KLAUS P. FISCHERand GEORGE J. PAPAIOANNOU
The chapters in this volume are based on papers and panel discussions presented in the International Symposium on Business Finance in Less Developed Capital Markets held at Hofstra University on September 22-23, 1988. The purpose of the symposium was to focus attention on theoretical and empirical issues pertaining to the application of financial decisions and policies by firms, financial institutions, and investors in the environment of less developed capital markets (LDCMs). 1
The organization of the symposium was motivated by the relative lack of a well-developed body of literature that addresses finance issues germane to economies with less developed financial systems. The specific aim of the symposium was to promote research in this direction and to facilitate communication among researchers interested in the field.
The lack of literature specific to LDCMs may be explained by the fact that modern finance theory and its empirical testing grew primarily in the United States, which operates with a well-developed and well-functioning financial system. Based on the seminal work of Modigliani and Miller ( 1958), the basic tenet of modern finance theory is that the financial decisions of the firm should be evaluated by their wealth effects on the firm's securities; in turn, these wealth effects are the product of the valuation process that takes place in the capital markets where financial claims are traded. Thus a positive theory of finance has been developed in the context of the efficient capital markets (ECM) paradigm that describes the performance of the capital markets in the United States. In such a capital market setting, not only is the valuation process carried on outside of the firm, but the prices reflect all relevant information and therefore are unbiased estimates of true values.
Outside the United States and a few other industrialized countries (most notably Canada and the United Kingdom), financial systems do not conform to the ECM