a much stronger impact on wages judging from their proximity to the average wage and both cross section and time series estimates the estimates imply that the elasticity of low paid unskilled employment with respect to minimum wages is in the range of 2 to 12 percent

third world debt and its effects on the british economy a southern view of economic mismanagement in the north when citicorp one of the largest banks in the world announced its decision to make a us 3 billion provision against third world loans in may 1987 almost every commentator agreed that it represented a turning point in the debt crisis it marked the end of the major banks policy of turning a blind eye to the debt crisis after years of unrealistic projections false hopes and promises in the north and with a third world debt already well above us 1 000 billion the banks suddenly began to speak of debt realities see for instance morgan guaranty s world financial markets june july 1987 this realism was a pre condition for overcoming one of the main stumbling blocks to any solution of the crisis namely the reluctance of the main creditor banks to acknowledge the impossibility of recovering the full face value of their ldcs loans

ipo underpricing and international corporate governance it is well established that a link exists between a country s legal system and the size liquidity and value of its capital markets we study how differences in country level governance affect the underpricing of initial public offerings ipos examining 4462 ipos across 29 countries from 2000 to 2004 we find the surprising result that underpricing is higher in countries with corporate governance that strengthens the position of investors relative to insiders we conjecture that when countries give outsiders more influence ipo issuers underprice more to generate excess demand for the offer which in turn leads to greater ownership dispersion and reduces outsiders incentives to monitor the behavior of corporate insiders in other words underpricing is a cost that insiders pay to maintain control in countries with legal systems designed to empower outsiders consistent with this control motivation for underpricing we find that underpricing has a negative association with post ipo outside blockholdings and a positive association with private control benefits in addition firms whose insiders are entrenched either by majority ownership or by dual class structures do not underprice more in countries with better governance in these firms the ownership structure protects managers from outside influence eliminating the incentive to increase outside ownership dispersion through underpricing

the political economy of the maoist conflict in india an empirical analysis we study the maoist naxalite conflict in india by constructing a comprehensive district level database combining conflict data from four different terrorism databases to socioeconomic and geography data from myriad sources using data on 360 districts for three time periods we find that land inequality and lower incomes are important factors behind the conflict exploiting the micro structure of the data we show that growth of incomes of scheduled tribes significantly decreases the intensity of the conflict finally we show that historical property rights institutions from colonial times that go back centuries affect present day conflict outcomes

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

insiders incentives for asymmetric disclosure and firm specific information flows abstract recent research suggests that insiders incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news jin and myers 2006 we investigate whether insiders incentives for private control benefit proxied by control ownership wedge affect firm specific return characteristics we find that control ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news overall our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow

the impact of the introduction of the u k minimum wage on the employment probabilities of low wage workers this paper uses longitudinal data from three contrasting data sets matched labor force surveys the british household panel survey and matched new earnings surveys to estimate the impact of the introduction of the u k minimum wage in april 1999 on the probability of subsequent employment among those whose wages would have needed to be raised to comply with the minimum a difference in differences estimator is used based on position in the wage distribution no significant adverse employment effects are found for any of the four demographic groups considered adult and youth men and women or in any of the three data sets used jel j38 j23

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

executive turnover and firm performance in china executive turnover and its link to firm performance can provide a crucial measure of how effectively a firm solves the two sets of principal agent problems a the diverging interests between top management and shareholders which may result in managerial entrenchment and b the diverging interests between controlling shareholders and minority shareholders which may lead to the expropriation of the latter by the former or tunneling as referred to in the literature tying the personal fortune of top executives to the firm s performance aligns the interests of shareholders and those of management it also breaks up the insider alliance between the controlling shareholder and management thereby helping protect the interests of minority shareholders although there is a large literature on executive turnover in western firms research on executive turnover in non western firms is limited and this paper is the only one on china a closer look at the executive turnoverperformance link in china one of the two major internal discipline mechanisms in corporate governance is particularly relevant since effective markets for corporate control are missing in china the largest developing and transitional economy in the world furthermore china is an interesting case because both types of agency problems are acute due to poorly defined property rights and weak investor protection which result largely from its command economy legacy

