Dear colleagues,
The third International Conference on Corporate Governance in Emerging Markets is approaching. 36 papers out of more than 200 submissions have been accepted and announced on the conference Web site. On behalf of the organizing committee, I would like to thank the EMCGN members for their interest and support.
In our second issue of EMCGN Newsletter, we start our Publications section with Randall Morck's latest paper, which annotates the role of business groups in developing countries in economic development. Developing countries are not "America, but poorer" Morck argues. "Understanding good governance in less developed countries requires understanding business groups." We continue with Mark J. Roe's paper, in which he investigates the links between polity and capital markets in developed and emerging economies.
The papers that follow Morck's and Roe's papers are empirical. The first one by Lin, Ma, Maletesta and Xuan is a cross country study that confirms that the divergence between control rights and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by controlling shareholders, thereby increases the credit risk and monitoring needs. The second one by Qian, Pan and Yeung, based on data on China, finds that politically connected firms are more likely to expropriate minority shareholders.
In the Opinions section we present reports on Russia, Taiwan (China) and Turkey. The reports on Russia and Taiwan (China) give concrete suggestions and constructive comments on how to implement more powerful governance strategies. We conclude this section with an IFC publication on the current status of "sustainable investments" in Turkey.
Melsa Ararat, Sabanci University
Publications and Working Papers
Finance and Governance in Developing Economies
Randall Morck
Understanding good governance in least developed countries (LDCs) requires understanding business groups, which denote corporations controlled by other corporations with wealthy families or tycoons at the end of the chain. While Classic Big Push industrialization may run afoul of well-known government failure problems in these countries, a successful Big Push coordination may only occur when a large business group, acting in its controlling shareholder’s interest, coordinates the establishment and expansion of businesses in diverse sectors. Once the Big Push succeeds, the economy contains competitive industries functioning capital and labor markets, and a responsible government.
Capital Markets and Financial Politics: Preferences and Institutions
Mark J. Roe
The paper explains the links between polity and capital markets in developed and developing economies. Capital markets’ shape, support, and extent are often contested in polity, as powerful elements — from politicians to mass popular movements — have reasons to change, co-opt, and remove value from capital markets. Roe finds two major categories of problems that afflict the interaction of politics and financial markets as: the contest between the haves and have-nots, and the capitalist haves splitting and contesting the polity among themselves. How these contests are settled deeply affects the form, the extent, and the effectiveness of capital markets. “Much important work has been done in recent decades on the vitality of institutions. Less well emphasized thus far is that widely-shared, deeply-held preferences, often arising from current interests and opinions, can at times sweep away prior institutions or, less dramatically but more often, sharply alter or replace them. When they do so, old institutions can be replaced by new ones, or strongly modified. Preferences can at crucial times trump institutions, and how the two interact is well-illustrated by the political economy of capital market.”
Corporate Ownership Structure and Bank Loan Syndicate Structure
Chen Lin, Yue Ma, Paul Malatesta, Yuhai Xuan
Using a hand-collected dataset, the authors examine the relationship between corporate ownership and bank loan syndicate structures. They discover that divergence between control and cash-flow rights of a borrowing firm’s largest ultimate owner has a significant impact on the concentration and composition of the firm’s loan syndicate. The effects of excess control rights on the syndicate structure is more pronounced for globally opaque firms, for firms with higher cash-flow rights dispersion across large owners, and for firms in economically troubled countries. In contrast, the relationship between control-ownership divergence and syndicate structure is mitigated by the lead arranger’s reputation and lending relationship with the borrowing firm as well as by strong shareholder rights and good credit information sharing systems. Overall, the results confirm that the deviation of control and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by large shareholders, thereby increases the credit risk and monitoring needs. Thus, the lenders form syndicates with structures that facilitate enhanced due diligence and monitoring efforts as well as the syndication process.
Expropriation of Minority Shareholders in Politically Connected Firms
Meijun Qian, Hongbo Pan, Bernard Yeung
Qian, Pan and Yeung document that the influence of political connections on a firm’s financing positions impairs its corporate governance. When a firm’s political connections guarantee bank loan access, the controlling shareholders are less concerned with reputation loss in the capital market, and therefore less concerned with an increase in the firm’s cost of capital on the equity market. As a result, politically connected firms are more likely to expropriate minority shareholders. As a final remark, the authors show that the firms whose controlling shareholders expropriate minority shareholders- especially those with political connections- underperform other firms.
Upcoming Events
European Corporate Governance Institute (ECGI) will have its General Assembly and Annual Lecture on April 8, 2011 at Duisenberg School of Finance in Amsterdam, the Netherlands.
The Third International Conference on Corporate Governance in Emerging Markets will be held May 28–29, 2011, in Korea.
Yale Governance Forum will be held June 16–17, 2011, in the United States.
