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This book provides the first comparative analysis of the determinants of sovereign bond spreads in the first era of financial globalization and bond finance (1870-1913) and today (1994-2002). Drawing on a newly-collected data set on bond yields, macroeconomic variables, and news of various categories for a panel of emerging markets, it is shown that news about wars or episodes of politically-motivated violence are significant and robust determinants of spreads; fiscal variables also play a role. In contrast, news about institutional reforms seldom have a rapid and significant impact. There are also important differences between the two eras: country-specific fundamentals accounted for a greater share of variation in spreads during the pre-WWI period than they do today. Crises shared by more than one country are common now, but were rare in the past. The mechanisms for addressing sovereign defaults in the previous era of globalization are discussed and some lessons for today are drawn.

This chapter analyzes the operations of the Corporation of Foreign Bondholders (CFB) — an association of British investors holding bonds issued by foreign governments — between 1870 and 1913. It describes the coordination among creditors fostered by the CFB and evaluates its successes and failures. It is shown that a revamped creditor association might facilitate creditor coordination today and facilitate sovereign debt crisis resolution. The CFB may have had an easier time than a comparable body would have today.

This chapter presents a systematic attempt to identify the determinants of bond spreads. Using multivariate regression analysis, it relates emerging market bond spreads for 1870-1913 and for the modern period to macroeconomic variables and to categories of news articles. It is shown that past and present investors pay attention to both macroeconomic fundamentals and to information reflected in the news, especially regarding violent conflicts. News on institutional reforms rarely elicit investor response. Country-specific fundamentals and news play less of a role in determining bond spreads today than they did in the past.

Diversified business (or corporate) groups, consisting of legally independent firms operating in multiple markets, are ubiquitous in emerging markets and even in some developed economies. The study of groups, a hybrid organizational form between firm and market, is of relevance to industrial organization, corporate finance, development, economic growth and other domains of economic inquiry. This survey begins with stylized facts on groups around the world, and proceeds to a critical review the existing literature, which has focused almost entirely on groups as diversified entities and on conflicts between controlling and minority shareholders. Other schools of thought on the political economy of corporate groups, on groups and monopoly power, and on groups as networks are discussed next. We then proceed to promising, yet virtually unexplored, alternative lenses for viewing groups, for example, as quasi venture-capitalists or as family-based structures. The analysis points out important biases in the literature including the avoidance of a serious discussion of the origins of business groups, and the unfounded assumption that rent-seeking is the only feasible political economy equilibrium in an interaction between groups and the government. We note that the empirical tendency to use recent data implies that the vast majority of studies exploit cross-sectional variation; the absence of (long) time-series data ensures that some conceptually important issues, such as how groups shape the environment in which they operate, receive relatively little attention. Lastly, we outline an agenda for future research.

Diversified business (or corporate) groups, consisting of legally independent firms operating in multiple markets, are ubiquitous in emerging markets and even in some developed economies. The study of groups, a hybrid organizational form between firm and market, is of relevance to industrial organization, corporate finance, development, economic growth and other domains of economic inquiry. This survey begins with stylized facts on groups around the world, and proceeds to a critical review the existing literature, which has focused almost entirely on groups as diversified entities and on conflicts between controlling and minority shareholders. Other schools of thought on the political economy of corporate groups, on groups and monopoly power, and on groups as networks are discussed next. We then proceed to promising, yet virtually unexplored, alternative lenses for viewing groups, for example, as quasi venture-capitalists or as family-based structures. The analysis points out important biases in the literature including the avoidance of a serious discussion of the origins of business groups, and the unfounded assumption that rentseeking is the only feasible political economy equilibrium in an interaction between groups and the government. We note that the empirical tendency to use recent data implies that the vast majority of studies exploit cross-sectional variation; the absence of (long) time-series data ensures that some conceptually important issues, such as how groups shape the environment in which they operate, receive relatively little attention. Lastly, we outline an agenda for future research.

This paper challenges the North and Weingast (1989) view that attributes Britain's ascendancy to economic supremacy to institutions that provided protection of property rights starting in the late seventeenth century. We show that for much of the eighteenth century, interest rates in Britain remained fairly high, and fluctuated considerably in response to political instability. We also show that the volume of British government debt remained low for nearly a century after the institutional changes described by North and Weingast. Finally, we show that British interest rates moved in tandem with Dutch interest rates, suggesting that Britain did not embark on a different path following the institutional changes of the late seventeenth century. We conclude that, in the short run, institutional reforms do not lead to higher growth by lowering the cost of capital.

This paper reviews the literature on corporate groups in Japan and elsewhere, and offers a comparison of Japan's corporate groups with groups in other developed and developing countries. It then proceeds to examine the evolution of corporate groups in Japan since the mid-1970s. The main conclusions that emerge are that: 1. Empirical evidence on the economic roles of corporate groups in Japan is limited. 2. Japanese groups are, in some respects, quite similar to groups in other countries, but their risk and return characteristics differ substantially. 3. There is little to suggest that over the past thirty years groups have had a major impact on Japan's industrial structure. In view of these findings, and because there is no evidence that Japanese groups (unlike those in some other countries) enjoy any particular political clout, it is unlikely that corporate groups will constitute an impediment to structural change in Japan.

