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Emerging Markets

Firms in developing countries face challenges posed by underdeveloped financial systems and markets, regulatory systems that are still works in progress, and legal environments that are not always efficient at protecting property rights and resolving commercial disputes. The Emerging Markets Research Track will provide a forum for the discussion on cutting edge research on ways to reform financial institutions, government policies and management strategies in developing countries so that they facilitate the growth and increases in productivity of businesses. We will partner with practitioners and policy makers to create a market for ideas how to improve both regulatory frameworks and business practices.


Capital Flight Risk
by Rabah Arezki, Gregoire Rota-Graziosi, and Lemma W. Senbet
Published in IMF's Finance & Development Magazine
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Formal versus Informal Finance: Evidence from China
by Meghana Ayyagari, Asli Demirguc-Kunt, and Vojislav Maksimovic
Published in the Review of Financial Studies, August 2010
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Abstract: The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries.


The African Financial Development Gap
by Lemma Senbet
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A keynote address in honor of Erik Thorbecke at the Institute for African Development Spring 2013 Symposium, Cornell University, April 19, 2013.

AERC and Diaspora
by Lemma Senbet
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A Keynote address at the 25 anniversary celebration of African Finance and Economic Association, ASSA Conference, San Diego, January 5, 2013. Prof. Senbet speaks about the African Financial Development Gap, increasing diaspora engagement to build on economic performance momentum, and the African Economic Research Consortium (AERC).

African Finance: Myths and Realities
by Lemma Senbet
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A keynote address for the “Entrepreneurship in Africa” Conference at Whitman School of Management, Syracuse University, April 2, 2010. Prof. Senbet explores the financial development gap faced by African countries and comments on the challenges to the African financial systems and the opportunities for financial entrepreneurship.


Improving Access to Banking: Evidence from Kenya
Franklin Allen, Elena Carletti, Robert Cull, Jun “QJ” Qian, Lemma Senbet, Patricio Valenzuela
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Abstract: Using household surveys and bank penetration data at the district-level in 2006 and 2009, we explore the impact of Equity Bank—a leading private commercial bank focusing on microfinance on the access to banking in Kenya. Equity Bank pursues distinct branching and business strategies that target underserved areas and less privileged households, unlike other commercial banks in Kenya. Equity Bank presence has a positive and significant impact on households’ use of bank accounts and bank credit, especially for Kenyans with low income, no salaried job and less education, and those that do not own their own home. The findings are robust to using the district-level proportion of people speaking a minority language as an instrument for Equity Bank presence. We conclude that Equity Bank’s business model— providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process—can be a solution to the financial access problem that has hindered the development of inclusive financial sectors in many African countries.

Resolving the African Financial Development Gap: Cross-Country Comparisons and a Within-Country Study of Kenya
by Franklin Allen, Elena Carletti, Robert Cull, Jun “QJ” Qian, Patricio Valenzuela and Lemma Senbet
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Abstract: With extensive country- and firm-level data sets we first document that the financial sectors of most sub-Saharan African countries remain significantly underdeveloped by the standards of other developing countries. We also find that population density appears to be considerably more important for banking sector development in Africa than elsewhere. To better understand how countries can overcome the high costs of developing viable banking sectors outside large metropolitan areas, we focus on Kenya, which has made significant strides in financial inclusion and development in recent years. We find a positive and significant impact of Equity Bank, a leading private commercial bank on financial access, especially for under-privileged households. Equity Bank’s business model—providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process—can be a potential solution to the financial access problem that has hindered the development of inclusive financial sectors in many other African countries.

Corporate Financial Distress and Bankruptcy: A Survey
By Lemma W. Senbet and Tracy Yue Wang
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Abstract: This paper provides a synthetic and evaluative survey of issues in corporate financial distress and bankruptcy. This area has moved into a public domain as a result of the recent global financial crisis that witnessed failures of many venerable institutions that got rescued by the government. Hence, this survey highlights the resolution mechanisms not only in the private domain but also in the public domain, and it uses corporate finance paradigms to interpret some of the far reaching developments in financial distress of systemic nature. This survey's theoretical anchor is a framework for the delineation of economic distress and financial distress. The difficulty in disentangling the dichotomy has been a central challenge in the empirics relating to financial distress, corporate bankruptcy, and the use of apparently cost-effective private mechanisms for resolving financial distress. This review devotes ample space on the discussion of conditions under which privatization of bankruptcy succeeds and fails, and the recent empirics on the subject. The review also grapples with the efficiency of bankruptcy codes and regimes, given the frequent usage of court-supervised mechanisms. The fundamental efficiency question about the bankruptcy law is whether the law effectively rehabilitates economically efficient but financially distressed firms and liquidates economically inefficient firms. This survey provides an ongoing debate in law and in economic theories about the efficiency of the US bankruptcy code. Moreover, it examines a linkage between financial distress and corporate governance, which has received growing attention. The review goes beyond the US to take a look at comparative bankruptcy codes around the world with a focus on bankruptcy reform issues in emerging economies. Finally, this survey takes us into a public domain and systemic financial distress. This is inspired by the recent global financial crisis. Is the standard bankruptcy procedure (e.g., those embedded in Chapters 11 and 7) sufficient for resolving systemic financial distress? The review attempts to answer this question in the context of the recently adopted landmark legislation, particularly the Dodd-Frank Act's Title II (Receivership), which governs the resolution of systemically critical institutions.

Do Phoenix Miracles Exist? Firm-Level Evidence from Financial Crises
by Meghana Ayyagari, Asli Demirgüç-Kunt and Vojislav Maksimovic
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Abstract: This paper provides empirical evidence on firm recoveries from financial system collapses in developing countries (systemic sudden stops episodes), and compares them with the experience in the United States in the 2008 financial crisis. Prior research found that economies recover from systemic sudden stop episodes before the financial sector. These recoveries are called Phoenix miracles, and the research questioned the role of the financial system in recovery. Although an average of the macro data across a sample of systemic sudden stop episodes over the 1990s appears consistent with the notion of Phoenix recoveries, closer inspection reveals heterogeneity of responses across the countries, with only a few countries fitting the pattern. Micro data show that across countries, only a small fraction (less than 31 percent) of firms follow a pattern of recovery in sales without a recovery in external credit, and even these firms have access to external sources of cash. The experience of firms in the United States during the 2008 financial crisis also suggests no evidence of credit-less recoveries. An examination of the dynamics of firms’ financing, investment and payout policies during recovery periods shows that far from being constrained, the firms in the sample are able to access long-term financing, issue equity, and significantly expand their cash holdings.

Small vs. Young Firms across the World Contribution to Employment, Job Creation, and Growth
by Meghana Ayyagari, Asli Demirgüç-Kunt and Vojislav Maksimovic
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Abstract: This paper describes a unique cross-country database that presents consistent and comparable information on the contribution of the small and medium enterprises sector to total employment, job creation, and growth in 99 countries. The authors compare and contrast the importance of small and medium enterprises to that of young firms across different economies. They find that small firms (in particular, firms with less than 100 employees) and mature firms (in particular, firms older than 10 years) have the largest shares of total employment and job creation. Small firms and young firms have higher job creation rates than large and mature firms. However, large firms and young firms have higher productivity growth. This suggests that while small firms employ a large share of workers and create most jobs in developing economies their contribution to productivity growth is not as high as that of large firms.