Debt or equity? how firms in developing countries choose. Discussion Paper.
Long stifled by government controls, emerging market (EM) corporate finance is changing dramatically as recent liberalization is revitalizing stagnant domestic capital markets and permitting increased access to overseas markets. This paper examines how EM firms choose between debt and equity in their financing decisions. The paper starts with a discussion of the traditional features of EM corporate finance. It then presents a simple framework for the debt-equity choice based on the standard considerations of cost, risk, control and disclosure. The unique manner in which these considerations could be influenced by government control is illustrated with examples from several EM countries. Our central conclusion is that, like Western firms, EM firms seek to minimize the cost of capital and retain control in the hands of existing shareholders. But they also face many non-market constraints, which are now disappearing. The concluding section remarks upon a number of interesting empirical regularities across countries as they embark on financial liberalization. EXECUTIVE SUMMARY. INTRODUCTION. THE CAPITAL STRUCTURE PUZZLE. Theory. Reality. FINANCIAL INSTRUMENTS, COST, RISK AND CONTROL. The cost of capital. Issuance costs. Risk. Control and disclosure. CAPITAL MARKETS AND CORPORATE FINANCE. Equity. Debt. Case study: India-Euroconvertible Bonds and Global Depositary Receipts (GDRs). A PECKING ORDER. Case study: an Indonesian Pecking Order. CONCLUSIONS.
Ministerio de Ambiente y Energía. Secretaría de Planificación del Sub-Sector Energía - Centro de Información de Energía y Ambiente, CIENA
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