The European Academy of Management (EURAM) Annual Conference, Management Culture in the 21st Century, will be held July 1–4 in Tallinn, Estonia.
Opinions
Modernization: Corporate Governance and Innovation. In their article, Igor Belikov, Vladimir Verbitskiy and Aleksey Ponomarev explain the links between Russia’s modernization and corporate governance. Russian experience portrays that policies based primarily on implanting new technological solutions and manufacturing processes into the existing management and governance practices are not a recipe for success. Innovations succeed only when they’re implemented along with modern management and governance practices.
ACGA White Paper on Corporate Governance in Taiwan. Detailed suggestions are given on mainly the three following topics: shareholder meetings and voting, board effectiveness, and shareholder rights.
Sustainable Investment in Turkey. This report, published by IFC and written by Ararat, Yurtoglu, Suel, and Tura, identifies a number of structural barriers, which are hindering the development of sustainable investment in Turkey, such as low saving rates and the size of the market. They note the short term and speculative nature of portfolio flows to Turkey’s stock markets while Turkey remains vulnerable to external financing conditions. Their analysis of the financial sector in Turkey reveals some of the negative consequences of business group structures, the dominance of banks in the financial sector and the overlap between asset owners and asset managers, for the development of a competitive investment management industry.
From Our Coordinator
Dear EMCGN Members,
We encourage all of our members to notify us regarding their ongoing research or the events or conferences they want to share with the Network. We also welcome other relevant information, your feedback, and suggestions for ways to improve this newsletter.
Please get in touch with Mehmet Ihsan Canayaz, our Associate Editor, for potential contributions or inquiries, using the contact information below. Your contributions are greatly appreciated.
Mehmet Ihsan Canayaz
Phone: +90-216-483-9626
E-mail: ihsancanayaz@sabanciuniv.edu
The organizing committee is still looking forward to seeing you all in Seoul.
Melsa Ararat, Sabanci University
---------------------
Emerging Markets Corporate Governance Research Network is supported by the Global Corporate Governance Forum, the leading knowledge and capacity building platform dedicated to corporate governance reform in emerging markets and developing countries. The Forum is a multi-donor trust fund facility located within the IFC, co-founded in 1999 by the World Bank and the Organisation for Economic Cooperation and Development (OECD). For more information about the EMCGN's activities, contact melsaararat@sabanciuniv.edu.
The third International Conference on Corporate Governance in Emerging Markets is approaching. 36 papers out of more than 200 submissions have been accepted and announced on the conference Web site. On behalf of the organizing committee, I would like to thank the EMCGN members for their interest and support.
In our second issue of EMCGN Newsletter, we start our Publications section with Randall Morck's latest paper, which annotates the role of business groups in developing countries in economic development. Developing countries are not "America, but poorer" Morck argues. "Understanding good governance in less developed countries requires understanding business groups." We continue with Mark J. Roe's paper, in which he investigates the links between polity and capital markets in developed and emerging economies.
The papers that follow Morck's and Roe's papers are empirical. The first one by Lin, Ma, Maletesta and Xuan is a cross country study that confirms that the divergence between control rights and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by controlling shareholders, thereby increases the credit risk and monitoring needs. The second one by Qian, Pan and Yeung, based on data on China, finds that politically connected firms are more likely to expropriate minority shareholders.
In the Opinions section we present reports on Russia, Taiwan (China) and Turkey. The reports on Russia and Taiwan (China) give concrete suggestions and constructive comments on how to implement more powerful governance strategies. We conclude this section with an IFC publication on the current status of "sustainable investments" in Turkey.
Melsa Ararat, Sabanci University
Publications and Working Papers
Finance and Governance in Developing Economies
Randall Morck
Understanding good governance in least developed countries (LDCs) requires understanding business groups, which denote corporations controlled by other corporations with wealthy families or tycoons at the end of the chain. While Classic Big Push industrialization may run afoul of well-known government failure problems in these countries, a successful Big Push coordination may only occur when a large business group, acting in its controlling shareholder’s interest, coordinates the establishment and expansion of businesses in diverse sectors. Once the Big Push succeeds, the economy contains competitive industries functioning capital and labor markets, and a responsible government.
Capital Markets and Financial Politics: Preferences and Institutions
Mark J. Roe
The paper explains the links between polity and capital markets in developed and developing economies. Capital markets’ shape, support, and extent are often contested in polity, as powerful elements — from politicians to mass popular movements — have reasons to change, co-opt, and remove value from capital markets. Roe finds two major categories of problems that afflict the interaction of politics and financial markets as: the contest between the haves and have-nots, and the capitalist haves splitting and contesting the polity among themselves. How these contests are settled deeply affects the form, the extent, and the effectiveness of capital markets. “Much important work has been done in recent decades on the vitality of institutions. Less well emphasized thus far is that widely-shared, deeply-held preferences, often arising from current interests and opinions, can at times sweep away prior institutions or, less dramatically but more often, sharply alter or replace them. When they do so, old institutions can be replaced by new ones, or strongly modified. Preferences can at crucial times trump institutions, and how the two interact is well-illustrated by the political economy of capital market.”