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

minimum wage effects across the private and public sectors in brazil abstract most of the available evidence on the effect of minimum wages concerns the private sector of developed countries in this paper we examine minimum wage effects in both private and public sectors for a key developing country we use monthly data from a brazilian household survey from 1982 to 2000 we find a strong compression effect in the wage distribution for both the private and public sectors however we find no evidence of adverse employment effects in either sector at the aggregate level or for vulnerable groups such as teenagers women and the low educated hence minimum wage policies in brazil appear to be a potentially viable anti poverty instrument

islamic economics the emergence of a new paradigm the authors illustrate the potential impact of the islamic doctrine on western economic relationships by focusing on the prohibition of interest riba in islamic economics they show that the alternate method of financier remuneration i e mudarabah profit and loss sharing will under certain conditions enhance capital investment on account of its ability to act as an efficient revelation device by applying ideas developed in the western contract literature the authors show that a mudarabah contract between the manager of a project and a syndicate of investors may permit a more efficient revelation of any informational asymmetries between the two copyright 1994 by royal economic society

from state to private ownership issues from strategic industries abstract this paper investigates the effects of privatization for a panel of 189 firms from strategic industries headquartered in 39 countries and privatized between 1984 and 2002 strategic firms can hardly be compared to manufacturing or competitive industries as they are generally under state monopoly and involve specific issues such as regulation political and institutional constraints we examine the change in ownership and postprivatization means of control by the government and assess whether positive changes in performance obtain in these particular industries that include firms from the financial mining steel telecommunications transportation utilities and oil sectors we document that governments continue to exert influence on former state owned firms after three years by retaining golden shares and or appointing politicians to key positions in the firm our multivariate results reveal a negative effect of state ownership on profitability and operating efficiency which the presence of a sound institutional and political environment moderates

the effects of minimum wages on employment theory and evidence from britain recent work on the economic effects of minimum wages has stressed that the standard economic model where increases in minimum wages depress employment is not supported by empirical work in some labor markets we present a general theoretical model whereby employers have some degree of monopsony power which allows minimum wages to have the conventional negative impact on employment but which also allows for a neutral or positive impact studying the industry based british wages councils between 1975 and 1992 we find that minimum wages significantly compress the distribution of earnings but do not have a negative impact on employment

board independence and operating performance analysis on french company and individual data this article studies the relationship between board independence and firm operating performance in french listed companies we take advantage of an original database with a time series dimension that can be used to mitigate heterogeneity and dynamic endogeneity issues in addition this database can be disaggregated at the individual director level this design enables us to introduce firm fixed effects and individual fixed effects in firm performance equations thereby controlling for heterogeneity at the firm and individual levels our main result is to document a significant negative relationship between independence and accounting performance this result suggests that in the french context the costs of independence i e the informational gap supported by independent directors compared to insiders and affiliated directors outweigh the benefits of independence i e the reduction in agency costs

the agency problems embedded in firm s equity investment we find that agency problems are embedded in firm s excess and abnormal equity investments that are mainly dictated by controlling shareholder s motives and ethical choices manifested in ownership and board structure the excess equity investment is gauged with respect to industry average the abnormal equity investment is specifically referred to the number of nominal investment companies that are fully controlled by the controlling owners while subject to little governance our empirical evidences of 345 taiwanese non financial listed firms show that firm s excess and abnormal equity investments are negatively correlated with controlling shareholder s cash flow rights while are positively correlated with the control cash flow deviation and board affiliation the results are supportive of the positive incentive hypothesis and the negative entrenchment hypothesis put forth by la porta et al 2002 journal of finance57 1147 1171 and claessen et al 2002 journal of finance57 2741 2742 the negative relation between equity investment and firm s value further supports the agency postulation that corporate excess and abnormal equity investments represent a leeway for controlling shareholder to exploit wealth of minority shareholders this study potentially contributes to the literature of business ethics by portraying an empirically testable linkage from controlling owner s ethical choices to his actions and therefore firm s value

blockholdings in europe an international comparison abstract we preview empirical work by the european corporate governance network on the size of block shareholdings in europe the most salient finding is the extraordinarily high degree of concentration of shareholder voting power in continental europe relative to the u s a and the u k thus the relationship between large controlling shareholders and weak minority shareholders is at least as important to understand as the more commonly studied interface between management and dispersed shareholders

legal harmonization institutional quality and countries external positions a sectoral analysis abstract motivated by the action plan for a european capital markets union cmu this paper analyzes the potential for legal harmonization and convergence in institutional quality to affect capital market integration based on hand collected data on the implementation of eu directives our analysis yields three key insights first legal harmonization promotes portfolio equity holdings second discrepancies in institutional quality matter primarily for cross border debt positions third the relationship between external investments and harmonization varies significantly across sectors the non bank financial corporations which account for a large share of portfolio positions react more to institutional harmonization than do banks and the non financial private sector

strategic urban projects in amsterdam and new york incomplete contracts and good faith in different legal systems contracts between local government and private investment agencies play an important role in strategic urban projects real estate cycles provide only a narrow window of opportunity within which to draft such contracts a legal system should therefore not impede the possibility of reaching an agreement quickly instead it should facilitate efficient ways of reaching an agreement lengthy contracting may contribute to the persistence of real estate market cycles this paper explores the question of whether the civil law principle of good faith facilitates the drafting of incomplete contracts which may be efficient in situations of high uncertainty and complexity as was the case with two strategic inner city projects the south axis in amsterdam and battery park city in new york city the paper further establishes that good faith does play a considerable role in the differences in contracting practice

