Stronger Emerging Market Corporate Governance Enhances Financial Resilience

IMF News, September 29, 2016

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Canonical URL: Stronger Emerging Market Corporate Governance Enhances Financial Resilience

Publication date: September 29, 2016
Main message: Stronger corporate governance and investor protection in emerging market economies can enhance resilience to global financial shocks and strengthen corporate balance sheets.
Scope: Findings presented as part of research for the Global Financial Stability Report.

Corporate governance and investor protection have generally improved in emerging market economies over the past two decades.
Improvements in governance have helped bolster the resilience of emerging market financial systems.
Corporate governance improvements:
- Make emerging markets more resilient to financial downturns.
- Foster deeper and more liquid capital markets, improving shock absorption.
- Enhance stock market efficiency, making equity prices less sensitive to external shocks and less prone to crashes.
Poorly governed firms experienced sharper stock price declines during financial market turmoil (for example, around the reaction to the U.K.’s “Brexit” vote).
Moving from the lower to the upper end of the firm-level governance index reduces the impact of global shocks by about 50 percent for emerging market firms, on average.
Better-governed firms typically display:
- Lower short-term debt ratios.
- Lower default probabilities.
- Ability to borrow at longer maturities.

The IMF created a new firm-level governance index for the analysis.
Using this index, the IMF found that emerging market firms outside of Latin America and Asia show the largest improvements since 2008.
At the country level, indices compiled by other institutions suggest that, in most emerging market economies, investor protection, property rights enforcement, disclosure rules, and auditing and reporting standards could be enhanced.

Continue reforms of legal, regulatory, and institutional frameworks to foster effectiveness and enforceability of corporate governance regimes.
Bolster the rights of all investors, in particular minority shareholders.
Bring disclosure requirements fully in line with international best practice.
Promote greater board independence.
Emphasize enforcement, transparency, and the rights of all investors as key elements of effective corporate governance.

The analysis is part of the IMF’s Global Financial Stability Report research.
The IMF will release further research from the Global Financial Stability Report on October 5.

Source: IMF News — "Stronger Emerging Market Corporate Governance Enhances Financial Resilience" (September 29, 2016).