Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview
5. B = total corporate debt, consisting of total bank debt, foreign debt, and debt owed
to insurance and trust companies (ESYB).
6.d = dividends, from national income accounts (ESYB).
7. ρ = annual average yield on stocks traded on the Korea Stock Exchange (ESYB).
8.r = interest rate on commercial bank loans for machines, industry, and promotion
(MSKE).
9.τ = corporate income-tax rate constructed from data obtained from ESYB.
10. K = capital stock, constructed by means of the perpetual inventory method,
Kt = It + (1 - δ)Kt-1, where the average depreciation δ is estimated to be 8 per-
cent per annum using the straight-line depreciation rule based on the average
lifetime of 35 years for structures and 15 years for machinery and equipment.
11.y = cyclical fluctuation of real aggregate output constructed as the deviation of real
GDP from its long-term trend.

NOTES

I would like to thank Indermit Gill, Mohsin Khan, Ashok Lahiri, and Sweder Van Wijnbergen for helpful comments and suggestions, and Boubker Abisourour for research assistance.

The World Bank does not accept responsibility for the views expressed herein, which are those of the author and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the bank; they do not necessarily represent official policy of the bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank of its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation.

1.
For an extension of the neoclassical theory of investment to include uncertainty, see Lucas and Prescott ( 1971).
2.
These characteristic features are typical of the financial market structure of most new industrialized developing countries, including, for example, Argentina, Brazil, Chile, Korea, Mexico, and the Philippines, as well as some developed countries such as Japan. In all these countries there exists a relatively well functioning equity market that serves to generate essential information regarding investors' attitudes and their expectations of future profitability and provides a limited amount of equity financing. Admittedly, the equity market's role in terms of providing corporate finance is still comparatively limited, but it seems to be growing in almost all these countries. Between 1981 and 1985 the market value of equity shares traded in the stock markets of Brazil (São Paulo), Korea, and Mexico, for instance, grew at an average annual rate of 365.2, 23.5, and 73.5 percent in local currencies, respectively, and at a rate of 45, 16.1, and 5.25 percent in terms of U.S. dollars. By the end of 1985 the aggregate market capitalization of the equity shares in these three countries' stock markets amounted to $89.4 billion, which is about one-fourth of the size of London's equity market. See Fédération Internationale des Bourses de Valeurs for recent information

-246-

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