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

can equity volatility explain the global loan pricing puzzle we examine whether equity volatility can explain the difference in syndicated corporate loan spreads paid by u s and european borrowers first documented by carey and nini 2007 we argue that ols estimates of the association between equity volatility and loan spreads are biased and inconsistent we suggest instrumental variables that potentially identify consistent estimates our instrumental variable results indicate that there is no statistically significant difference in loan spreads paid by u s and european borrowers and that ols estimates of the association between idiosyncratic equity volatility and corporate loan spreads are biased downward by about a factor of 5

r d investment and financing choices a comprehensive perspective abstract we posit that the effects of r d investment on financing choices depend on the degree of intervention barriers and appropriation discrepancy between capital providers and the firm based on these two contingencies we categorize financing instruments into four types common equity common stock convertible securities preferred stock and convertible debt transactional debt corporate bonds and relational debt bank and commercial loans from the experiences of 39 petroleum firms during the period 1976 2005 we found r d investment has a positive effect on the use of common equity a u shaped effect on the use of convertible securities and an inverted u shaped effect on the use of relational debt to raise capital these effects are sustained over several years

institutional differences and the development of entrepreneurial ventures a comparison of the venture capital industries in latin america and asia this paper examines how differences in distinct institutional clusters of countries impact on the vital entrepreneurial activity of venture capital and how individuals organizations and their collective action in turn shape those institutions the focus on venture capital offers researchers the opportunity to view an industry that comes from a common root with strong and consistent traditions in which to examine how the differing institutional settings impact on behaviors in different markets and how the institutions themselves may change in these settings we also focus on emerging economies since such economies offer a natural laboratory to study the impact of institutional change specifically this paper employs an institutional theory perspective to examine venture capital in two regions of the world that form institutional clusters of countries latin america and asia it is found that the venture capital industry exhibits a strong consistency across many dimensions yet institutions in these two distinct settings result in significant differences in industry practice therefore this research is able to contribute to both empirical and theoretical understanding of emerging economies institutions in those environments and venture capital

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

a reassessment of the new economics of the minimum wage literature with monthly data from the current population survey we estimate the employment effects of federal minimum wage increases using monthly current population survey cps data from 1979 through 1997 we find that the empirical differences in the new minimum wage literature based on cps data primarily can be traced to alternative methods of controlling for macroeconomic conditions we argue that the macroeconomic controls commonly included in models where no employment impact is found are inappropriate we consistently find a significant but modest negative relationship between minimum wage increases and teenage employment using alternative controls or allowing employer responses to the policy to occur with some delay

the value of the voting right a study of the milan stock exchange experience i study the large premium 82 percent attributed to voting shares on the milan stock exchange the premium varies according to the ownership structare and the concentration of the voting rights and it can be rationalized in the presence of enormous private benefits of control a case study seems to indicate that in italy private benefits of control can easily be worth more than 60 percent of the value of nonvoting equity a tentative explanation for these findings is provided traditional finance theory disregards the value of voting rights in pricing common stock in most cases this omission does not seem harmful many studies of differential voting stocks in different countries have indicated that voting rights are generally worth between 10 percent and 20 percent of the value of common stock the italian evidence i present differs sharply from this view in italy voting shares that have inferior dividend rights trade at an average premium

developing countries changing nature of financial integration and new forms of external vulnerability the brazilian experience this article argues using the example of brazil that the changing nature of developing and emerging countries decs financial integration has created new forms of external vulnerability causing large and volatile capital and exchange rate movements despite sound fundamentals and a substantial reduction in its traditional external vulnerabilities the brazilian real has been one of the most volatile currencies over recent years the article argues that this has been the result of the surging exposure of foreign investors in an increasingly complex set of very short term domestic currency assets following a minskyan analysis we demonstrate that the changing nature of brazil s external vulnerability confirms both the inherent and endogenous instability of international capital flows and decs subordinate role in the international financial system we conclude with policy recommendations to reduce decs external vulnerability sustainably

