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Rima Turk
This paper analyzes how differences in legal origin, judicial efficiency, and investor protection affect firm leverage and earnings volatility across developing countries. Using a large number of developing countries, four main findings are highlighted. First, firms in civil legal origin countries rely more on debt financing compared to firms in common law countries, and they exhibit lower earnings volatility. Second, under weak judicial enforcement, firms tend to borrow more but they take less risk. Third, stronger creditor rights increase debt financing and reduce earnings volatility. Fourth, firm listing on a developed stock exchange shifts the capital structure towards more equity financing, and it increases the firm’s ability to borrow more when the judicial system is inefficient. The results reinforce the importance of strengthening laws and institutions as well as deepening capital markets in developing countries to improve financing conditions and investment outcomes.
Swart R. Ghosh and Mr. Atish R. Ghosh
This paper examines the role of structural factors—governance and rule of law, corporate sector governance (creditor rights and shareholder rights), corporate financing structure—as well as macroeconomic variables in currency crises. Using a technique known as a binary recursive tree allows for interactions between the various explanatory variables. It is found that structural vulnerabilities play an important role in the occurrence of “deep” currency crises (those with a real GDP growth decline of at least 3 percentage points) and that there are complex interactions between these structural vulnerabilities and macroeconomic imbalances.
International Monetary Fund

The transitional program is broadly on track and quantitative program targets have been met, but structural reforms have been delayed. There are still risks to revenues and expenditures from possible judicial decisions, and the fiscal program may need to be adapted for changes in the macroeconomic framework. Monetary policy continues to face significant uncertainties, and priority needs to be given to providing a predictable regulatory framework for the banking system. Policy preparation can facilitate the transition to the new government.

International Monetary Fund. External Relations Dept.

The IMF’s proposal for a Sovereign Debt Restructuring Mechanism (SDRM) to improve the way countries’ unsustainable debt is restructured continues to generate heated debate as time draws near for its consideration at the spring meetings of the IMF’s International Monetary and Financial Committee. In an effort to further spell out the proposal, the IMF hosted a conference on January 22 to exchange views with the private sector, emerging markets, nongovernmental organizations, legal experts, and academics. Participants generally agreed that something needed to be done about unsustainable sovereign debt and they welcomed the IMF’s consultative approach, but they differed sharply on solutions. What follows is coverage of that conference, along with excerpts from a speech by Jack Boorman, Special Advisor to the IMF’s Managing Director, and coverage of an IMF training seminar on the SDRM held on January 6 by Peter Kenen of Princeton university.

Mr. Prakash Loungani

Abstract

Good “corporate governance”—the system by which corporations are directed and controlled—is critical in building market confidence and encouraging stable, long-term investment flows, particularly foreign capital flows. In addition, good corporate governance practices with respect to debt restructuring improve economic dynamism by facilitating the transfer of capital from weak firms to stronger ones.

Rima Turk

This paper analyzes how differences in legal origin, judicial efficiency, and investor protection affect firm leverage and earnings volatility across developing countries. Using a large number of developing countries, four main findings are highlighted. First, firms in civil legal origin countries rely more on debt financing compared to firms in common law countries, and they exhibit lower earnings volatility. Second, under weak judicial enforcement, firms tend to borrow more but they take less risk. Third, stronger creditor rights increase debt financing and reduce earnings volatility. Fourth, firm listing on a developed stock exchange shifts the capital structure towards more equity financing, and it increases the firm’s ability to borrow more when the judicial system is inefficient. The results reinforce the importance of strengthening laws and institutions as well as deepening capital markets in developing countries to improve financing conditions and investment outcomes.