Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection

Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Review of Finance Wiley

Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection

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Publisher
Wiley
Copyright
Copyright © 2000 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1369-412X
eISSN
1468-2443
DOI
10.1111/1468-2443.00006
Publisher site
See Article on Publisher Site

Abstract

When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller.

Journal

International Review of FinanceWiley

Published: Jun 1, 2000

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