level dependent annuities defaults of multiple degrees abstractmotivated by the risk of stopped debt coupon payments from aleveraged company in nancial distress we value a level dependentannuity contract where the annuity rate depends on the value of anunderlying asset process the range of possible values of the asset isdivided into a nite number of regions the annuity rate is constantwithin each region but may di er between the regions we considerboth in nite and nite annuities with or without bankruptcy risk i e bankruptcy occurs if the asset value process hits an absorbing bound ary such annuities are common in models of debt with credit risk in nancial economics suspension of debt service under the us chap ter 11 provisions is one well known real world example we presentclosed form formulas for the market value of such multi level annuitiescontracts when the market value of the underlying asset is assumedto follow a geometric brownian motion the authors thank zheng huang and bernt ksendal for comments and discusssions an earlier version of this paper has been presented at fibe 2008 nhh keywords multi level annuity credit risk nancial distress jel classi cations g33 g13 g32

do countries matter for voluntary disclosure evidence from cross listed firms in the us this paper explores the likelihood and consequences of voluntary disclosure proxied by management earnings forecasts for a sample of 1005 cross listed firms in the us from 40 countries over the period 1996 2005 our study is grounded in a three tiered conceptual framework that relies on insights from and implications of institutional theory agency theory and bonding theory to explain the costs and benefits associated with voluntary disclosure consistent with institutional theory and agency theory our results indicate that disclosure likelihood increases with the strength of cross listed firms home country legal institutions and is also influenced by us listing type product market internationalization and ownership structure further our results show that voluntarily committing to us disclosure practice is associated with lower information asymmetry which supports reputational bonding theory overall our study provides a costs and benefits framework to understand voluntary disclosure practices in an international context our work also presents evidence that home country institutions still matter when foreign firms migrate into the us financial market which highlights the importance of country level institution development

foreign tax credit limitations and capital structure decisions this paper extends prior studies by collins and shackelford 1992 and froot and hines 1995 that investigate the impact of foreign tax credit ftc limitations on firms capital structure decisions binding ftc limitations reduce the marginal tax benefit of domestic interest deductions and provide incentives for firms to substitute equity financing for domestic debt collins and shackelford 1992 document a positive relation between the impact of ftc limitations and changes in firms preferred stock accounts during 1986 89 froot and hines 1995 unable to isolate domestic debt changes document that firms with excess ftcs decreased their worldwide debt growth in 1986 91 but they do not find evidence that ftc limitations influence a shift away from debt and into preferred stock financing thus these two studies find conflicting evidence regarding whether ftc limitations influence firms to use preferred stock as a financing vehicle and neither study provides direct evidence regarding a decline in domestic debt or a potential common

sharing contracts marginalisation adverse selection and markup calculation this paper proposes a new approach to explain the dominance in the islamic banking market of markup contracts at the expense of sharing ones we show that the dual pricing practised in this market produces an additional or artificial dimension of adverse selection which is causing the sharing contracts marginalization we suggest specialized use of two islamic contractual categories as a device for eliminating artificial adverse selection we suggest also an endogenous calculation of the markup that is independent of the interest rate based on the financing cost unification this approach allows the deduction of default and liquidity risk premiums

noncooperative equilibrium and market signalling among many recent developments in the economics of information none has generated more controversy than the concept of market signalling introduced by a michael spence if buyers are less well informed about product quality than sellers and no additional information is available market clearing prices must reflect some weighted average of product quality then if potential sellers of the highest quality products have the greatest opportunity costs and these costs exceed price they will not enter the market this adverse selection phenomenon is however offset if sellers of higher quality products can adopt activities that operate as a signal to potential buyers intuitively an activity is a potential signal if entering into it has a lower marginal cost for sellers of higher quality products for example the fly bynight operator faces a higher advertising cost per unit of sales than the new entrant who plans to build and then maintain his reputation or in the labor market productivity on the job is positively correlated with performance in school therefore the higher productivity worker has on average a lower personal cost of obtaining a given set of educational credentials similarly in purchasing insurance the marginal cost of accepting a higher coinsurance rate for a specific loss is lower for those with a lower probability of loss but on closer inspection it turns out that informational equilibria that is equilibria in which signalling is needed to distinguish product quality do not have the stability properties of classical walrasian equilibria in papers by michael rothschild and joseph stiglitz and the author 1975 1977 it has been shown that unless the difference between quality levels is sufficiently large there is for every set of signal price pairs s some alternative s 4 s which if offered by a single seller would improve his lot that is there is no cournot nash signalling equilibrium one possible inference that might be drawn from this result is that signalling could not be an important phenomenon in a competitive economy after all if any attempt at signalling were to result in interference in the form of competitive responses there would be no opportunity for individuals to identify the correlation between the level of the signal and the underlying quality of the product however this is too simplistic since the interference cannot take place until after signalling has been established it is therefore more appropriate to suppose that an economy is initially in a state of informational equilibrium with signals reflecting product quality and to ask whether the potential instability is likely to lead to a general collapse of the equilibrium following the approach adopted by charles wilson there have been several related attempts to introduce quasi dynamic considerations in which every agent takes into account the reaction by other agents when contemplating a defection from the initial set of signal price pairs s it is then argued that the set s forms a stable equilibrium if for every alternative s that would make a single defector better off this same signalprice pair would make the defector worse off after the reaction by other agents where these attempts differ is in the university of california los angeles this research was supported by national science foundation grant soc 76 13443 to the rand corporation