Corporate Ownership Structure and Bank Loan Syndicate Structure
Chen Lin, Yue Ma, Paul Malatesta, Yuhai Xuan
Using a hand-collected dataset, the authors examine the relationship between corporate ownership and bank loan syndicate structures. They discover that divergence between control and cash-flow rights of a borrowing firm’s largest ultimate owner has a significant impact on the concentration and composition of the firm’s loan syndicate. The effects of excess control rights on the syndicate structure is more pronounced for globally opaque firms, for firms with higher cash-flow rights dispersion across large owners, and for firms in economically troubled countries. In contrast, the relationship between control-ownership divergence and syndicate structure is mitigated by the lead arranger’s reputation and lending relationship with the borrowing firm as well as by strong shareholder rights and good credit information sharing systems. Overall, the results confirm that the deviation of control and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by large shareholders, thereby increases the credit risk and monitoring needs. Thus, the lenders form syndicates with structures that facilitate enhanced due diligence and monitoring efforts as well as the syndication process.
Expropriation of Minority Shareholders in Politically Connected Firms
Meijun Qian, Hongbo Pan, Bernard Yeung
Qian, Pan and Yeung document that the influence of political connections on a firm’s financing positions impairs its corporate governance. When a firm’s political connections guarantee bank loan access, the controlling shareholders are less concerned with reputation loss in the capital market, and therefore less concerned with an increase in the firm’s cost of capital on the equity market. As a result, politically connected firms are more likely to expropriate minority shareholders. As a final remark, the authors show that the firms whose controlling shareholders expropriate minority shareholders- especially those with political connections- underperform other firms.
Upcoming Events
European Corporate Governance Institute (ECGI) will have its General Assembly and Annual Lecture on April 8, 2011 at Duisenberg School of Finance in Amsterdam, the Netherlands.
The Third International Conference on Corporate Governance in Emerging Markets will be held May 28–29, 2011, in Korea.
Yale Governance Forum will be held June 16–17, 2011, in the United States.
The European Academy of Management (EURAM) Annual Conference, Management Culture in the 21st Century, will be held July 1–4 in Tallinn, Estonia.
Opinions
Modernization: Corporate Governance and Innovation. In their article, Igor Belikov, Vladimir Verbitskiy and Aleksey Ponomarev explain the links between Russia’s modernization and corporate governance. Russian experience portrays that policies based primarily on implanting new technological solutions and manufacturing processes into the existing management and governance practices are not a recipe for success. Innovations succeed only when they’re implemented along with modern management and governance practices.
ACGA White Paper on Corporate Governance in Taiwan. Detailed suggestions are given on mainly the three following topics: shareholder meetings and voting, board effectiveness, and shareholder rights.
Sustainable Investment in Turkey. This report, published by IFC and written by Ararat, Yurtoglu, Suel, and Tura, identifies a number of structural barriers, which are hindering the development of sustainable investment in Turkey, such as low saving rates and the size of the market. They note the short term and speculative nature of portfolio flows to Turkey’s stock markets while Turkey remains vulnerable to external financing conditions. Their analysis of the financial sector in Turkey reveals some of the negative consequences of business group structures, the dominance of banks in the financial sector and the overlap between asset owners and asset managers, for the development of a competitive investment management industry.
From Our Coordinator
Dear EMCGN Members,
We encourage all of our members to notify us regarding their ongoing research or the events or conferences they want to share with the Network. We also welcome other relevant information, your feedback, and suggestions for ways to improve this newsletter.
Please get in touch with Mehmet Ihsan Canayaz, our Associate Editor, for potential contributions or inquiries, using the contact information below. Your contributions are greatly appreciated.
Mehmet Ihsan Canayaz
Phone: +90-216-483-9626
E-mail: ihsancanayaz@sabanciuniv.edu
The organizing committee is still looking forward to seeing you all in Seoul.
Melsa Ararat, Sabanci University
---------------------
Emerging Markets Corporate Governance Research Network is supported by the Global Corporate Governance Forum, the leading knowledge and capacity building platform dedicated to corporate governance reform in emerging markets and developing countries. The Forum is a multi-donor trust fund facility located within the IFC, co-founded in 1999 by the World Bank and the Organisation for Economic Cooperation and Development (OECD). For more information about the EMCGN's activities, contact melsaararat@sabanciuniv.edu.
© April 2011 IFC |