Showing papers by "Asli Demirguc-Kunt published in 1992"

Developing country capital structures and emerging stock markets

Abstract: In the developing world financing patterns vary greatly from what we observe in developed countries. In the poorest developing countries firms rely mostly on internal resources and informal credit markets for financing. This paper seeks to investigate the impact of emerging stock markets on the financing patterns of developing country corporations. The focus is to test whether equity markets and banking systems are complements or substituteds in providing financing to corporations. It is possible to answer this question by investigating capital structures of firms across a sample of countries with different levels of stock market development. If equity is substituted for debt financing one would expect countries with less developed stock markets to have higher leverage. However, if the opposite is true and there is complementarity between equity markets and banks, leverage would increase as stock markets become more developed. This paper discusses key properties of debt and equity contracts in financing decisions and reviews the literature on capital structure to identify relevant factors, other than stock market development, that may affect the financing pattern of corporations. It also presents preliminary empirical findings and identifies directions for further research.

The Brady Plan, the 1989 Mexican debt reduction agreement, and bank stock returns in the United States and Japan

Abstract: The authors investigate the impact of the menu approach to debt rescheduling on the market value of two major creditors: US and Japanese banks They try to understand how major creditor banks are affected by debt reschedulings and the menu choices they make, so that debt deals can be structured in a way that appeals to both creditors and debtor countries They measure the stock market's reaction to the announcement of the Brady Plan and the Mexican debt reduction agreement The Brady Plan was implemented through the menu approach, which acknowledges creditor heterogeneity and provides financing packages that meet the country's financing requirements while still allowing the banks to reduce their exposure The Mexican agreement provides an opportunity to test the impact of the Brady Plan's implementation By examining individual bank's menu choices, exposure levels, and the market's reaction, they explore whether banks were able to make optimal portfolio choices when confronted with the obligation to participate They show that stock prices for different groups of banks reacted quite differently to focal events Among all banks, US multinationals showed the strongest positive reaction to the Brady announcement and the Mexican agreement US non-multinationals do not appear to have been significantly affected by these international-debt-related events The reaction experienced by all Japanese banks was much weaker than that of US multinationals and was negative for the Brady announcement and the initial Mexico announcement The authors contend that the lack of a strong reaction was because of the Japanese banks'relatively low exposure to developing country risk They see the negative market reaction as a reflection of the expectation that a US-initiated debt reduction strategy would not be favorable for Japanese banks Indeed, after the menu choices were announced, the market recognized that the Japanese banks were treated fairly and corrected itself They do not find that banks that made different choices were treated differently by the market, so banks were able to negotiate menu choices in their best interest and to make portfolio choices consistent with their business objectives The results here confirm that the menu approach to debt restructuring may benefit both the creditor banks and the debtor countries

Creditor country regulations and commercial bank lending to developing countries

Abstract: Ever since the debt crisis of 1982, commercial banks continue to be reluctant in lending to developing countries. It is often argued that regulatory pressures on commercial banks have also contributed to the banks' reduced exposure to developing countries. This paper explores this possibility, focusing particularly on the effect of the Bank for International Settlement (BIS) risk-related capital adequacy regulations and different practices of country risk provisioning in major creditor countries. The main conclusion of the paper is that the BIS capital adequacy regulations may be somewhat less effective than they appear in accomplishing their main goal of controlling the overall riskiness of the international banking system, but that they may be quite effective in decreasing the size of commercial banks' developing country loan portfolios. The paper also discusses how mandated provisioning rules against developing countries are an additional deterrent to increasing bank lending.

Barriers to portfolio investments in emerging stock markets

Abstract: The authors examine to what extent features of the international tax system and indicators of transaction costs affect the required rates of return on emerging stock markets. They show that the capital gains withholding tax levied on foreign portfolio investors increases required pre-tax rates of return. As countries generally do not index their capital gains taxes, it follows that inflation increases the capital gains tax base, as well as the required rate of return on equity. Dividend withholding taxes instead appear not to increase the required pre-tax equity returns significantly. The differing results for capital gains and dividend taxes reflect the fact that foreign investors generally can receive domestic tax credits only for foreign withholding taxes paid on dividends. The return on equity is part of the issuing firm's cost of capital. So, capital gains withholding taxes imposed on nonresidents increase the cost of capital for domestic firms and discourage physical investment. Private investment levels have tended to be low in developing countries in the 1980's. The cost of equity finance in developing countries has gained in importance inthe last decade, as these countries'access to international lending capital has been limited during most of the decade. What do these findings imply for the design of tax policy in relation to foreign portfolio investment in developing countries? The existence of foreign tax credits for dividend taxes paid suggest that a country should tax capital gains more lightly than repatriated dividends - as do Greece, Pakistan, Portugal, and Venezuela. Each of these countries has positive-dividend withholding taxes but no capital gains taxes imposed on non-residents. Colombia and India do the exact opposite: they tax capital gains far more heavily than dividends. Despite what appears optimal, the trend in developing countries is toward lower dividend withholding taxes, with little change in the average level of capital gains taxation. It appears desirable for developing countries to index their capital gains taxes to prevent them from being higher than anticipated.

Interest rates, official lending, and the debt crisis: a reassessment

Abstract: The authors document and try to explain the sizable cross-country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973-89. They find that Indonesia and Turkey, which are often praised for not rescheduling in the 1980s, paid interest rates substantially below LIBOR - and avoided the interest rate shock of the early 1980s. Differences in the default-risk premium explain some of the variation among countries, but different degrees of access to official loans carrying highly subsidized interest rates played the major role. In the sample they studied, they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates. For the period 1981-89, it is possible to control for differences in the currency composition of debt, and the results are essentially unchanged. These results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross-country differences in the burden of interest payments.