optimal debt and equity values in the presence of chapter 7 and chapter 11 explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders in the first best outcome reorganization adds value to both parties via higher debt capacity lower credit spreads and improved overall firm value if control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers most of the benefits are appropriated by borrowers ex post lenders can restore the first best outcome by seizing this control or by the ex post transfer of control rights reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only the u s bankruptcy code which includes a liquidation process chapter 7 and a reorganization process chapter 11 aims to resolve a number of important issues associated with a distressed firm these issues can be classified into information asymmetry problems e g quality of the firm heinkel and zechner 1993 agency problems e g risk shifting jensen and meckling 1976 or coordination problems e g debt of various maturities berglof and von thadden 1994 in this paper we investigate whether there is a place for a reorganization process in the presence of costly financial distress and liquidation these costs capture in reduced form the aforementioned frictions we wish to characterize the states of a borrowing firm relative to its outstanding contractual debt obligations at different stages of financial distress assuming full information and a single issue of debt we also seek to determine the role played by the bankruptcy code in improving the welfare of borrowers and lenders and how its influence depends on the rights given to borrowers and lenders at various stages of financial distress more precisely we build on structural models of debt merton 1974 black and cox 1976 which allows us to determine overall firm value along with the values of equity and debt in line with this literature we assume that liquidation destroys part of the firm s value we then ask the basic and yet important

the balance of power in closely held corporations abstract we analyze a closely held corporation characterized by the absence of a resale market for its shares we show that the founder of the firm can optimally choose an ownership structure with several large shareholders to force them to form coalitions to obtain control by grouping member cash flows a coalition internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than would any of its individual members the model has implications for the optimal bundling of cash flow and voting rights and for the optimal number and size of shareholders

reviewing the business case for corporate social responsibility new evidence and analysis this study complements previous empirical research on the business case for corporate social responsibility csr by employing hitherto unused data on corporate social performance csp and proposing statistical analyses to account for bi directional causality between social and financial performance by allowing for differences in the importance of single components of csp between industries the data in this study overcome certain limitations of the databases used in earlier studies the econometrics employed offer a rigorous way of addressing the problem of endogeneity due to simultaneous causality although the study s results provide no evidence that there is a generic or universal business case for csr they indicate that there is a strong link between single stakeholder related issues of csr and financial performance however the analysis does not establish causality within these relationships

islamic corporate governance risk sharing and islamic preferred shares the recent financial crises including the asian and subprime crises indicated the need to reinforce corporate governance mechanisms in emerging and developing market economies corporate governance refers to all the factors that affect firm processes including among others financing strategies firms must avoid debt financing instruments and adopt financing instruments that allow for risk sharing rather than risk shifting because all recent financial crises were in essence debt crises the primary objective of this paper is to examine the principles of risk sharing promoted by islamic finance and study their implications for corporate governance the secondary objective of this paper is to propose a pricing model for a new risk sharing financial instrument islamic preferred shares ips that was recently discussed by zarka and al suhaibani shariah compatible preference shares the sharia basis and economic rationale working paper sabic chair for islamic financial market studies 2012 we study the implications of this new instrument as a powerful tool for corporate governance in the case of islamic markets we explain the possible contribution of ips to agency cost reduction sharia screening costs and ethical corporate governance

the simple macroeconomics of profit sharing this paper is in the spirit of the temporary equilibrium approach to macroeconomics it basically extends that framework to cover a profit sharing system and then compares the macroeconomic characteristics with those of the more familiar wage system a first preliminary step is to demonstrate how a microeconomic model of monopolistic competition can be built up into a junior member of the keynesian macro family the methodology is to create from first principles including a careful formulation of a monopolistically competitive product market structurea natural underpinning for the standard aggregate demand specification the primary goal of the paper is to apply the integrated monopolistic competitionkeynesian type apparatus described above to investigate the macroeconomic properties of a profit sharing economy the existence of a consistent general framework covering both cases invites meaningful comparisons that indicate clearly why an economy based on profit sharing principles possesses natural immunity to stagflation by contrast the wage economya system we have largely accepted without critically examining its macroeconomic consequences is more prone to suffer from unemployment and inflation the policy implications for aggregate demand management in wage and share systems are analyzed and contrasted in writing this paper my philosophy has been to not shirk from using those reasonable parameterizations and functional forms which yield nice crisp results and permit me to focus sharply on the essential logic of basic issues it is certainly possible to present the main results in a somewhat more general formulation as the astute reader will appreciate but i fear only at some cost of distracting attention from those central features i wish to highlight

