Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions

February 25, 2015

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Format: Chicago

Rima A Turk. Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions, (USA: International Monetary Fund, 2015) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Average effective tax rate, Debt financing, External debt, Income tax systems, Labor, Legal support in revenue administration, Revenue administration, Tax policy, Taxes, Wages

Keywords: Average effective tax rate, Corporate Decisions, Creditor right, Debt financing, Developing Countries, Global, Income tax systems, Investment outcome, Investor Protection, Legal Origin, Legal support in revenue administration, Market capitalization, Real GDP, Shareholder right, Shareholders rights protection variable, Short term debt, Total debt, Wages, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/038
Stock No:

WPIEA2015038
ISBN:

9781498359054
ISSN:

1018-5941

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