provide strong disincentives for a private sector company to list. Costs and expenses of this nature can be prohibitive for smaller enterprises relative to their size. Other obstacles include lack of understanding by entrepreneurs of the availability of the primary market for accessing finance, the potential for the founder to lose absolute control over the company and concerns over greater transparency.

In many emerging markets, the corporate sector is dominated by companies with a strong controlling shareholder. Many companies, when they are not controlled by the State itself, are controlled by individuals or families who frequently are also the company’s founder. “For developing countries, the average firm is majority controlled. . . . Large family owners are the norm not only in East Asia, but around the world.”<sup>36</sup> Controlling shareholders typically simply do not want to relinquish control of the companies that they dominate. In Mexico, for example, medium-sized companies “tend to remain under the control of their founding families, who fund themselves with credit and do not have incentives to take them public.”<sup>37</sup> Research on family-controlled companies has demonstrated that frequently such companies are better managed and demonstrate higher performance than companies with a more dispersed ownership base.<sup>38</sup> In emerging markets in particular, families can exert a meaningful control on management that might otherwise be lacking, particularly where an effective court system and a strong regulator may be absent<sup>39</sup> A controlling shareholder is in a good position to run the company as it sees fit, and may well be able to raise necessary funds through pre-existing personal or political relationships. While this type of financing may inhibit the long term growth prospects of the company, in the short and medium terms, it may be sufficient.

The desire of many family-owned companies to remain as private companies and their reluctance to grow beyond reinvesting retained earnings and financing by family and friends can stem from many causes, including the concern over loss of control described above. In addition, the need for full disclosure of the company’s financial position and to publish audited financial statements that accord with international standards can give rise to a higher tax burden and have a significant adverse impact on the company’s profitability, and is thus a significant disincentive to obtaining a listing.<sup>40</sup> Sometimes the founder does not want to assume the regulatory burden and costs of increased disclosure, particularly as these are not simply a one-

> 36 T. Nenova, 2004 By way of example, in Brazil, almost 51 percent of all firms are controlled by individuals, and in Mexico, the ten largest shareholders in the 40 largest companies own more than 80% of their respective company’s shares, and almost 70% of the shares of the 60 most actively traded companies are held by controlling shareholders.

> 37 Financial Times, April 12, 2005

> 38 Andersen 2004

> 39 T. Nenova, 2004

> 40 In countries as diverse as India, Colombia and Kenya, endeavors have been made to overcome companies’ reluctance to make full financial disclosure by offering fiscal incentives to companies that list. Measures include lower income tax rates and exemptions from capital gains taxes on transfers of shares on exchange but rarely provide a moratorium on taxes properly payable in past years.   While in the short term they can be effective in encouraging listing, tax incentives often have undesirable side effects, including distorting the country’s tax revenue base and being readily open to abuse.

14