investor yield and gross underwriting spread comparisons among u s dollar domestic yankee eurodollar and global bonds abstract the characteristics and features of domestic foreign eurobonds and global bonds differ from one another as do their regulation we develop regression models to compare investor yield differences that should logically exist at issuance for these bond market segments for u s dollar denominated bonds our empirical results show that ceteris paribus both privately placed and rule 144a eurodollar issues yield more than publicly placed bonds yankee bonds yield insignificantly more than domestic bonds and the bearer feature common to eurodollar bonds is not prized enough by institutional investors for them to accept a lower yield relative to domestic or yankee bonds we do not find a statistically significant difference between the investor yield spread on u s dollar global bonds and u s domestic bonds or yankee bonds or eurodollar bonds we also study underwriting costs of publicly traded bonds and find ceteris paribus that eurodollar bonds are far more costly for the firm to issue than domestic bonds yankee bonds or global bonds domestic and yankee bonds are more expensive than global bonds and there is no significant cost difference between domestic and yankee bonds

managerial incentives investment and aggregate implications scale effects we explore a managerial model of investment behaviour in which an incentive problem arises because one input factor managerial effort is not publicly observed we show that an optimal incentive contract leads to investment levels which are below first best in low states and that this phenomenon can account for greater cyclical variability in aggregate production and investment from the perspective of incentive scheme design a special feature of the model is that screening takes place over two variables investment and output rather than one as is customary

the persistence of profits in banking an international comparison this article examines the dynamics of bank profitability in the usa germany great britain france italy and switzerland over the period 1993 2014 we find long run bank profit persistence in all six countries in the period before the financial crisis in 2008 banks with large capital ratios are persistently more profitable and there is little evidence of a link between bank size and the persistence of bank profits commercial saving banks are persistently more less profitable in four of the six countries the effects of the financial crisis in 2008 differed dramatically across countries as well as across ownership types while us banks experienced dramatic declines in the immediate aftermath of the crisis they recovered much faster than their european counterparts and essentially retain their long run profit potential by the year 2014

three and a half cycles of mania panic and asymmetric crash east asia and latin america compared this paper argues that despite some significant differences the 1982 debt crisis the 1994 mexican crisis and the 1997 east asian crisis share the common characteristic that over lending and over borrowing are basically endogenous market failures of over liquid and under regulated financial markets along the lines described by kindleberger s manias panics and crashes although these crashes have tended to be asymmetric as the largest international lenders have emerged relatively intact the paper concludes with a discussion of brazil s increasing vulnerability to a sudden collapse of confidence and withdrawal of finance which indicates the probability of another impending crisis

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

on the costs of a bank centered financial system evidence from the changing main bank relations in japan we examine the effects of bank firm relationships on firm performance in japan when access to capital markets is limited close bank firm ties increase the availability of capital to borrowing firms but do not lead to higher profitability or growth the cost of capital of firms with close bank ties is higher than that of their peers this indicates that most of the benefits from these relationships are appropriated by the banks finally the slow growth rates of bank clients suggest that banks discourage firms from investing in risky profitable projects however liberalization of financial markets reduces the banks market power the close relationship between manufacturing firms and financial institutions in japan has recently been at the center of the debate on the appropriate financial system for the reforming economies of eastern europe as opposed to the anglo saxon separation of finance and industry long term ties between main banks and their client firms involving bank loans bank equity holding and some bank appointed personnel which are common in japan and germany have often been described as a growth oriented financial system that could serve the needs of developing and reformed economiies better than anonymous capital markets modeled after the arnerican and british financial systems the claim that close ties between investmentoriented banks and industrial firms could help overcome the difficulties of relative backwardness dates back to gerschenkron 1962 who investigates european development rosovsky 1961 applies gerschenkron s framework to the analysis of japanese growth more recently aoki patrick and sheard 1994 hoshi kashyap and loveman 1994 and teranishi 1993 among others portray the close ties between finance and industry in japan as an important factor in the international competitiveness of modern japanese

