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Corporate risk around the world

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Author Info

  • Claessens, Stijn
  • Djankov, Simeon
  • Nenova, Tatiana

Abstract

Weaknesses in the corporate sector have increasingly been cited as important factors in financial crises in both emerging markets and industrial countries. Analysts have pointed to weak corporate performance and risky financing patterns as major causes of the East Asian financial crisis. And some have argued that company balance sheet problems may also have played a role, independent of macroeconomic or other weaknesses, including poor corporate sector performance. But little is known about the empirical importance of firm financing choices in predicting and explaining financial instability. Firm financing patterns have long been studied by the corporate finance literature. Financing patterns have traditionally been analyzed in the Modigliani-Miller framework, expanded to incorporate taxes and bankruptcy costs. More recently, asymmetric information issues have drawn attention to agency costs and their impact on firm financing choices. There is also an important literature relating financing patterns to firm performance and governance. Several recent studies have focused on identifying systematic cross-country differences in firm financing patterns - and the effects of these differences on financial sector development and economic growth. They have also examined the causes of different financing patterns, particularly countries'legal and institutional environments. The literature has devoted little attention to corporate sector risk characteristics, however, aside from leverage and debt maturity considerations. Even these measures have been the subject of few empirical investigations, mainly because of a paucity of data on corporate sectors around the world. Building on data that have recently become available, the authors try to fill this gap in the literature and shed light on the risk characteristics of corporate sectors around the world. They investigate how corporate sectors'financial and operating structures relate to the institutional environment in which they operate, using data for more than 11,000 firms in 46 countries. They show that: 1) the origins of a country's laws, the strength of its equity and creditor rights, and the nature of its financial system can account for the degree of corporate risk-taking. 2) In particular, corporations in common law countries and market-based financial systems have less risky financing patterns. 3) Stronger protection of equity and creditor rights is also associated with less financial risk.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2271.

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Date of creation: 31 Jan 2000
Date of revision:
Handle: RePEc:wbk:wbrwps:2271

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Related research

Keywords: Banks&Banking Reform; Payment Systems&Infrastructure; Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Financial Intermediation; Housing Finance;

References

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  1. Caprio, Gerard, Jr & Demirguc-Kunt, Asli, 1998. "The Role of Long-Term Finance: Theory and Evidence," World Bank Research Observer, World Bank Group, vol. 13(2), pages 171-89, August.
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Citations

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Cited by:
  1. Shang-Jin Wei & Julan Du, 2003. "Does Insider Trading Raise Market Volatility?," IMF Working Papers 03/51, International Monetary Fund.
  2. Ferro, Gustavo & Antón Rodríguez, Martín, 2007. "Crédito, producto y eficiencia en la producción de crecimiento
    [Credit, production and efficiency in the production of growth]
    ," MPRA Paper 15094, University Library of Munich, Germany, revised Mar 2009.
  3. Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers.
  4. Enisse Kharroubi, 2004. "Macroeconomic Volatility and endogenous debt maturity choice," Money Macro and Finance (MMF) Research Group Conference 2004 22, Money Macro and Finance Research Group.
  5. Agustinus, Prasetyantoko, 2007. "Corporate Responses to Currency Depreciations: Evidence from Indonesia," MPRA Paper 6502, University Library of Munich, Germany.
  6. Ricardo N. Bebczuk, 2005. "Corporate Governance and Ownership: Measurement and Impact on Corporate Performance and Dividend Policies in Argentina," Department of Economics, Working Papers 059, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  7. Li, Kai & Griffin, Dale & Yue, Heng & Zhao, Longkai, 2013. "How does culture influence corporate risk-taking?," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 1-22.
  8. Mitton, Todd, 2004. "Corporate governance and dividend policy in emerging markets," Emerging Markets Review, Elsevier, vol. 5(4), pages 409-426, December.
  9. Galina Hale & Assaf Razin & Hui Tong, 2007. "Credit Constraints and Stock Price Volatility," NBER Working Papers 13089, National Bureau of Economic Research, Inc.
  10. Brockman, Paul & Liebenberg, Ivonne & Schutte, Maria, 2010. "Comovement, information production, and the business cycle," Journal of Financial Economics, Elsevier, vol. 97(1), pages 107-129, July.
  11. Mulder, Christian & Perrelli, Roberto & Rocha, Manuel Duarte, 2012. "External vulnerability, balance sheet effects, and the institutional framework — Lessons from the Asian crisis," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 16-28.
  12. Ferro, Gustavo, 2000. "¿Vale la pena tener intermediarios financieros propios? Un examen a la literatura reciente
    [Does it worth having local financial intermediaries? An examination onto recent literature]
    ," MPRA Paper 15359, University Library of Munich, Germany.
  13. Roxana Mihet, 2013. "Effects of culture on firm risk-taking: a cross-country and cross-industry analysis," Journal of Cultural Economics, Springer, vol. 37(1), pages 109-151, February.
  14. Hale, Galina B & Razin, Assaf & Tong, Hui, 2006. "Institutional Weakness and Stock Price Volatility," CEPR Discussion Papers 5651, C.E.P.R. Discussion Papers.
  15. Dado, Marinela E. & Klingebiel, Daniela, 2002. "Decentralized credtor-led corporate restructuring - cross-country experience," Policy Research Working Paper Series 2901, The World Bank.
  16. Halil Ibrahim Aydin & Cafer Kaplan & Mehtap Kesriyeli & Erdal Ozmen & Cihan Yalcin & Serkan Yigit, 2006. "Corporate Sector Financial Structure in Turkey : A Descriptive Analysis," Working Papers 0607, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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