Corporate Finance in Emerging Market Economies

Corporate governance and bankruptcy are about ensuring that market signals are channeled into corporate decisions, and corporations do not abscond with resources entrusted them by investors. The purpose of this paper is to discuss how market and government failures influence the design of institutions supporting corporate finance in emerging market economies. Weaknesses in these institutions are an important part of the explanation for why more capital is not flowing from the capital-rich to the capital-poor economies. Even in countries that now enjoy large inflows of direct investment may find weak corporate governance and poorly functioning bankruptcy procedures to be critical if these flows were to corporate governance and bankruptcy laws are generally believed to be critical to investment and growth, they are particularly important in emerging market economies where corporations often are hugely influential in the economy-at-large and in politics. We propose a general framework for thinking about the challenges of designing these institutions in emerging market economies and draw some policy implications. In particular, we emphasize the importance of enforcement and the impact of weak enforcement on corporate governance and bankruptcy design.