Even in countries with a thriving small business culture, the companies, which are largely family-owned, continue to be reluctant to list on the exchange and new listings are few and far between. In addition, in many countries prime companies are listed on foreign markets, and local exchanges remain less attractive for foreign investors. These factors have produced domestic securities markets in vastly different emerging markets which look surprisingly similar, despite large differences in market capitalization. While the characteristics identified below may not be present in all markets, as a general matter, they are typical of many emerging equity markets and frequently represent both the cause and effect of one another.

Many emerging markets operate with low levels of transparency, poor information disclosure and weak corporate governance. In contrast, robust disclosure rules, monitoring and enforcement, and information dissemination are positively associated with a vibrant equity market.<sup>11</sup> Timely and credible company disclosure promotes investor confidence, thus encouraging investors to participate more actively in the market. Greater liquidity may attract additional listings, which in turn increase investors’ access to trading opportunities. As a result, market activity may increase, and capital formation is facilitated. However, since outside investors are not the primary source of finance in emerging markets, the external demand for disclosure and market liquidity is lower than in developed economies, and there is not much pressure either on issuers or governments to provide better disclosure or to improve governance.<sup>12</sup> Moreover, in countries with poor investor protection and low economic development, where outside finance is expensive and better governance mechanisms may be unavailable or very costly, there is little incentive for companies to adopt better governance because it does not result in a lower cost of capital.<sup>13</sup> In addition to low levels of disclosure, transparency and weak corporate governance, stock exchanges in many emerging markets tend to be characterized by a substantial lack of liquidity. While liquidity can be measured in different ways, as a general matter, a liquid market is one in which there is a reasonable amount of turnover or trading, and where large transactions can take place quickly and efficiently. Emerging stock markets typically have very low turnover, with only a few companies responsible for a large percentage of the total trading that takes place. In Chile, for example, the annual turnover ratio of listed companies is lower than ten percent annually. In Brazil, ten companies account for more than 50% turnover and 100 companies account for 99% of total trading. In Mexico, almost all of the trading is conducted in the shares of a few dozen large international companies.<sup>14</sup> Accompanying the low levels of liquidity are low percentages of free float (the percentage of shares available for sale to the public). Thus, even those companies that decide to go public only offer a small percentage of their shares for

> 11 Bushee and Leuz 2005 12 Frost, Gordon and Hayes 2002 13 Doidge, Karolyi and Stulz 2004 14 Financial Times, April 12, 2005

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