Using a newly constructed data set, we compare sources of funds and investment activities of venture capital (VC) funds in Germany, Israel, Japan and the UK. Sources of VC funds differ significantly across countries, e.g. banks are particularly important in Germany, corporations in Israel, insurance companies in Japan, and pension funds in the UK. VC investment patterns also differ across countries in terms of the stage, sector of financed companies and geographical focus of investments. We find that these differences in investment patterns are related to the variations in funding sources - for example, bank and pension fund backed VC firms invest in later stage activities than individual and corporate backed funds - and we examine various theories concerning the relation between finance and activities. We also report that the relations differ across countries; for example, bank backed VC firms in Germany and Japan are as involved in early stage finance as other funds in these countries, whereas they tend to invest in relatively late stage finance in Israel and the UK. We consider the implication of this for the influence of financial systems on relations between finance and activities.

Researchers commonly assume that business groups, a ubiquitous organizational form in emerging markets, permit affiliated firms to share risk by smoothing income flows and by reallocating money from one affiliate to another in times of distress. This view has received support in the literature on Japanese keiretsu. To examine the generality of these findings worldwide, we amass a new data set on business groups in 15 emerging markets, and couple this with historical and modern data from Japan. Our results, using multiple estimation techniques, corroborate the existing evidence on risk sharing within the Japanese keiretsu. In addition, in some emerging markets such as Brazil, Korea, Taiwan and Thailand, we find evidence suggesting that group affiliation is associated with a 20 – 30 percent reduction in the standard deviation of operating returns. We also find evidence of substantial “liquidity smoothing†in India, although data constraints prevent us from knowing the extent to which this phenomenon is widespread. However, risk reduction by business groups is far from a universal phenomenon -- the magnitude of the effect is small in most of the other countries in our sample, even though it is sometimes statistically significant. Tests of two-dimensional first-order-stochastic-dominance suggest that the Japan result – that group affiliated firms have both lower levels of operating profitability and lower standard deviations of operating profitability – does not generalize to most emerging markets. Finally, we find no correlation between the extent of income smoothing provided by groups and measures of capital market development. We conclude that the provision of risk sharing, to compensate for under-developed capital markets, is probably not the most important reason for the ubiquity of business groups around the world

This paper analyzes yield spreads on sovereign debt issued by emerging markets using modern data from the 1990s and newly-collected historical data on debt traded in London during 1870-1913, a previous golden era for international capital market integration. Applying several empirical approaches, we show that the co-movement of spreads across emerging markets is higher today than it was in the historical sample. We also show that sharp changes in spreads today tend to be mostly related to global events, whereas country-specific events played a bigger role in 1870-1913. Although we find some evidence that economic fundamentals, too, co-move more strongly today than at that earlier time, our interpretation of the results is that today`s investors pay less attention to country-specific events than their predecessors did in 1870-1913.

How do firms that go public decide whether to list on a major stock exchange or locally? Using a unique data set on Israeli IPO?s in the US and Tel Aviv, we show that companies that list in the US are young and overwhelmingly high-tech oriented. We argue that high-quality innovative firms are willing to incur additional costs associated with listing in the US in order to reveal their value and distinguish themselves from firms that issue stock back home. Costs of listing in the US include first day underpricing and relinquishing corporate control.

This paper analyzes the Corporation of Foreign Bondholders (CFB), an association of British investors holding bonds issued by foreign governments. The CFB played a key role during the heyday of international bond finance, 1870-1913, and in the aftermath of the defaults of the 1930s. It fostered coordination among creditors, especially in cases of default, arranging successfully for many important debt restructurings, though failing persistently in a few cases. While a revamped creditor association might once again help facilitate creditor coordination, the relative appeal of defection over coordination is greater today than it was in the past. The CFB may have had an easier time than any comparable body would have today.

We examine the impact of capital markets reform on patterns of corporate finance in Israel, focusing on the role of banks in the Israeli financial system, and in particular on whether their role has changed following a decade of liberalization. Our main finding is that, although external financing through equity issues on stock markets (in Israel and abroad) has increased, the financial system is still bank dominated. Using a simple model, we suggest that continued bank dominance may reflect a deliberate strategy of the (universal) banks to restrict competition in arm's length capital markets by strengthening bank-firm relationships. Similar phenomena may well be expected in other countries.

This paper uses data on manufacturing firms listed on the Tokyo Stock Exchange to evaluate whether firms that are part of Japanese financial groups (keiretsu) behave differently from other Japanese firms. The results from this analysis reject the hypothesis that these firms collude in order to raise profits. The data do suggest that keiretsu firms are heavily influenced by their banks to produce at levels beyond those warranted by pure profit maximization. These higher levels of output may also explain why entry into markets with strong keiretsu presence is often described as difficult. Copyright 1995 by Blackwell Publishing Ltd.