Reference no: EM131550533

Resources

Read/review the following resources for this activity: 

• Chapter 5
• Lecture
• Minimum of 1 reliable resource for initial post

Introduction

State Capitalism can today boast of having some of the most powerful companies on the planet like Russia's Gazprom - the world's biggest natural-gas company - and China Mobile - a Chinese company with 600 million customers.

Initial Post Instructions

Do you think state ownership and control of companies (like the aforementioned examples) in emerging markets is an effective method of corporate governance given that they are backed by the all powerful state but behave like private-sector multinational corporations. 

Writing Requirements

• In addition to one initial post, respond to at least two peers.
• Initial Post Length: minimum of 250 words
• Using APA format, provide at least one citation with corresponding references page and use appropriate in-text citation(s) referring to the academic concept for the initial post.

Lecture

Introduction

Chapter 5 analyzes problems of information and control in financial markets. It first discusses asymmetric information issues that are especially relevant to EFMs - a) they rely heavily on debt as opposed to equity because of underdeveloped equity markets; b) the debt is more in the form of bank loans as opposed to securities like bonds, for example, because of underdeveloped bond markets; c) there is more short term debt rather than long term debt; and d) the preference is for secured versus unsecured loans. Investors in developed financial markets have access to substantial amounts of information (e.g. data on companies) from institutions of information that they can use to make informed decisions. On the contrary, EFMs lack accurate information, so the question is how do EFMs behave in the absence of information? How does the problem of adverse selection play out in EFMs? Who monitors corporate performance and who oversees the monitors? Is there a mechanism in place to control self-dealing by insiders and, if so, how effective is it? 

In the US, there is a conflict of interest between the management and the stockholders and the problem is one of the principal (stockholder) effectively monitoring the agent (manager) or what is commonly referred to as the principal-agent problem. On the other hand, in most EFMs the control conflict is not between the stockholders and the management but between a) the controlling stockholders ('insiders' who are usually members of the family) versus the outside stockholders ('outsiders') and b) debtors (primarily banks) and controlling stockholders - banks need to protect themselves against expropriation of the firm's assets by the latter (thus leading to a debt default) when the firm is privatized, for example. It then goes on to discuss issues of corporate governance in EFMs and the role that institutions of information like accounting firms, credit rating agencies, disclosure laws etc. perform in efficient capital markets.