Corporate Risk Around the World

52 Pages Posted: 20 Apr 2016

See all articles by Tatiana Nenova

Tatiana Nenova

World Bank, South Asia; World Bank - Policy Unit; Harvard University - Department of Economics

Stijn Claessens

Bank for International Settlements (BIS)

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Date Written: January 2000

Abstract

Corporate financing patterns around the world reflect countries' institutional environments.

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, Claessens, Djankov, and Nenova 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: - 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. - In particular, corporations in common law countries and market-based financial systems have less risky financing patterns. - Stronger protection of equity and creditor rights is also associated with less financial risk.

This paper - a product of the Financial Sector Strategy and Policy Group, Financial Sector Vice Presidency - is part of a larger effort in the Bank to study the determinants of the riskiness of countries' corporate and financial systems.

Suggested Citation

Nenova, Tatiana and Claessens, Stijn and Djankov, Simeon, Corporate Risk Around the World (January 2000). World Bank Policy Research Working Paper No. 2271. Available at SSRN: https://ssrn.com/abstract=629121

Tatiana Nenova (Contact Author)

World Bank, South Asia ( email )

1818 H Street, NW
Washington, DC 20433
United States

World Bank - Policy Unit ( email )

1818 H Street NW
Washington, DC 20433
United States
(202) 458-9531 (Phone)
(202) 522-2031 (Fax)

Harvard University - Department of Economics

Littauer Center
Cambridge, MA 02138
United States

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Simeon Djankov

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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