Business Removing

PROTECTING INVESTORS 57
With languid equity markets, economic growth is
held back. If Jordan’s equities traded as much as those
in the average OECD market—implying a quadrupling
of their turnover—analysis suggests annual growth
would have been higher by up to 1.1 percentage points
a year. 30 If equities in Mexico traded as much as those
in the OECD on average, the analysis implies annual
growth would be higher by up to 0.6 percentage points
(figure 7.8).
Better disclosure and investor protections also result
in higher valuations. A recent study estimates that threequarters
of differences in corporate values across countries
are due to differences in investor protection. 31 In
a study of companies in the United States, an investment
strategy that sells the decile of companies with weakest
disclosure and legal protections and buys into the decile
of companies with the most disclosure and protections
generated a 50% premium during 1995–99. 32 Evidence
from Korea and Russia suggests even higher returns: a
160% premium for Korean companies and nearly 800%
premium for Russian ones. 33
The benefits accrue mainly to small businesses and
entrepreneurs like Kwadwo, the Ghanaian looking for
FIGURE 7.8
Large potential growth from more active equity markets
Percentage point increase in annual GDP growth from
equity turnover
1.3
Iran
1.1
Jordan
0.7
Greece
Source: Calculations based on Beck and Levine (2004).
business partners. The reason is that they don’t have
long–standing relations with banks, as established businesses
do. If Kwadwo were to find a partner and start the
bus service to Accra, other entrepreneurs benefit as well,
by having cheaper access to the capital city. But the effects
reach farther. Travel to school and hospitals is easier. The
distance between equity markets and the poor shrinks.
0.7
Czech
Republic
0.6
Mexico
0.3
Hungary
Notes
1. Cadbury report (1992).
2. Gregory (1999, 2001, 2002) and OECD (2003).
3. La Porta and others (2000).
4. See Beck, Demirguc-Kunt and Maksimovic (forthcoming).
5. Some examples are available in the corporate governance assessments carried
out under the World Bank’s Reports on the Observance of Standards
and Codes program. Thirty-eight assessments have been completed.
Reports are available at http://www.worldbank.org/ifa/rosc_cg. html.
6. Claessens, Djankov, and Lang (2000) and La Porta, Lopez-de-Silanes,
and Shleifer (1999).
7. New York Times, Dec. 8, 1998, p. A16.
8. Beck, Demirguc-Kunt, and Maksimovic (2002).
9. Batra and others (2003).
10. Johnson and others (2000).
11. Business Week, July 24, 2000, p. 17.
12. Schmidt (1999).
13. Sunday Times, Jan. 20, 2002, p. 4.
14. New York Times, Dec. 24, 2003, C1.
15. Business Week, Jan. 12, 2004, p. 32.
16. Djankov and others (forthcoming).
17. Cited in Morck and Nakamura (2003).
18. Examples of how nominee ownership can be misused to expropriate
small investors are provided in OECD (2001).
19. The work by Andrei Shleifer and his colleagues has led to a large literature
on the benefits of investor protections. See La Porta and others
(1998), Pistor, Raiser and Gelfer (2000) and Rajan and Zingales (2003).
20. These measure were developed by La Porta and others (1998) and
updated to January 2004 for 115 countries in Doing Business in 2005.
Class actions suits are another protection for small investors but are
typically more difficult to enforce.
21. But note that implementing good internal controls and hiring external
auditors costs as much as it did before the Internet.
22. See Capaul (2004) for details. Thirty-one companies are listed on Nivel
I, 5 companies on Nivel II, and 3 companies on the highest level.
23. On October 1st 2004 the penalty for missing the deadline in submitting
the annual report will be raised to 500 million Rupiah (about
US$55,000).
24. Naneva (2003).
25. CalPERS (2004).
26. Lerner and Schoar (2004).
27. Liquidity is the preferred measure for stock market development as it
reflects the opportunity for risk diversification and entry of small investors.
Market capitalization is frequently driven by prices and may
reflect expectations about future growth rather than an active market.
28. Landis (1938).
29. Calculation based on La Porta, Lopez-de-Silanes and Shleifer
(forthcoming).
30. Beck and Levine (2004). Also see Levine and Zervos (1998).
31. Nenova (2003).
32. Gompers, Ishii and Metrick (2003).
33. Black (2001) and Black, Jang and Kim (2003).