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

IMF Working Papers, February 25, 2015

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

Author: Rima A Turk
Date: February 25, 2015
Type: IMF Working Papers (Working Paper No. 2015/038)
Core research question: How differences in legal origin, judicial efficiency, and investor protection affect firm leverage and earnings volatility across developing countries.
Scope: Uses a large number of developing countries to analyze links between institutional features and firm financial outcomes.

Firms in civil legal origin countries rely more on debt financing compared to firms in common law countries, and they exhibit lower earnings volatility.
Under weak judicial enforcement, firms tend to borrow more but they take less risk.
Stronger creditor rights increase debt financing and reduce earnings volatility.
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.

Strengthening laws and institutions can improve financing conditions for firms in developing countries.
Deepening capital markets (including facilitating firm listings on developed stock exchanges) can shift capital structures toward equity and enable greater borrowing capacity when judicial systems are inefficient.
Enhancing creditor rights and judicial enforcement can affect both levels of debt financing and firm earnings volatility.

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

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.

IMF Working Papers — Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions (Rima A Turk, February 25, 2015)

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