steady state unemployment under profit sharing this paper demonstrates how asymmetric treatment of high seniority insider workers and non tenured outsiders gives rise to bad macroeconomic st eady states in a wage economy the framework uses a nash bargaining solution where workers may bargain over pay but firms control hiring profit sharing is then considered as an alternative payment mechanism having the automatically corrective incentive property that employers want to hire more outsiders given the assumptions of the model it is shown that widespread profit sharing results in lower unemployment and more output even though it is individually rational for insiders to prefer wages over profit shares copyright 1987 by royal economic society

estimating the impact of minimum wages on employment wages and non wage benefits the case of agriculture in south africa assessments of the impact of minimum wages on labor market outcomes in africa are relatively rare in part this is because the available data do not permit adequate treatment of econometric issues that arise in such assessments this paper however attempts to estimate the impact of introducing a minimum wage law in the agriculture sector in south africa based on 15 waves of the biannual labor force survey conducted between september 2000 and september 2007 the chosen sample includes six waves before the legislation s effective date march 2003 and nine afterwards to assess whether the changes experienced by farm workers are unique we identify a control group that has similar characteristics to the treatment group our econometric approach involves using two alternative specifications of a difference in differences model we test whether employers reduced employment and whether they responded at the intensive margin by reducing hours of work the results suggest a significant employment reduction in agriculture from the minimum wage and particularly a noticeable move away from employment of part time workers an increase in wages on average and a rise in non wage benefits compliance our analysis also indicates that firstly overall average of hours worked fell in the post law period suggesting that employers adjusted to some extent on the intensive margin secondly it appears that hours of work increased more in areas where wages were lower in the pre law period driven largely by the fall in part time employment

how islamic is islamic banking abstract islamic banks hold well over us 700 billion in assets and are growing at over 15 p a islamic banking and finance ibf involves wider ethical and moral issues than simply interest free transactions its advocates argue that these make it more economically efficient than conventional banking and promote greater economic equity and justice to what extent then do actual islamic banking practices live up to the ideal and how different are they from conventional banking a preliminary investigation shows that three decades after its introduction there remain substantial divergences between ibf s ideals and its practices and much of ibf still remains functionally indistinguishable from conventional banking this runs counter to claims by ibf advocates that it would rapidly differentiate itself from conventional banking however despite not providing an alternative to conventional banking and finance ibf does strengthen a distinctly islamic identity by providing the appropriate islamic terminology for de facto conventional financial transactions

professional accountancy organizations and stock market development this study investigates the relationship between the ethical educational and disciplinary development of professional accountancy organizations paos in a given country and the development of that country s stock market using a comprehensive measure based on the responses of the major paos in 36 countries to a questionnaire designed by the international federation of accountants to assess the development of paos internationally we find a significantly positive association between the development of paos and stock market development in addition we find the positive association between the development of paos and stock market development to be more pronounced in countries with higher levels of investor protection a stronger public enforcement environment or lower levels of corruption suggesting the importance of complementary institutions in the relationship between paos and stock market development we also find that better developed paos are associated with better quality financial reporting finally our result also shows that relative to the investigation and discipline mechanism and educational requirements imposed by paos the ethical development of a country s professional accountants appears to have the strongest positive association with a country s stock market development

the heterogenous impact of taxation on fdi a note on djankov et al 2010 abstract summary taxes in the host country matter a lot for fdi inflows but only for non oecd countries taking advantage of the rich dataset constructed by djankov et al 2010 we show for example that raising the first year effective corporate income tax rate by 10 pp reduces fdi inflows by 3 4 to 1 9 pp in non oecd countries and the effect is null for oecd countries not taking this heterogeneity into account upward downward biases the estimated impact of the corporate tax on fdi inflows for oecd non oecd countries

corruption in bank lending to firms cross country micro evidence on the beneficial role of competition and information sharing abstract building on the important study by beck demirguc kunt and levine 2006 bank supervision and corruption in lending journal of monetary economics 53 2131 2163 we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus registries on corruption in bank lending using the unique world bank data set wbes covering more than 4 000 firms across 56 countries with information on credit bureaus registries assembled by djankov mcliesh and shleifer 2007 private credit in 129 countries journal of financial economics 84 299 329 and bank regulation data collected by barth caprio and levine 2006 rethinking bank regulation till angels govern cambridge university press new york to measure bank competition and information sharing we find strong evidence that both banking competition and information sharing reduce lending corruption and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption we also find that the ownership structure of firms and banks legal environment and firm competition all exert significant impacts on lending corruption

