Corporate Risk around the World
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 ca...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/01/438992/corporate-risk-around-world http://hdl.handle.net/10986/19855 |
| Summary: | 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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