generally closely held and managed by majority, often family, interests. On average, excluding Korea, the three largest shareholders own some 50% of the shares of the ten largest non-financial private firms and 46% for the ten largest firms in Asia.<sup>2</sup> While this ownership concentration in Asia is not very different from that in Latin America, it does raise the possibility of increased risk taking.

- **Weak Market Incentives.** The incentives to improve, either at the individual firm level or at the country ievel, disclosure and governance were limitedl in many countries. Many firms had comfortable relations with banks and other financial intermediaries and were easily able to raise equity through new stock issues. This lack of market discipline appears to be due to five factors. First, the interlocking ownership between financial intermediaries and corporates, as in Chile during the early 1980s, as well as other relationships played a role. Korea is a good example of how interrelationships between banks and corporates reduced market discipline. Second, the rapid and large increase in stock prices in the early 1990s throughout emerging Asia may have reduced the sensitivity of equity investors to company disclosure and governance. Third, the requirement in some countries for government approval of new equity issues (and their prices), government ownership and contingent government support (e.g., in large infrastructure projects) may have also comforted investors. Fourth, there are few, well governed domestic institutional investors in the region. Privately managed institutional investors are rare and the large publicly controlled funds and investment banks have been mostly passive players in corporate matters. And fifth, key market institutions that play a key role in facilitating and creating the incentives for market discipline to work in industrial countries are not fully developed in the region. For example, credit rating agencies were only recently introduced in many countries. The nascent regulatory framework further aggravated this lack of market institutions. While by 1997 most East Asian countries had built the legal and regulatory basis to move from a merit to a market based regulatory system, rnarkets did yet not necessarily adequately perform their signaling and monitoring functions.

- **Protecting Minority Shareholders.** The legal and regulatory systems of many countries in the region include a relatively wide set of provisions to protect shareholders from abuse by insiders. Table III.1 (based on La Porta et al., 1997 and 1998) compares the investor and creditor protection in East Asia with other regions. The table shows that shareholder' and creditor protection is stronger in Asia than in Latin America.' In enforcement of property rights, however, the region, especially Indonesia and the Philippines, scores much below Latin America, meaning that shareholders could not fully use their legal protecting mechanisms. Furthermore, weak disclosure meant shareholders often did not have the information to judge corporate performance and insider behavior.

> 2 Not corrected for shareholder affiliation and cross-shareholding between **firns** (see further La Porta et. al. 1998).

14