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

reassessing the law finance and growth nexus after the recent great recession abstract the paper provides a reassessment of the relationship between financial structure financial development and economic growth conducting cross section and panel econometric analyses for a sample of 62 countries over 1980 2016 in line with the traditional literature we confirm the existence of a positive cross country relationship between the legal system financial development and growth even including the experience of the recent great recession in addition when jointly assessing the effect of financial structure and financial development on growth it emerges that a more bank oriented economy enjoys higher benefits in terms of long run real gdp per capita growth than a market oriented one when we consider variations across countries and over time we find that both financial structure and financial development affect growth but in an opposite way as the cross section analysis in particular when we control for their joint effect on growth we observe a positive impact of market based financial systems and a negative impact of the overall financial development we also provide evidence of the existence of a positive and significant relationship between economic growth and shadow banking during the 2002 2016 period highlighting the crucial role played by non bank financial intermediation in complementing traditional banking and in affecting the real economy

coase versus the coasians who should enforce laws or contracts judges or regulators many coasians though not coase himself advocate judicial enforcement we show that the incentives facing judges and regulators crucially shape this choice we then compare the regulation of e nancial markets in poland and the czech republic in the 1990s in poland strict enforcement of the securities law by a highly motivated regulator was associated with a rapidly developing stock market in the czech republic hands off regulation was associated with a moribund stock market i introduction at the heart of economists traditional skepticism about government regulation is the coase theorem coase 1960 the theorem states that when property rights are well dee ned and transaction costs are zero market participants will organize their transactions in ways that achieve efe cient outcomes when they can do so it is not necessary for the government to engage in corrective actions through taxes regulations or even legal rules financial markets are often used to demonstrate the coase theorem s case against regulation advocates of the regulation of these markets point to a variety of potential failures such as the ability of security issuers to expropriate both potential and existing investors through misrepresentation or proe t diversion investors fear of such expropriation prevents e rms from raising external funds and keeps efe cient projects from being undertaken not so reply the coasians they point out that most securities transactions take place between sophisticated adults and that both the buyers and the issuers of securities have available to them a vast range of private arrangements to achieve efe ciency including contracts such as corporate charters certie cation by intermediaries and various forms of bonding such contracts render most laws and regulations unnecessary stigler 1964 easterbrook and fischel 1991

portfolio management and appropriation of private benefits of control in many countries around the globe portfolio managers utilize well accepted models assuming that a partial stake of ownership is proportionally valued this assumption is incorrect in markets in which traded firms or publicly held firms are controlled by major owners who would take any possible measure to protect and maintain a lock on control so they can secure a sellable asset to another control seeker in this case estimation of key parameters such as volatility expected returns and diversification effect may be grossly distorted we would argue that a major trigger for the value of the benefits of control is the ability of control owners to transfer assets from their own portfolio to a controlled publicly traded firm while it is obvious that these transfers will take place if and only if it is beneficial to the control owners the impact on the minor shareholders may not necessarily be negative and may vary depending on several parameters thus the benefits of control are not entirely private i e appropriation and diversion of the resources of publicly traded firms for the benefit of the control owners this paper aims to model the effect of the benefits of control on the value of a minority held public firms it focuses on two related issues that are discussed in the literature on the benefits of control what drives the value of the benefits of control given the empirical evidence that control seekers are willing to pay a significant premium for control and secondly can these benefits be rationally modeled to better understand these issues it then models a specific drive on the part of control seekers who in addition to their stake in a publicly traded firm own a private portfolio it could be argued that they may transfer inferior investments to the public firms that they control exploiting less than perfect transparency however while they own this valuable option of transferring inferior investments into the public firm these actions may still be beneficial to the minority shareholders we establish a model and derive a simulation procedure that are applied to several cases in which transfers are made in exchange for cash or equity instances of full disclosure or partial transparency the likelihood that the control owners actions will be contested in court level of risk and other parameters then we will compare the results to empirical finding the final model will be greatly simplified so that the end formula can be easily used by practitioners

law and finance at the origin what are the key determinants of financial development and growth a large literature debates the relative importance of countries legal and political environment in this paper i present evidence from ancient rome where an early form of shareholder company the societas publicanorum developed i show that the societas publicano rum flourished in a legally underdeveloped but politically supportive environment roman republic and disappeared when roman law reached its height of legal sophistication but the political environment grew less supportive roman empire in the roman case legal development appears to have mattered little as long as the law as practiced was flexible and adapted to economic needs the law as practiced in turn reflected prevalent political interests after discussing parallels in more recent history i provide a brief overview of the literature on law and finance and on politics and finance the historical evidence suggests that legal systems may be less of a technological constraint for growth than previously thought at least at the origin