Research Directions: A Theoretical Framework
LEMMA W. SENBET
One of the things that I have learned is that research in finance as it relates to less developed capital markets seems less developed as well. I am hoping, though, that there is no systematic relationship between research development and economic development; thus I am hoping that the research dimension will get the work done much faster than the development of those countries themselves.
I take the position that less developed capital markets are distinguishable from highly developed capital markets principally on the basis of market imperfections. I think that that is pretty obvious. Therefore, I view my topic of research in corporate finance as the impact that the market imperfections have on corporate finance in less developed capital markets. I view market imperfections broadly to include three categories, the first being incomplete markets and transaction costs. The second concerns agency conflicts and information. These agency conflicts may arise among parties within the private system, or they may arise between the private system and the public system. The third category is taxation. These are the issues that we have dealt with in corporate finance mostly in the context of highly developed capital markets. I warn that I outline these issues only because they are not readily doable. If they were, I would not be inclined to share them publicly. Thus these are issues that I think would be potentially doable by those who are highly initiated and highly motivated.
I first deal with the issue of agency conflicts and the design of securities. I started thinking about how these would be related to less developed capital markets. The chapter by Stavros Thomadakis shows that we can get good mileage out of an agency-theoretic framework. I may also add that in highly developed capital markets, the United States being an example, the agency-theoretic framework has been utilized to provide an economic rationale for the complex types of securities issued by the firm. For instance, why do firms issue debt with conversion privi-